Earnings, ECB and Inflation to Headline Heavy Data Week

Last week saw some interesting developments across global markets as the staged and, at least thus far, has held on to a top-side breakout. This, of course, has been driven by a recent uptick in Fed hawkishness as we approach the bank’s final two meetings on the year; but this week sees a plethora of data points coming out that could confirm or reverse these recent themes. In today’s Market Talk, we’re looking at three of the most likely market moving data points for this week.

The pace of quarterly earnings announcements out of the U.S. picks up considerably this week as over 80 firms in the will be reporting. This is a huge point of emphasis because not only will markets be looking for results of the most recent quarter, but also to modifications of earnings guidance and expectations for quarters ahead. Earnings is traditionally a volatile period for stocks and this will likely be no different, but at issue are some very large concerns that could exacerbate the fear around the recent uptick in hawkishness. As in, if companies are missing their earnings estimates while downgrading future expectations, this wouldn’t make for a very accommodating environment for near-term rate hikes.

Making matters more difficult from a trading perspective is the fact that this will be a rather constant driver throughout the week, as major, large cap companies are reporting earnings every single day.

For now, the S&P 500 is still in an extended bull market. The bigger ‘potential’ move is likely to the downside, while the most probabilistic move is continuation-higher. But for stocks to really sell-off, we’ll likely need a hard line from the Fed towards near-term rate hikes, similar to what happened at the beginning of the year when the Fed said that they expected to hike rates as many as four times in 2016. So until that happens, and until major support levels become broken – traders will likely want to look at U.S. equities with a top-side bias.

Last week saw the break of a trend-line, although the more pertinent, longer-term upward sloping trend-line is still alive and well, currently around ~150 handles from current price (shown in black on the chart below). Also of interest – the current zone of support (taking 2,100-2,137) is a prior zone of resistance, setting the highs for much of last year.

In our Q4 forecast for equities, we used the title of ‘Picking Up Pennies in Front of the Steamroller,’ and that’s still very much relevant. If you’d like to receive our full Q4 forecast, .

The big question as we approach the next ECB meeting is what the bank might be looking to do with their QE program. As of now, the ECB’s bond buying program is set to expire at the end of March 2017. At the last meeting, there was a brief amount of disappointment when they didn’t preemptively extend the program at that meeting, but there was little cause for concern as the ECB had ample opportunity to do so before the program’s designated end date of Q1, 2017.

But since that last meeting we’ve begun to hear a growing chorus of questions around how impactful QE may actually be and how much it might actually be helping the Euro-zone. This opens the door to a potential smaller program, or, as we saw in Japan recently, a shift in the program’s dynamics as the ECB looks to more effectively employ their QE-expenditures.

So, there’s a considerable number of questions to be answered at this next ECB meeting; and the bank still does have some time before the current QE program is set to end, so this could be an ample opportunity to float an idea (similar to May, 2014) before actually employing it in order to gauge market response.

On top of earnings this week also brings a series of inflation prints, with heavy focus likely to be paid towards those from New Zealand (later tonight, early Tuesday in Asia), the U.K. (Tuesday morning) the United States (later on Tuesday morning) and Canada (Friday morning).

The big point of interest for FX traders here will likely be the U.K. inflation number, as we’re now starting to see the impact to inflation from the ‘sharp repricing’ in the value of the after the Brexit referendum. Last week’s ‘Marmite crisis’ highlights what can happen to inflation on imported products when a domestic currency plunges, with the big question now becoming whether inflation on other imported products is shifting higher until, eventually, it may force the Bank of England’s hand away from even more aggressively-dovish monetary policy.

Should U.K. inflation print above expectations, we may finally start to see some form of confirmation of support in , which has been somewhat of a fleeting prospect over the past couple of weeks as ‘Hard Brexit’ has ruled the headlines. For now, the chart is showing a consistent down-ward sloping trend-line that’s been active in the pair for the past 850 pips. And while confirmation of support might seem like a distant prospect; market condition changes often take place around data prints that shift the narrative, and should U.K. inflation begin to come in above-line, this could certainly take place. Remain skeptical until proof dictates otherwise.

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Earnings, ECB and Inflation to Headline Heavy Data Week

Talking Points:

, with highlights on U.S. corporate earnings and inflationary prints out of New Zealand, the U.K., the U.S. and Canada. .

– This week also brings two major Central Bank meetings of interest with the Bank of Canada (Wednesday) and the European Central Bank on Thursday. Will the BoC finally look at additional stimulus after waiting for Trudeau’s measures to show effect? And how might the ECB shift their policy that is currently designed to end in March of 2017? (more…)

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