It has been an exciting year for stock traders. The ‘Trump effect’ spurred equity-market rallies globally in January and February, and now the focus has shifted toward Europe.
This is going to be a ‘Super Week’ for FX traders, with the FOMC and Dutch election coming through on Thursday, and talk of the UK PM Theresa May triggering Article 50 to formally begin the Brexit process, potentially as early as the last week of March.
Right now, the market has nearly priced in a 100% probability of a quarter percent Fed rate rise this Wednesday or Thursday. The odds are that they either hold the rate unchanged, which is now very unlikely, or that they raise the interest rate by 50 bps. In the latter case, panic will soon spread out to risk assets and we might see some pull-back in the stock market, especially in real-estate-related sectors.
In Europe, the Dutch election is in the spotlight this week. The latest poll suggests that the Netherlands’ far-right Party for Freedom (PVV) is likely to emerge as one of the largest parties, with the far right poised to have a bigger influence on the anti-Islam and anti-EU negotiations.
GBP/USD rebounded overnight to the 1.222 area, despite widespread rumours that the Theresa May would initiate Britain’s exit from the EU soon. The market has probably priced in too much pessimism about Brexit, so the certainty of Article 50 could result in a relief rebound of sterling after ranging for six months.
Will the European chaos hit Asian equities? As concerns sentiment, yes, this is likely. That being said, fundamentally the effect will take a much longer time to appear. Any panic selling triggered by sentiment will provide good opportunities for value investors to accumulate good stocks. Rising volatility will also create trading opportunities for FX traders.
