Trade war rhetoric weakened throughout the month, despite the tariffs coming into effect and China refusing to sit down and talk with the US anymore. The markets most sensitive to a trade war (commodities and commodity currencies plus emerging markets) all gained against the greenback this month.
Just this week however, we had the FOMC raise rates as expected, and Powell was hawkish in his conference. This put a big squeeze on funding rates. We discussed this somewhat last month in reference to Australia. However, this week the squeeze is on European banks, with Italy being the focus. This saw the US dollar put some strong gains on, despite historically falling on a rate rise.
In stock land, the market flipped around on tariff news. Up one week down the next. It looks to be finishing the month higher, although well off the highs posted mid-month.
So, what can we expect moving into October? Very little. Seasonally stocks find a bottom in October and then run higher all the way through to January in what is called the “Christmas Rally”.
Known event risk for October is very little, although the ECB meeting at the back end of the month may produce some volatility. With no direction from North America, the focus will be on the ECB policy and how far behind the curve they are getting. The delay in moving rates is starting to sting the EU banks funding costs (as it has in Australia). Will their forward guidance of no rate rise till end of 2019 change? If it does, then expect a huge rally in the Eurodollar.
We will not hear from the US Fed until November but do not expect any action from them until the December FOMC meeting on the 19th. Powell indicated he would like to see the effect of the rate rises before moving again. The market is expecting another rise this year though.
We cannot trade in fear of the unknowns, and with a leader like Trump there will always be unknown risk. The trade negotiations around Mexico, Canada and China will continue to drive price action. However, there is also the Iranian sanctions and the fallout from the US going it alone. The rumblings from EU could gain traction, and would Trump then respond with a trade war against them too? Who knows with him. It seems his ego is precious and if pricked, he becomes churlish. Not exactly a recipe for a stable market.
Therefore, I expect a relatively quiet and steady October as trade negotiations continue and the northern hemisphere comes back to work from the summer. This could be interspersed with Trump tweets to disrupt and provide volatility, you just never know the unknowns.