5 Things To Watch Next Week

An Italian Budget Deal?

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Outside the European Union, the ongoing debate regarding the Italian budget might be quite perplexing, especially given the strong reaction by financial markets. While the relatively small budget deficit of the country is really violating the rules of the Eurozone, we have seen much larger deviations from the fiscal rules without meaningful consequences.

That said, the sorry state of the Italian financial system, the stealth capital flight from the country, and the structural imbalances of the ECB’s bond purchasing program validate the scrutiny of the EU. Some analysts say that the Italian banking system is outright insolvent, but in any case, deep structural reforms would be necessary, and the real issue behind the debate is the populist anti-EU rhetoric of the new government. With that mind, even if the two sides reach a deal on the budget, which could lead to a strong relief rally in Europe, Italy will likely cause further severe headaches down the road.

Trillions in Market Cap Reporting

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The US earnings season is entering its crucial phase, with next week being one of the busiest in this quarter. The Nasdaq will be in the focus throughout the week, but the sheer size of the tech giants reporting means that the whole market could experience wild swings.

The three largest companies Microsoft (MSFT), Amazon (AMZN), and Google parent Alphabet (GOOG), alone represent more than $2 trillion in market value, and Intel (INTC), Verizon (VZ), AT&T (T), Visa (V) are also very important for the US and the global economy.

So far, the quarter surpassed expectations, and should the string of earnings beats continue, it could provide stability to the shaky stock markets. Besides the largest firms, we will keep a close eye on anything China-related, to get authentic information on the real state of the country’s economy.

The European Central Bank Behind the Curve, as Usual…

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As global economic growth is clearly slowing, and the Italian worries already caused a widening in the yield spreads between the core and the periphery in the Eurozone, the ECB seems to be way behind the curve with its monetary policies.

Although the tightening the schedule of ECB is very gradual, we could still get a hawkish surprise next week, and that could enter the hall of fame among the disastrous decisions by the central bank. The ECB managed to hike rates in the middle of financial crises before (the summers of 2008 and 2011), and although the Euro’s weakness and the Fed’s tightening steps could give the impression that there is room for a hawkish shift, the macro backdrop suggests otherwise. Look for a strong bounce in the Euro and further weakness in equities, should Draghi & Co. confirm our suspicions.

Will the Chinese Bounce Last?

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2018 for Chinese stocks has been nothing short of disastrous, with the key benchmarks entering deep bear markets, fading all rally attempts so far. With the largest credit bubble in history threatening the country’s financial system, and with Chinese growth being more important than ever for the global economy, what happens in the coming months could be crucial for all investors.

On Friday, one of the lowest (official) GDP prints came out from China, while auto sales also dropped for the first time in decades, suggesting that the stock market could be correct in pricing a hard landing. While the verbal and other forms of intervention lifted stocks before the weekend, should another rally attempt fail, the bear market could enter an accelerating, mainstream phase.

US Midterms Drawing Closer

The Chinese problems are likely not caused, but definitely amplified by the ongoing trade spat with the US, and before the midterm elections in three weeks time, it’s unlikely that we will see easing in the conflict. According to polls and prediction markets, the GOP will likely keep the Senate majority. While the Democrats are still expected to take the House, the Republicans and Trump seem to have the momentum.

As stocks usual suffer in times of political uncertainty, risk assets would likely be better of, at least short-term if the current trends would continue, as A blue House + Senate combination could mean two very stormy years in Washington.

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Author:
Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.