UNIT University Network for Investing and Trading UniMelb

Before The Bell 11/03/2018

By: Thomas Barry


US markets were buoyant on Friday after jobs and wage data came out as lighter than expected. This suggested the US Federal Reserve may be less bullish in its interest rate hikes – a good thing for equity markets which dipped heavily earlier in February on fears of rising bond yields. The US CPI report on inflation, which comes out on Tuesday, will provide insight on whether inflation has picked up enough to worry markets about further rate hikes. The Dow Jones Industrial Average was up 1.8% on Friday, along with 1.7% from the S&P 500. These gains are likely to provide a big lift for equity markets on Monday. That said, the threat of a global trade war still looms. Discussions over the weekend reaffirmed that the EU, Japan, and South Korea would not yet be spared from the US tariffs on aluminium and steel – while Australia has already secured an exemption.


Global commodity prices are still relatively strong on the back of industrial demand. The threat of a global trade war does pose some concerns as the US has indicated that aluminium and steel are just the beginning. If tariffs extend further into commodities, or goods dependent on raw materials, then there could be significant price volatility. Oil saw significant price movements over the weekend (around 3%) which may indicate weaknesses in shale production.


Forex markets will be watching global events this week. Further clarity on the trade tariffs front could drive significant currency movements either way for the USD. Retaliatory tariffs from the EU and China would not only add fuel to the fear of a global trade war but also weaken the USD. Further, US CPI data, with its implications for interest rates, could send the USD higher if the data is better than anticipated.


Bond yields are likely to follow a gradual upwards trend as most central banks around the world look to raise rates. As noted earlier, US CPI data will be an important indicator for the pace of rate rises from the US Federal Reserve. In Europe, the fallout from the Italian election, and resulting political stalemate, will have impacts not only in their local bond markets but also around the EU. With the two largest parliamentary groups being particularly keen to leave the EU, European bonds will be something to watch.

Other Assets:

Cryptocurrency markets will likely be muted this week under further regulatory scrutiny. Other alternative asset classes, including infrastructure and unlisted property, may see some short-term gains as investors look for higher yields.

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