Stocks end the week little changed on the half day. The S&P500 gained 0.1% to 2,090 while the Dow Jones fell 0.1% to 17,798. Equities for the most part were flat this week. Today indices in China suffered renewed losses as reports stated that several brokerages were under regulatory investigations. The Shanghai composite fell 5.5% as global markets were under renewed pressure from China. Fed funds futures continue to reflect a 74% chance of tightening in December. The dollar index rose 0.3% to 100.05 and the euro fell 0.1% to $1.0596. In accordance with a stronger dollar gold fell and was down $20 on the week. Investors will pay close attention to the ECB meeting next week on Thursday for further hints on Mario Draghi’s forward guidance. Markets are hoping and pricing in decisive monetary easing from the ECB at this meeting. In particular investors are expecting a 20 basis point cut to the deposit rate to -0.40% as well as a e20bn expansion to the monthly asset purchase program. The US two year yield finished the week at 0.93% compared to the equivalent maturity bund yield at -0.41%. The ten year US yield finished down 1 basis point to 2.22%. Industrial commodities continued their slide as a result of the dollar’s strength and expectations that the Fed will tighten in the weeks ahead.
Next week marks a very important monetary policy week. It appears as if everyone is expecting further easing out of the ECB on Thursday. On Friday the November non-farms payroll data is expected to show that the economy added 205k jobs in November. This data will be especially important as it will show the state of the expansion in the aftermath of October’s strong report. Janet Yellen will also speak twice. On Wednesday she will speak with the Economic Club of Washington and on Thursday she will testify in front of the US Congress. As a result this could prove to be one of the most important markets weeks of the year given the lineup and timing ahead of a potential rate hike in a few weeks. Concerns are now shifting towards how the effects of a stronger dollar will trickle through and depress inflation. There is not too much worry being given to the effect of bond values when rates rise. In the past some analysts had expressed concerns that as rates rise bond prices and values will fall which does not bode well for asset managers. However it appears that for now there is enough buying pressure from abroad to support US yields to prevent a sharp spike. The Fed is still expected to tighten in December even if Friday’s data appears slightly underwhelming, as investors expect that it will take serious downside risks to derail the Fed at this point. Speculative positions that the dollar will rise against peers such as the euro or the yen have more than tripled over the last month.
Geopolitical risk is becoming apparent however monetary policy is still driving the narrative in markets. Financial markets have been seemingly aloof to the Paris terror attacks as well as the events this week relating to Turkey and Russia. Similarly attacks were made in Beurut, Ankara, and Bali. Usually events such as these result in inflows into haven assets such as gold and oil prices rise. However upcoming policy headlines are taking center stage and driving prices. This may reflect the possibility that investors are pricing down the possibility that these events escalate.