Caution Seen Overnight But Data Still Key

This week looks set to end on a slightly positive note with European futures pointing to a moderately higher open following similar gains in the U.S. and Asia overnight.

Risk appetite has certainly improved this week although we’re still seeing investors hold back a little. Clearly there is still some fear that the markets could just implode again and all of the factors that were supposedly behind the first round are still very much still there. That said, investors may see more opportunities now than they did before which could support markets at these levels.

One of the key risks all along has been the Federal Reserve and whether it will raise interest rates at the meeting next week. The debate has been going on for months and there are plenty of arguments for and against it. Moreover, many Fed policy makers appear on the fence so it’s hardly surprising that there is so much uncertainty surrounding it.

In fact, the uncertainty is causing more problems in the markets than the prospect of a rate hike itself. This view is increasingly shared by many emerging market central bankers who think the Fed should just raise rates already and remove the uncertainty from the markets.

With the meeting fast approaching, we could see a little more caution in the markets between now and next Thursday’s decision. Whatever the announcement, the market reaction is likely to be substantial and that can make some investors uncomfortable.

That could extend to today with a number of pieces of Chinese economic data being released over the weekend. So much of the recent market turmoil has come from China and this data could be the latest trigger. The fact that it is released when the markets are closed may prompt some risk aversion into the close today. These are some key data releases and could dictate sentiment at the start of the week.

While we may see some added caution over the next week and possibly some risk aversion into the close today, that doesn’t mean the session will be dull. There are a number of important pieces of data being released that could provide some market volatility.

We’ll get final inflation figures from Germany and Spain early in the session, followed by U.K. consumer inflation expectations, a very important indicator of future inflation. In a period of low inflation, it is important for inflation expectations to remain high or the consumer may start putting off large purchases and wait for cheaper prices, or just not be worried about them rising much. In a country like the U.K., that could lead to some serious problems and consumer spending is so important to the economy. While inflation expectations have been falling over the last few years, they are still above 2% and therefore are not currently a concern.

Later on in the U.S. we’ll get PPI inflation data followed by the preliminary UoM consumer sentiment reading for September.

Economic Calendar

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.