For this short holiday trading week, I’m expecting volatility in asset classes that range from oil to stocks to the U.S. dollar, as traders and investors try to figure out how to “price in” a metric ton of macro uncertainty scheduled for the next three weeks.
Enjoy turkey and family and friends the week because the schedule is full of stomach-churning uncertainty after the holiday.
First up at bat is the meeting of Presidents Trump and Xi at the November 30-December 1 Group of 30 meeting in Buenos Aires. Markets have climbed on days when optimism reigned that the talks might move the U.S.-China trade war toward a settlement, and then tumbled on days when one party or the other dashed hopes with a new demonstration of how far the two sides are apart. The most recent case in point is the failure of the just concluded APEC (Asia-Pacific Economic Cooperation) summit to agree on a closing statement. The U.S. presented a demand that the organization in essence denounce the World Trade Organization and call for its reform. The Chinese disagreed vehemently. Hence no written statement. I don’t regard the WTO question as central to the U.S.-China talks so this disagreement doesn’t doom the Buenos Aires meeting of Trump and Xi. But it is emblematic of the tendency of U.S. trade policy to veer off on tangents that seem to have more to do with the ideological warfare between China hawks such as Peter Navarro, the White House trade advisor, and more pragmatic administration figures such as Treasury Secretary Steven Mnuchin. That warfare inside the administration doesn’t bode well for settling this trade war soon. But, hey, you never know…. Which is why this uncertainty is so, well, uncertain.
Next to the plate is OPEC’s regular meeting on December 6. Right now, it looks like the Saudis are leading a charge toward cutting production across the board at OPEC & Friends. (Which means Russia.) The Saudi’s themselves have said they will cut production by 500,000 barrels a day in December. That in and of itself probably isn’t enough to end the oil bear market–but agreement from Russia and the Gulf States to follow the Saudi lead and a vote for a formal change in OPEC policy would certainly send oil prices significantly higher. The odds that the Saudi’s will prevail look about 50/50 to me right now.
And then on December 19, the Federal Reserve meets on interest rates. The odds are heavily in favor of a December increase and the market has pretty much priced that in. What isn’t priced in is policy for 2019. Even back before the October sell off in stocks, Wall Street wasn’t convinced that the Fed would raise rates three times in 2019, as it seemed to be signaling. Two increases seemed much more likely to what I’d characterize as a slight majority on the Street. But after seeming to hold fast to its three increases in 2019 schedule, in recent days both the Fed chair and vice-chair have cautioned the the Fed doesn’t operate in a vacuum and that interest rate policy must take account of a potential slowdown in global economic growth. Is the Fed trying to set up the financial markets for some new and less forceful language in the press release and press conference after the December 19 meeting? Possible and as right now you can see the market toying with hedges against that possibility and its likely result of weakening the dollar.