Risk assets continued to grind higher in the past week as economic data remained firm, geopolitical risks declined and the US earnings season started on a positive note. On economic data, we saw strong industrial production data from Germany and Italy, underpinning the consensus view of a Europe growth recovery. A spike in Taiwan’s September export numbers and better-than-expected 3Q17 GDP numbers from Singapore also gave optimism that Asia/emerging markets and global trade growth is chugging along. Political tension was down a notch after we went by another week without “noise” from North Korea, and Catalonia suspended its independence declaration to seek dialogue with the central government. In the US, the earnings season started with around two-thirds of the companies reporting positive earnings surprises for calendar 3Q17.

This week, these factors, i.e. macro data, geopolitics and earnings will likely remain the key drivers for the markets. On macro, the market will probably look to US industrial production, the Philadelphia Fed manufacturing index and the UK labour market data to get the latest indications of the strength of the global economy. On geopolitics, the deadline for the Catalan President to clarify his stand on whether Catalonia has declared independence is looming, and a refusal to back down risks re-escalation of tensions this week. The start of the China’s Communist Party of China 19th Party Congress on 18 Oct (Wed) will be of interest to the markets, on expectations of greater clarity on China’s leadership transition and her policy priorities in the next five years. European companies will begin reporting earnings this week, adding to the activity in the stock markets. In the US, 56 S&P companies will report their earnings this week. Expect positive earnings surprises to continue.

On FX, USD strength took a pause last week, especially after a disappointing US CPI read last Friday. For a period of sustained USD strength, a pick-up in US inflation looks to be an important ingredient. We continue to wonder how long inflation can diverge from the firmer economic growth that we are seeing.