The October Effect

The new month will commence tomorrow and this year that sees US equity markets entering the most notorious month of the year at close to their all time highs. Throughout the last century the biggest one day crashes have all occurred during the month of October- Black Monday (1929 and 1987), Black Tuesday (1929) Black Thursday (1929). There’s a black Wednesday in there too, when the pound crashed out of the ERM. However, ‘Black Friday’ as we know, is associated with something altogether very different.

Now, because of all these historic crashes and sell-offs in the equity markets have occurred during the month of October, it has now become known as the ‘October effect’. Interesting therefore that the US and China trade talks are due to recommence next month too. What is also interesting; is thatthis year the global economy appears to be at, not very near the end of a 10year period of expansion. So, should we be wary of what might unfold in the next few weeks then? I think it’s probably wise, especially given that most recentlyoptimism over the prospect of a US/China trade deal has been on the rise again.

Meanwhile, it’s the last trading day of the month today. It’s also the end of the third quarter and the end of the Japanese fiscal half year. The last day of the month usually means there’s potential for FX fixing orders to impact the markets, but this month it might also make for some larger than normal, last minute equity portfolio adjustments too.

Late on Friday evening the GBPEUR did drop below support at 1.1235, but there was very little follow through on the move. That’s probably because it was so late in the session. The low for the day was set at 1.1231. Furthermore, there’s been no further downside in Asia overnight. However, that might change as the day progresses and there is the potential for the price to come lower today, especially if there is month end fixing demand to buy the EUR. That’s often indeterminable, but can never be ruled out.

Being the first week of the new month, that means one thingin respect of economic data releases-it’s US payroll week. So, as usual the markets will be looking forward to the latest US jobs report on Friday. Unfortunately, these days in terms of any kind of market reaction to this data; the advancedanticipation rarely gets transposed into exciting market moves. We shall just have to see how that plays out again this week- perhaps more on this subject ahead of the data, in my next article on Friday morning.

Before any of that we have the only major central bank policy meeting of the week, from the Reserve Bank of Australia. That’s due in the early hours tomorrow and the RBA isexpected to keep their 1% benchmark rate on hold. So,assuming that’s the outcome, the markets will probably focus on what the central bank has to say about the prospects for the economy and how that impacts the currency.

This morning the markets might pay attention to the latest German unemployment data (8.55am) which will probably have reached you before this does. Hence I cannot legislate for whatever that reveals. Later at 1pm there’s there’s alsoGerman CPI inflation data due out too, which could also have an impact. Irrespective of either outcome, what I can say; is that the fortunes of the German economy are still very much on the markets’ radar and in the short term, likely to remain that way.

The other important release due this week is from the US. The latest ISM manufacturing index for September will be released at 3pm tomorrow. Now, last month that data sent a shiver through the markets when it dropped below 50 for the first time in a long while. The reason for the concern is that readings below 50 indicate manufacturing contraction. This month the markets are expecting something of a rebound, back above 50 and probably won’t be too impressed if they don’t get it.

Important Economic Releases/Events Due This Week

30/09- 1.00pm Eurozone- German September CPI inflation report

01/10- 5.30am Australia- RBA Monetary Policy Decision

            (Consensus for Benchmark Rate to remain Unchanged at 1%)

01/10- 9.30am UK September Manufacturing PMI

01/10- 10.00am Eurozone September CPI Inflation Report

01/10- 1.30pm Canada July Annualized GDP Estimate

01/10- 2.30pm Canada September Manufacturing PMI Index

01/10- 3.00pm US September ISM Manufacturing Index

02/10- 1.15pm US ADP September Private Payroll Report

03/10- UK September Services PMI Index

03/10- 3.00pm US September ISM Non-Manufacturing Index

03/10-3.00pm US August Factory Goods Orders

04/10- 1.30pm US September Unemployment Report