There are three things traders need to make money in markets. They are volatility, volatility and volatility. Without it, we can't make anything. This coming week has the potential to provide levels of volatility not seen since the covid-19 pandemic in 2020 and the 2008 financial crisis. That's because there is a time bomb sitting at the heart of the financial system which could explode by Thursday this week. That is the deadline for the US debt ceiling.
Your TLDR is that there are 3 key junctions in the coming week we need to be aware of. Month end flows on Wednesday, Non-Farm Payrolls on Friday and whilst they'd usually be headline events all on their own they will pale into insignificance on Thursday if the politicians in Washington fail to reach a deal to raise the $31.4 Trillion Dollar debt ceiling to avoid a catastrophic default. Data wise - Monday will be a write off, so let's jump straight into Tuesday and look at the key markets to focus on this week.
There is virtually no economic data for Monday this week. Coupled with the Memorial Day holiday in the US, it's worth keeping your powder dry for the more important events later in the week.
The Japanese Unemployment Rate will be printed overnight on Tuesday and whilst we aren't expecting a change from the current levels of 2.8%, it's worth noting the slight uptick in trend over the course of the year so far. There could be some connection with the general sense of change we see coming out of Japan. A recent research document from the Bank of Singapore signposted a new dawn for the Japanese economy and a return to 'healthy' levels of inflation. It's something we've heard before but this time it could be different. New BoJ Gov Ueda is sticking to a loose monetary policy for now so we have held a short yen bias (long USDJPY). The only caveat would be if the US defaults this week. The yen would no doubt be the safe haven traders would be fighting over.
Key Market: USDJPY
German Inflation Data on Wednesday has been moving lower which will be welcomed by both the ECB and the Bundesbank. What won’t be as welcomed is the fact that Germany last week officially moved into a technical recession. We’re expecting the inflation trend to continue with the market looking for a print of 6.5% from the previous 7.2% for the Prelim year on year readings. The play should be relatively straight forward with increased volatility and a Dax which is looking to rollover. Don't forget it's the end of the month too. Expect a potentially wild end to both the European and US sessions across all major asset classes.
Key Market: DAX
If Washington hasn't ironed out a deal to increase the US debt ceiling by Thursday then there are no rules as to how the markets would interpret this once in a lifetime event. Therefore it's not easy to forecast how to trade it. Firstly, spreads would no doubt widen making intraday scalping much harder and margins would go up. Secondly, circuit breakers could be used on major exchanges if volatility gets too far out of hand on futures markets. The team at HowToTrade think risk assets would come under immediate pressure. Stocks would roll off and money would flow into the Yen and Swiss Franc. The dollar is slightly more complicated as we could see meaningful volatility on both the long and short side and market participants try to make sense of what is going on and where to park funds. If we do go to the wire and you decide to trade then be careful!
Key Market: S&P500
In the event we do survive the Debt Ceiling deadline then Non-Farm Payrolls on Friday will be a welcome relief! In the trading room we've been monitoring Initial Jobless Claims as a guide for understanding if the interest rate hiking cycle has been putting pressure on the US jobs market. So far, not so much and NFP still seems to be defying gravity. Will this week be the month we see the change? The street is looking for 180K from the previously robust 253K
Key Market: DXY
So there we have it, Non-Farm Payrolls would usually be a highlight of the month but this week there are no rules if the US debt ceiling is not raised. Ratings agency Fitch has already put the US on watch, meaning they are at risk of losing their AAA status if a default did occur. Make no mistake this week is about as serious as it gets. Whatever happens, Shain Vernier, Connor Woods and myself will guide you through the week every day in the trading room. We live stream throughout the day so you'll have over 30 years trading knowledge and experience in your corner. Head over to HowToTrade.com to sign up for a free trial and we'll see you in our next Live Stream!