Market attention this week will focus on Fed speakers, the G20 meeting and tensions between the US and Iran. Here are my thoughts on all three:
Federal Reserve Chairman Powell and Vice Chair Williams are both scheduled to speak tomorrow. Investors will be looking for any further clues on the path, timing and magnitude of Fed interest rates in the months ahead and whether they validate market expectations of easing at the July FOMC meeting. Markets are already pricing in several cuts and a result the USD has weakened sharply over recent months, suggesting that the bar to an even more dovish stance is high. Nonetheless, the Fed is at least likely to deliver a 25bp rate cut at the July meeting followed by at least one or two further hikes this year.
The main event this week (Fri-Sat) is the G20 meeting in Japan and in particular the potential meeting between Presidents Trump and Xi on the sidelines. Expectations/optimism towards some form of progress on trade talks appears high. Markets are set to remain upbeat heading into the G20, suggesting that risk assets will maintain their rally this week, which will bode well for equities. However, the reality is that the gap between both sides remain wide and there may be some positive noises emanating from the G20 on trade, concrete progress is likely to be limited.
Trump and Xi are likely to discuss a range of issues, with trade teams from both sides preparing the topics for discussion, after talks broke down last month. It is likely that both Trump and Xi will agree to continue more formal talks, with both leaders sounding positive in the run up to the G20. However, the threat of additional 25% US tariffs on the remaining $300bn of Chinese exports to the US, remains in place and it is unlikely that this will be taken off the table without some major concessions from China. As I’ve previously stated it could take months before a concrete deal is agreed upon. In the meantime global trade will continue to deteriorate.
Elsewhere geopolitical tensions remain in focus as President Trump threatens Iran with additional sanctions in an effort to force Iran to renegotiate the 2015 nuclear accord, as early as today. This follows Trump’s decision to call off planned air strikes in response to Iran’s shooting down of an unmanned drone. Iranian oil exports have plunged as a result of sanctions and oil prices continue to react, rallying by around 8.7% in just under a week. Markets will remain nervous over the risks of any further escalation, leaving oil prices susceptible to a further push higher.