A pivotal week ahead after Wall Street closed last week on a sour note near key support levels stretching back to the beginning of the year (the 2600 area in the S&P 500, for example) and the ugly drawdown in equity markets in February. Signs of a widening credit crunch are intensifying in corporate credit, where the FT notes
that “December on course to be first month without junk bond sale since Lehman crash” (paywall) and over at Bloomberg, John Authers discusses financial stocks globally and frets whether they are the “canary in the coalmine
” for global asset markets, given their tendency to lead the market to the downside in times of turmoil.
This brings us to the matter of this week’s Federal Open Market Committee meeting. Fed chair Powell has been rather clear in expressing his belief that inflation is not a factor driving risks to the economy, and that financial stability is perhaps the most important factor in what drives cycles of economic weakness.
Coming into this week, the alarm bells are sounding in corporate credit and the US dollar is perched at its highest levels since early 2017. It is clearly time for the Fed to blink and that is what the market is pricing – but how profound will the actual blink prove on Wednesday and is the market watching the Fed or has the credit crunch taken on its own momentum that will only be reversed when the Fed not only blinks, but goes into full reverse?
The US risks another government shutdown ahead of the New Year as Trump demands border wall funding and can’t get it from what will be an increasingly obstreperous opposition next year as the new Congress commences on January 3. The GOP willingness to join battle over the border wall appears less than enthusiastic.
Elsewhere, Brexit dominates the focus in Europe. After EU leaders roundly rebuffed Theresa May’s attempt to alter the existing Brexit deal last week, the markets are at a loss for what happens next. January 21 is the last date for a vote that will see an inevitable rejection of the deal and sterling will likely remain in a nervous holding pattern, particularly as May has taken up a position for now against a second referendum. Chart: Dollar index
The dollar index posted brief new highs for the cycle on Friday before pulling back slightly into the close ahead of this week’s FOMC meeting. Two factors to look for this week are of course the degree to which the Fed brakes its policy tightening trajectory, but also whether the market finds a more cautious message sufficiently encouraging to boost risk appetite. If so, the dollar may have peaked for now, but if the credit crunch has taken on its own momentum, any Fed downshift may be too little, too late for now.