China To Keep Covid Rules & US Mid-Term Elections and CPI Preview

Okay, happy Sunday folks, hope you're doing well and had a fantastic weekend. 4 major things I'm going to talk to you about in this briefing for the week ahead. Firstly, the COVID zero tolerance policy in China, then we're going to talk about US CPI, the midterms of course happening in the US on Tuesday, and then we've got UK GDP on Friday. Before I begin, don't forget if you're new to the channel to subscribe. Lots more videos coming out throughout the week. But let's get stuck in and talk about this Chinese situation. And in fact, it could be a really interesting, i.e., volatile open of electronic trade shortly. And that's why I really wanted to jump on Sunday night rather than Monday morning to prep everyone up. And the reason why is, as you can see from these headlines, the health officials in China essentially have vowed unswervingly to stick to the country's zero-COVID policy approach. There's a lot of optimism, you'll remember, in markets at the end of last week. A lot of that was built in on the back of the fact that we might have been heading for an earlier loosening of restrictions. Oil prices, we were up north of a $92 handle by the end of last week. Pretty decent week. We also saw Chinese equities, the Hang Seng Index had its best gain in over a decade. Last week, in fact, on the back of a lot of these hopes. But that's been really dampened over the weekend, and Beijing have come out and made those comments. So assets from equities to oil having rallied, most likely are going to have a bit of a pullback at the market open. The Australian dollar, which has already been up and running, acting as somewhat of a bit of a Chinese risk proxy, is down about 1% on the back of the news. Now, to give a bit of context, Analysts at Goldman Sachs, in terms of when they foresee timings-wise of when we might see a relaxation in Chinese COVID rules, they're looking at around Q2 of next year. Hence the reason why the market reacted quite positively at the end of last week, because it was quite unusual coming on the back of the party congress that we just had the prior week for them to be talking about such measures, and evidently that not being actually true as far as health officials have confirmed this weekend. While Chinese equities are likely to fall on Monday given this news, expectations for further stimulus from the government after weak economic data and gains in COVID-19 cases in China for the month of October could limit some of the downside in equities, not for the session but just going forward, because it puts greater emphasis now on the government to step in and in some form and shape like they do on many occasions in the past, try to re-stimulate the, the economy. China is set to report trade data in the overnight session, and they've got inflation figures on Wednesday. Weakening factory prices and tame consumer prices, just another sign of the weakness in momentum at the moment in the Chinese economy, and hence the reason why you could have a, some decent downside to kick things off this week. But then that would probably lead to a growing expectation that the government will step in with more stimulus action. So that's one of the main things and definitely something that will be in focus immediately at the market open. Otherwise, the other big thing this week is US inflation data, and of course there's still the underlying factor that really drives Federal Reserve thinking. We obviously had the decision last week and that rocked the equity market and other assets after the Fed kind of gave a, quite a hawkish rate trajectory path going forward after executing their fourth consecutive 75 basis point rate hike. The year-on-year reading is expected at 7.9%. That is a bit of a deceleration, if you like, from 8.2% in the month of September. The core reading though, of course, will be key— ex-food and energy. That's expected to have edged down by just 0.1% to 6.5%. At the moment, what we're looking at on the FedWatch tool from the CME is around a 50-50 balance between how the market is currently priced for the next Fed meeting on the 14th of December with whether it's going to be a 50 or a 75 basis point rate hike. So if we get a weaker inflation reading, then more likely to see that 50 tilt back up because there still will be tightening, still multiple times going forward. It's just to what degree do they start to slow down the, the clips that they're moving rates higher going forward. And of course, this will be key and meaningful for the type of reaction you'd like to see in markets. Downside, surprise, then likely to support then equity prices, like to see yields decline, dollar weaker, and then vice versa on a high side number. Talking then of midterms, of course this is a, a big moment for President Biden, but also as well for what it means for markets in terms of the fiscal monetary balance going forward for the next 2 years really. All 435 seats in the US House of Representatives are up for grabs, and there are 35 US Senate seats out of the 100. Republicans would need to pick up 5 seats to take a majority in the House and just 1 to control the Senate. Opinion polling appears to be showing momentum building for the Republican Party candidates, with a majority in both the House and the Senate looking now according to polling, as the most likely outcomes. The presidency, importantly, is not up for election until obviously 2024, but the outcome of the midterms could determine whether or not Biden will stand again and also whether— we heard from him just a few days ago— Donald Trump will seek the Republican nomination to run. So really quite important for that, uh, outcome. Um, if the Republicans gain control of Congress, What does that mean? Well, it basically in summary means that Joe Biden's ability to pass any legislation becomes completely curtailed. At that point, he becomes what's known as a lame duck kind of president. If the Democrats lose, then it's more likely they will see interest rate cuts in the US in the second half of next year as the economy obviously starts to move deeper into recession to provide stimulus to help the economy rebound rather than if they were to win, the Democrats, then of course they can pull on the levers of fiscal policy to likely do more of the heavy lifting and interest rates would stay higher for longer to offset the inflation impulse. So it is important who controls that because it controls then what is actionable from a fiscal perspective. And as a byproduct, a secondary order, if you like, then that will influence potentially the approach that the Fed will have to take. Because of those two core pillars that really drive the economy. So that's the way to kind of think about it from a market's perspective. And then just taking a quick look at the calendar, they really are the main events that are occurring. There are a few other things, of course, to keep an eye on. Well, on Friday you do have the third quarter output figure in the UK, so GDP expected to contract 0.5%, evidence the economy is already in a recession. And we obviously saw the Bank of England hike alongside side the Fed by 75 basis points. What we're looking out for now are 4 Monetary Policy Committee members speaking throughout the week, and we're looking for any indications then for hints towards what might come next, of course. Meanwhile, over in Europe, the week kicks off with Euro area finance ministers meeting in Brussels. Also attending some of these talks does include the ECB president Christine Lagarde, vice president Di Guindos, and chief economist Philip Lane as well. So definitely worth keeping an eye on that as well. And that's pretty much it. So again, hopefully that was useful, short and sharp. Yeah, keep your wits about you at the market open. The Chinese news is probably going to dominate to kick things off, then the midterms on Tuesday, CPI on Thursday. And yeah, take care and all the best with your trading.