The Fed and Brexit: what to watch in the week ahead

published 28 January 2019

GettyImages-1091325978 — The UK sees yet another vote on Brexit

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It's a big week for markets. Not just in the UK, where we have another round of infighting over Brexit, but also in the US.

There, investors are hoping that Jay Powell has finally got the message forget the wider economy, and focus on the level of the S&P 500 (isn't that what a good Federal Reserve chairman is meant to do, after all?)

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So let's take a look at what's happening and what markets expect.

The big event for global markets: the Fed speaks

For global markets, the big news event on the calendar this week is the Federal Reserve's latest interest-rate setting meeting. It starts tomorrow, and finishes on Wednesday. We get to hear about the decision after the UK market closes (in the early evening), and then on Thursday, Fed chairman Jay Powell, gives a more detailed press conference on his thoughts.

What do you need to watch out for here?

First, we're really not likely to see an interest rate rise on Wednesday. So that will probably be a bit of an anti-climax.

What will be of more interest to markets is how Powell sounds at the press conference. Firstly, they'll want to hear a certain amount of caution about the economy not too much, as that'll rattle them, but enough to make them hope that there won't be any more rate rises in the near future.

Secondly, what they'll really be interested to hear about is any hesitation on continuing with quantitative tightening (QT). The Fed had been planning to shrink its balance sheet (by getting rid of the bonds it bought during quantitative easing) virtually "on autopilot".

Markets don't like that idea. And while there's a lot of disagreement over exactly what QT means for markets in a mechanical sense (just as there was a lot of disagreement and still is over exactly what QE did), I suspect that if Powell indicates that the Fed's balance sheet might shrink at a slower pace, then markets would love it.

It's worth noting that investors do seem to have got their hopes up about this one. The US government shutdown was well-timed as far as they're concerned. It'll make the economic data look ropey, even while the underlying economy should only take a minor, short-term hit. So you get a good excuse for the Fed to be dovish, but you also get solid growth.

That's the new version of Goldilocks (the "not too hot, not too cold" economic scenario that markets love) and investors will hope that Powell will stick to the script. If he does, you can expect the US dollar to weaken and markets to strengthen.

But let's see what happens. Powell is still finding his feet and I'm not sure he's got it in him to be sufficiently clear with markets as yet. They want reassurance that he's on their side. He might still be labouring under the misapprehension that he's meant to consider the needs of the US, not just Wall Street.

The big event for UK investors: the next Brexit vote

For the UK, of course, the big story is Brexit. I discussed this last week, but tomorrow we have another vote on prime minister Theresa May's withdrawal agreement.

The main thing to watch out for here is a specific amendment that would give MPs the right to request an extension of the Article 50 process, if there is no approval for a Brexit deal by 26 February.

Markets are very hopeful now that a "no deal" Brexit will somehow be entirely removed from the table. That hope is buoying sterling up right now. Yet complications have a way of creeping in, so don't be surprised if a burst of uncertainty leaves markets feeling unnerved again after the shouting and showboating is over once more.

What else is happening?

The US non-farm payrolls report for January comes out on Friday, but the numbers may be even less reliable than usual due to the effect of the government shutdown. There's also a US GDP estimate for the fourth quarter but again, I wouldn't pay it too much attention.

The US and China are still in talks over whether they can avoid the US increasing tariffs on $200bn of Chinese goods in March, and there will be another round of those in Washington at the end of the week.

On the companies side, in the UK we have a trading update from the Royal Mail (LSE: RMG) for the nine months to 23 December tomorrow. The share price has lost about a third of its value in the past year, and the company warned on profits at the start of October. On Thursday, we have third-quarter results from telecoms group BT (LSE: BT) and oil major Shell (LSE: RDSB), along with full-year figures from consumer goods giant Unilever.

Overseas, it's a big week for the FANG tech stocks and for China-dependent stocks. Apple (Nasdaq: AAPL) and Samsung (LSE: SMSD) both report this week, and investors in both companies will be worried about sales of smartphones dropping. The reaction will be interesting to watch will the figures be even worse than expected, or better than hoped?

Other big tech stocks reporting include Microsoft (Nasdaq: MSFT), Alibaba (NYSE: BABA), Facebook (Nasdaq: FB) and Amazon (Nasdaq: AMZN). Oh, and electric car maker Tesla (Nasdaq: TSLA), which reports on Wednesday. Meanwhile, big industrial stocks reporting include Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), Honeywell (NYSE: HON) and Caterpillar (NYSE: CAT), which in all should give us a good sense of how trade disputes and slowing Chinese growth are hitting big business.

PS Be sure to get your tickets for our event on 12 February, when I'll be talking to Tim Price and Netwealth's Iain Barnes about how trade wars, Brexit and central bankers are affectingmarkets and how you can act to protect your wealth from the resulting upheaval.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.