Market Insider

Why markets see next week as among most important of year

OPEC's 'market share' strategy

Even in a Thanksgiving holiday lull, financial markets are gearing up for a week of drama.

"Next week could be one of the most important weeks of the whole year," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. While U.S markets were closed for the Thanksgiving holiday Thursday, stocks were mixed Friday morning on extreme light volume in a shortened session. The market focus is already on the coming week, and for investors worldwide, it's a busy one.

First on Monday, the IMF is expected to grant China's yuan reserve currency status. The yuan would be included in the fund's Special Drawing Rights basket which, while largely symbolic, would elevate the currency and China's influence in the global economy.

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Next Friday's U.S. November jobs report is the highlight of the week because it is the last big piece of data for the Fed to mull before its rate hike meeting Dec. 15 and 16. But then there's the European Central Bank's meeting next Thursday, where it is expected to expand its easing program, and the diverging central bank policies should continue to play out in markets.

Fed Chair Janet Yellen speaks not once but twice next week, and she is expected to hammer home the U.S. central bank's message that it wants to raise rates in mid-December barring any unexpected economic blowup. Yellen will be testifying before the Joint Economic Council on Thursday, but she speaks before the Economic Club of Washington on Wednesday at 12:35 p.m. EST. There are more than a half-dozen other Fed speakers, and an open central bank meeting Monday on how the Fed operates under new Dodd-Frank rules governing its emergency powers.

Oil will also be big in the coming week, with OPEC's meeting in Vienna next Friday. The Organization of the Petroleum Exporting Countries is not expected to take any action that would change its year-old strategy to let the market set prices but the meeting may be loud with rhetoric from members that want the policy to change.

Already outspoken Venezuela tops the list, but Iran and others may also want the cartel to cut some production. Iran would want to clear the way for its own oil to come back on the market, once sanctions are lifted.

The currency market has already been previewing next week's central bank activity. News reports of a more aggressive ECB sent the euro lower Wednesday, to the $1.05 range and the dollar index moved above 100 and they continued to trade around those levels Friday. ECB President Mario Draghi speaks after the meeting Thursday, but he also travels to New York where he will be speaking to the Economic Club of New York next Friday.

The European Central Bank is expected to possibly add to its quantitative easing program and extend it to different types of debt. The ECB could also cut its already negative deposit rate by another 10 basis points.

"They are buying 60 billion euros [$64 billion] worth a month, and they possibly get to 80 or 90 billion euros," said Chandler. As the euro fell Wednesday, the yield gap between the two-year German bund and U.S. Treasury was the widest in nine years. The two-year bund yield fell to negative 0.42, reaching the widest spread with the in nine years.

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The euro crossed back above $1.06 Wednesday after dipping below it, and analysts say it's possible the common currency could move lower again after the ECB meeting. "The market's priced in a lot so it's going to be tough for Draghi to leapfrog expectations," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank.

Ruskin said the currency market will also be waiting for the November jobs report.

"Most people view the Fed tightening in December as a fait accompli unless the jobs number is very weak," he said.

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He said a level above 200,000 could not only signal a Fed rate rise but would be strong enough to bring forward expectations for hiking in 2016.

"There's a big level (in the euro) at 104.60, which is a cycle low. Just the ECB alone is going to have a hard time taking out that kind of level. I think we're going to need strong U.S. jobs data to propel it to new levels," said Ruskin.

The IMF move on the yuan has been much anticipated, but Chandler said what's not known is the percent it will be given in the basket. Currently it was expected at about 15 percent but that could be reduced. "Chinese interest rates are higher than U.S. interest rates. The bigger the weight the more emerging markets have to pay for debt," he said. "The SDR is a function of the country and the interest rate."

Chandler said there's an expectation the IMF move would boost private-sector investment, as investors follow central banks into the currency but he doubts there will be much of that initially.