Five upcoming events that could drive markets

Weekly Market Compass: As the market roller coaster continues, we anticipate where the next twist could be

Five upcoming events that could drive markets

Time to read: 4 min

Markets took another roller coaster ride last week. The yield on the 10-year US Treasury bond rose to 2.95% — a level it hasn’t seen in four years — but then moved lower by the end of the week.1 Stocks also vacillated, largely in response to those Treasury yield movements. It appears that markets are unsettled and primed to react to the news of the day — both negatively and positively. Below, I discuss five upcoming events that could possibly be the catalyst for more moves ahead.

Five things to watch in the coming week

1. Humphrey-Hawkins testimony. Jerome Powell will make his debut in his new role as Chairperson of the US Federal Reserve (Fed) with his semi-annual Humphrey-Hawkins testimony before Congress. He will speak before the House of Representatives on Feb. 28 and the Senate on March 1. As is customary, the Fed released its Monetary Policy Report in advance of that testimony. While its release was largely overlooked, it is a treasure trove of information, including several special topics that give insight into important concerns for the Fed. Those special topics are:

  • Determining how tight the labor market is
  • Understanding why inflation has been low in advanced economies
  • Closely examining monetary policy rules

These topics will likely be touched on in Powell’s testimony or in the question-and-answer sessions following his testimony, given markets’ focus on inflation and Fed policy-making. All are very important given their impact on Fed decision-making going forward.

2. Continued Brexit negotiations. UK Prime Minister Theresa May met with her Cabinet last week in an effort to internally agree upon the terms it will seek in Brexit negotiations with the European Union (EU). This was necessary because May is scheduled to meet with European Council President Donald Tusk this week. The prime minister is between a rock and a hard place — she is burdened with unrealistic expectations from much of the UK over the terms that she should insist upon for the Brexit, and she is facing general dissatisfaction within the UK and even her own party while negotiating against the EU, which clearly has an upper hand. May is reportedly attempting a “cafeteria-type” proposal, where the UK is advocating for a trade agreement similar to the one it has today on an “a la carte” basis — without having to assume all of the additional obligations that made membership in the European Union unappealing to British citizens.

Negotiations appear headed for trouble as Tusk, not surprisingly, already announced in the past few days that the UK’s position is “based on pure illusion” and that the UK cannot “have its cake and eat it too.” Tusk made his position abundantly clear last week, explaining, “From the very start, it has been a key principle of the EU-27 that there will be no cherry-picking and no single-market a la carte … This is and will continue to be a key principle, I have no doubt.” We will want to follow negotiations closely, especially given that we’re nearing one year until Brexit is supposed to occur — with far less progress made than should have been made by this time. Coupled with the rapid passing of time, this lack of progress in negotiations suggests economic growth could be further depressed, as economic policy uncertainty typically leads to decreases in corporate spending.

3. China flexing its muscles. Last fall I wrote that Chinese President Xi Jinping was in the process of consolidating power, which could include extending his term in office. This effort has gained significant momentum, as it was announced over the weekend that China plans to drop term limits for the presidency. This is a very significant moment for China, and suggests far greater power for Xi going forward. Last week also saw the Chinese government take over an insurance company and charge its founder with economic crimes. While many pundits believe it demonstrates China’s interest in reining in growing corporate debt, it also is a sign of Xi’s growing power. Greater strength at home will undoubtedly enable Xi to demonstrate greater strength in foreign relations — including trade. Going forward, I expect China to respond in a more powerful way to growing protectionist threats from trading partners such as the US.

4. US jobs report. This coming Friday will see the release of the US Employment Situation Report for the month of February. The key data point to focus on is average hourly earnings; in my opinion, this is the single most important metric for us to follow. Recall that a surprisingly high average hourly earnings number in last month’s jobs report — 2.9% year over year — triggered fears of inflation, higher Treasury yields and, in general, the start of significant market volatility that has yet to end.

5. Italy’s general election. The Italian general election will take place next weekend, on March 4. The outcome is uncertain given that there was a moratorium imposed on polling in mid-February, which remains in effect through the election. In addition, when polls were still in effect earlier this month, they showed that about 30% of Italian voters were undecided.2 We will want to pay close attention to this election, given 1) the difficulties Italy may face in forming a governing coalition (think of how long it took for Germany to do the same after its September election), and 2) the possibility that the new government could tilt more anti-EU, which could prove problematic for French President Emmanuel Macron’s attempts at reform and improvement of the EU, including greater fiscal unity (Macron is already having difficulty implementing reforms in his own country).

Key takeaway

In summary, after years of relative calm and tranquility in the markets, volatility in equity and bond markets appears to be here to stay. I think of this as a lengthy transition period as markets are normalizing in response to the normalization of monetary policy by central banks.

In essence, last week supplied more evidence of the “Chihuahua market” that I wrote about two weeks ago. Instead of a bull market that drives equities ever higher, we’re seeing a market that can make quite a bit of noise, jump up and down, run in circles and nip at investors’ heels. This market (much like Chihuahuas themselves) is nothing to be scared of, in my view — but some investors may need to adjust their approach in dealing with it. That could include greater diversification, an allocation to alternative investments, and equity strategies that focus on stocks with attractive valuations and a history of low volatility.

1 Source: Bloomberg, L.P.

2 Source: Reuters, “Uncertainty reigns in final polls ahead of Italy election,” Feb. 16, 2018

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Also, explore our Market Compass investment guide, which provides a look at three macro issues —disruption, divergence and demographics — using clear, compelling charts.

Important information

Blog header image: ImageFlow/Shutterstock.com

All investing involves risk, including risk of loss.

Diversification does not guarantee a profit or eliminate the risk of loss.

Alternative products typically hold more nontraditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

The opinions referenced above are those of Kristina Hooper as of Feb. 26, 2018. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper
Chief Global Market Strategist

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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