In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation
UBS
Equity investors do not like taxes. US President Trump announced higher taxes for US consumers, in a trade dispute with the EU. The EU is likely to announce taxes on EU consumers of goods partially made in the US. The two sides do not seem to be trying to resolve the dispute. Markets worry about more taxes at a time of economic slowdown.
UK Prime Minister Johnson praised UK exports, highlighting sales of Jason Donovan's compact disc to North Korea. (Compact discs of my greatest hits do not sell in North Korea). Plans to conclude the interminably tedious EU-UK divorce were well received by the Conservative Party. They were not as well received by the EU. Markets do not assume the plans will succeed, so did not react.
US Fed President Williams highlighted the strength of the US economy to date, but noted the investment and trade uncertainties ahead. The comments were more prudent than dovish. It is worth remembering that central banks look at the whole economy. Equities are disproportionately hurt by trade taxes, and do not necessarily reflect the whole economy.
US durable goods and capital goods data is due. There are assorted service sector sentiment polls from around the world.
Morgan Stanley
Two Sided Weakness Bearish
Watch: Payrolls, PPI, CPI, UMich Survey
The ISM Manufacturing and Non-Manufacturing surveys both fell by much more than the market expected. After
weak personal spending data last week, we expect these data prints will drive US yields lower and increase
market expectations for a 25bp Fed cut in October. If nonfarm payrolls disappoint Friday, the USD may
underperform substantially as the market prices in the possibility of proactive Fed cutting and a protracted
slowdown in growth. We like short USD positions against CHF, CNH, and INR and would buy NZDUSD on dips. The
Bloomberg DXY Index has downside potential to the bottom of the channel around 1187.
EUR Strength Against USD Bullish
Watch: German Factory Orders, German and French IP, German Trade Balance
The downside surprise in US ISM survey data has pushed US-German yield differentials down in favor of a
stronger EURUSD. This trend may continue as this may mark the start of weakness in the rest of the world
economies spilling over into the US, which does not bode well for the US equity market outlook and hence inflows
into USD. Any potential positive Brexit news may also push Bund yields higher (as Bunds may have been used as
a Brexit hedge), allowing EUR to rally. EURUSD has held the 1.0870 retracement support level, which is
constructive, though a break of 1.1110 is required to confirm a bullish breakout.
JPY CADJPY Lower Bullish
Watch: BoP, Eco Watchers Survey, Machine Tool Orders, PPI, M3
As USDJPY declines in reaction to investors' repricing of future Fed policy and forward-looking US growth, we
expect Japanese investors to increasingly FX hedge their USD exposure. Given the very large size of Japanese
investor exposure to US fixed income markets, small increases in hedge ratios will have outsized downside
impacts on USDJPY. We are watching for a break below 106.50. A close below that level would open potential to
104.46. We like expressing bullish JPY momentum with short CADJPY positions as oil may fall on weak
expectations for global growth.
GBP All Eyes On EU's Response Neutral
Watch: GDP, IP, Trade Balance
After PM Johnson presented his Brexit proposals to the EU, all eyes will be on the EU's response, especially after
media reports suggest there could be a majority in the House of Commons for the deal. Within days, it may be
known whether the EU could accept or reject these ideas, suggesting possible sharp moves in GBP. Given the
binary outcome, we stay neutral on GBP for now. Positive Brexit news may allow an outsized rally in GBPUSD as
short positioning is large. We see GBPUSD moving towards 1.3500 - 1.4500 should there be a Parliament majority
for the deal, and GBPUSD at 1.1000 - 1.1500 should there be a no-deal Brexit this month.
CHF Fade the Rally In USDCHF Bullish
Watch: FX Reserves, Sight Deposits
CHF has weakened despite the sell-off in risk appetite in the past week, diverging from the performance of JPY.
This seems mainly attributable to a Swiss bank's change in the currency denomination of its operational riskweighted
assets to USD from CHF, but we think the market impact of this has been exaggerated and like fading
the rally in USDCHF. The SNB's limited room to cut rates much further, continued Brexit uncertainty and the ECB
boosting EUR liquidity via QE (some of which may flow into CHF assets) are likely to put upside pressure on CHF
too. We expect EURCHF to stay in the 1.0800 - 1.1050 range for now.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. The views discussed in the above article are those of our analysts and are not shared by Tickmill. Trading in the financial markets is very risky.