This December, we may see more stormy weather coming to the financial markets. Here are five events which have the potential to create even more turbulence than we've experienced so far this year:
December 1: Trump / Xi dinner at the G20 summit
President Trump and China’s Xi Jinping met over dinner Saturday evening December 1 in Buenos Aires at the G20 meeting. The eyes of the world were on this meeting and the leaders of the world's two largest economies as the trade war between the US and China continues. Immediately before the meeting, Trump’s top economic advisor Larry Kudlow commented, “This is a big deal, this meeting, the stakes are very high.”
Ongoing market reaction: Odds had favored some sort of agreement in which both parties could claim victory, and they did not disappoint: a trade war truce for 90 days was agreed to. On the next business day, December 3, both the US and Chinese equity markets rallied by nearly 2 percent. However, on December 4-10 US equities fell approx. 9 percent, partially due to confusion with details of the trade deal. The USDCNY rate reached 6.85 despite the trade concerns.
December 6: OPEC meeting
Oil prices have dropped 30 percent in the last two months, the sharpest decline in years. The Organization of Petroleum Exporting Countries (OPEC) held its second and final meeting of the year. Representatives from the 15 OPEC countries discussed how best to manage output in a market characterized by oversupply and reduced demand.
Market reaction: An agreement was reached to cut oil production more than expected, causing an immediate 4 percent jump in oil prices. Commodity currencies quickly rallied, and the JPY and INR sold off as expected.
December 11: BREXIT / UK Parliament vote
On December 11, the UK parliament will vote on a BREXIT deal, which will decide the future of the UK’s departure from the EU, officially set to take place on March 29, 2019.
Potential market reaction: Odds favor a deal revised by Parliament, which could result in another BREXIT referendum vote. Whatever the outcome, investors may welcome a resolution of any kind, and will likely bid up UK and EU equities, the EUR and GBP.
December 13: European Central Bank (ECB) meeting
There will be no interest rate hike; the -0.40 benchmark rate, which has been in place since March 2016, will remain in place until sometime later next year. The markets expect that ECB President Draghi will announce the formal phase out of quantitative easing, despite the recent slowdown in eurozone growth.
Potential market reaction: The ECB has been telegraphing its decisions well in advance, so there should be little reaction in financial markets.
December 19: Fed’s FOMC meeting
The US Federal Reserve is likely set to hike rates another 25 basis points to 2.25-2.50 percent. The official FOMC statement, the “dot plot” and comments by Fed Chairman Powell will all be scrutinized to see what predictions the market can make for upcoming rate adjustments. Will the Fed hike three more times in 2019 and once in 2020, lifting the final target to 3.25-3.50 percent? Or will there be a pullback in expectations?
Potential market reaction: Fed members, including Powell, have recently signaled that they may adopt a more flexible approach in their gradual interest rate increases. If they do so, it will likely reap rewards for US equity buyers and short sellers of US dollars in the FX markets.
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For the full review of what moved markets in November and the look forward, read FX Monthly Outlook December 2018.
Sources: Bloomberg 2018