As we head into the new trading week, there are numerous developments across global markets that investors and traders should keep an eye on. The S&P 500 has closed at its 45th all-time high (ATH) for 2024, with the Dow Jones Industrial Average also touching record highs. Meanwhile, the Russell 2000 index surged by 2.1% on Friday and is now nearing the 52-week high of 2299. This week could see a crucial test for the index as it continues to gather momentum.
Positive Sentiment in US Equity Markets – But Not Yet Euphoric
Investor sentiment towards US equities remains bullish, though it hasn’t reached the euphoric levels seen during previous peaks. A key signal of this is the performance of cyclical sectors in the S&P500, which are outpacing defensive sectors, indicating that risk appetite is increasing. High-beta stocks are outperforming low-volatility stocks, and short-sellers are continuing to cover their positions. Market internals reveal a healthy level of participation, with 62% of S&P 500 companies trading above their 20-day moving averages. However, only 21% of S&P500 constituents closed at a 4-week high on Friday. Historically, a peak in the index usually coincides with this figure exceeding 50%, suggesting there may still be room for the market to climb.
US Q3 Earnings to Gain Focus
As US Q3 earnings season gets into full swing, it will play a larger role in driving fluctuations in the market. Around 9% of the S&P 500 market capitalization will report this week, setting the stage for a significant wave of earnings the following week, with 37% of the market cap expected to report.
On Friday, JP Morgan delivered a strong earnings report, raising the bar for other banks set to report this week, including Bank of America, Goldman Sachs, Citigroup, and Netflix. While Netflix tends to capture more headlines, United Health (UNH) could be a significant player for the Dow, as it represents 9.1% of its weighting. Given that options pricing indicates a potential 4% move on the day of earnings, any substantial shift in UNH stock price could ripple across the Dow.
European and Asian Indices – Focus on Germany and Japan
In Europe, the German DAX40 remains a standout play, with upward momentum expected to continue. A break above 19,500 could trigger more capital inflows, pushing the index higher. Meanwhile, in Asia, Japan’s Nikkei 225 (NKY225) is watching the 40,000 level closely. A weaker Japanese yen could provide further support for the index, and even when priced in CHF (the strongest G10 currency last week), the NKY225 shows resilience, indicating its recent gains are not merely currency-driven.
China’s Economic Outlook – Key Weekend Briefing from MoF
The focus shifts to China and Hong Kong markets, which are expected to react to a key briefing by China’s Minister of Finance over the weekend. While market volatility had subsided towards the end of last week, there’s a risk of increased fluctuations if the government’s statements fail to provide clear fiscal stimulus plans. Market participants are eagerly waiting for signs of action to lift China out of its debt deflation cycle and stimulate consumption. Any failure to provide clarity could lead to a weaker open in China and Hong Kong markets.
The Trump Factor and Its Impact on Tariffs
With the 2024 US presidential election heating up, Donald Trump’s polling numbers in key swing states have improved, raising the possibility of his return to the White House. This has implications for tariffs, with market players increasingly hedging against the risk of higher tariffs on Chinese imports. Options markets are seeing rising demand for volatility in USDCNH, USDMXN, and EURUSD, reflecting concerns over tariff increases. If Trump were to win, a potential 35% hike in tariffs on Chinese imports would undoubtedly hamper China’s efforts to boost consumption.
In this scenario, FX markets could present some compelling trades. Long positions on USDCNH are becoming a consensus, with many recalling the 11% rally in 2018 following the introduction of tariffs. Similarly, short EURUSD positions could gain traction if US economic strength allows a potential Trump presidency to push for aggressive tariff measures.
USD Upside Risks and ECB Moves
The US dollar remains in focus as its near-term prospects continue to look positive. The US Dollar Index (DXY) has been testing 103, and a break above this congestion zone could lead to a move towards its year-to-date average of 103.72 and the 200-day moving average at 103.76. The EUR, which makes up 57% of the DXY, will be influenced by Thursday’s European Central Bank (ECB) meeting. Markets are expecting a 25-basis-point rate cut, and the tone of the ECB’s statement will be crucial in guiding further EURUSD moves.
US Retail Sales and Fed Speakers
While much of the market’s attention is on the labor market, US retail sales on Thursday will also play a pivotal role. The forecast calls for a 0.3% month-on-month increase, with a risk of an upside surprise. Recent retail sales reports have consistently exceeded expectations, so this will be an important data point to watch. Additionally, Fed Governor Waller’s speech on Monday will provide insights into the ongoing debate about whether the Federal Reserve will cut rates by 25 basis points at the upcoming November meeting.
Other Key Global Events to Watch
Geopolitical developments, especially those that could impact Iranian crude output, continue to be a risk for oil prices. In the UK, employment figures, CPI, and retail sales data will be in focus as the market prepares for a potential rate cut from the Bank of England in November. In Australia, the September employment report could move markets, while CPI data from New Zealand and Japan may shift expectations around future rate cuts, particularly in New Zealand, where the central bank could cut rates by 75 basis points in November.
Good luck to all traders this week ahead