Can you believe we’re already in the middle of the year? It seems only yesterday when I did my first Saltbae impression!
Anyway, after looking back at the 5 major themes that dominated Q2 2017, let’s now look forward to the 5 market themes that could influence price action in Q3 2017:
1. Brexit negotiations
It’s been almost exactly a year since Britain voted out of the EU but things are only starting to heat up.
British Prime Minister Theresa May had a rough start by epically failing a snap election, but things have turned around now that her Conservative Party has teamed up with the Democratic Unionist Party (DUP).
In fact, the teamwork had paid off just yesterday when the House of Commons voted to support May’s legislative agenda for the next two years.
May is still at cliff’s edge, though, as the vote won by a narrow 323 to 309 and only because the government had to make last-minute promises to fund abortions in Northern Ireland.
Heck, word on the streets was that the vote was too close to call and that May had to rush back from a meeting with Angela Merkel to make her vote count!
All eyes will be on the Brexit negotiations which officially started this month. The EU has already set the tone for the first meetings and, with her fragile hold on parliamentary majority, market players are expecting May to play nicely and maybe soften her Brexit stance. Or not.
2. Euro Zone debt crisis
What’s a trading year without worries about the Euro Zone’s debts and banking system, amirite? Investors’ biggest concerns might be stowed for now, but it probably won’t take a lot to fire up uncertainty again.
Greece narrowly avoided a default in July after the IMF invoked a technicality that would unlock funds from the other Eurogroup countries but not from the institution.Basically, the IMF “approved” of a bailout program but would only chip in once the Eurogroup has hashed out the deets of a debt relief for Athens.
The move not only encouraged countries to contribute their share, but it also allowed time for the IMF and the Eurogroup to settle their differences in approaching Greece’s debt relief.
But until the creditors AND the Greek government find a way to make Greece’s debt sustainable enough to re-enter the capital markets and not just kick the can down the road, threats of a default will continue to plague the euro.
In Italy, threats of an early election – which could have led to a hung parliament or victory for anti-establishment Five Star Movement – diminished as a deal between the Five Star Movement and Renzi’s Democratic Party fell through.
The country headed for municipal elections instead but results were far from promising. Center-right parties dominated the elections, which is a setback for Renzi’s center-left party.
Meanwhile, Italy just avoided a massive bank run after banks Banca Popolare di Vicenza and Veneto Banca flatlined and had to have their ashes (read: bad loans) scattered among the other major banks.
But while investors haven’t ditched Italy’s banks en masse, there’s still plenty of work to be done to cover the country’s gross non-performing loans and avoid future threats of a bank run.
3. Has oil hit bottom?
Earlier this week we talked about the 3 main factors weighing on oil prices. And near the end of the piece, we discussed how the selloff in the past couple of days has taken the edge off from Black Crack’s overbought conditions.
Oil has seen a bit of recovery after officially entering bear market last week, but we have yet to see significant improvements that would lead to a trend reversal.
Will the OPEC see increased cooperation regarding its production quotas? Will production from the U.S. continue to flood markets with supply? More importantly, how will investors respond to the (lack of) developments?
Yesterday we discussed how Russiagate allegations against Trump might just be a negative press covfefe.
Founded or not, though, the allegations have affected the dollar. This is because threats of impeachment means more delays on Trump’s promises to reform taxes and regulations and implement infrastructure projects that would #MAGA.
Will the Trump administration gain more momentum and bring Trumphoria back in Q3? Market players are eyeing the GOP’s healthcare bill, which might gain more traction in the next few weeks. If it passes, then the Trump administration can move on to estimating tax cuts and regulatory changes. Stay tuned.
5. Central bank biases: the plot thickens
Central bank news is always big news in the forex scene, but the plot has thickened now that more than one major central banker is showing signs of shifting biases.
That’s right; it’s not just the Fed that’s thinking of normalizing its policies! Earlier this week ECB’s Mario Draghi waved a red flag to euro bulls when he said that factors that are dragging on inflation are:
“on the whole temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations.”
Market players took it as a sign that the ECB is overlooking recent disappointments in inflation reports in favor and is thinking of tapering its asset purchasing program.
ECB Vice President Vitor Constancio later hinted that Draghi’s message was misunderstood, but market players said “no takesie backsies!” and continued to buy the euro anyway.
BOE’s Mark Carney also made headlines this week when he hinted that rate hikes will be “necessary” if U.K. businesses shrug off Brexit uncertainty.
Meanwhile, BOC’s Stephen Poloz said that previous rate cuts “have done their job,” leading many to believe that the central bank would soon tighten its policies.
Will more central banks join the hawkish bandwagon? Check out our checklist for the hawkish and dovish central banks as well as the neutral ones and see which central banks are likely to shift biases in the next couple of months!