There was little new of note from Trump’s speech at Davos, with the main comments being that “America first” did not mean “America alone”. There was no comment around the NAFTA talks, although he did allay some fears around the potential for trade or currency wars. It will be an interesting week for the US (USD) this week with President Trump’s first State of the Union speech tomorrow, the Fed meeting on Thursday and then January Non-farm payrolls on Friday, all having potential to move the market. The Federal Open Market Committee meeting this week is likely to reinforce broad market expectations of three hikes this year thanks to a more upbeat outlook for the US and global economies, and somewhat diminished concern about low inflation. This Fed meeting will be the last with Janet Yellen as Chair, having been succeeded by Jerome Powell. The market will be focused on the tone of any press -release afterwards to see whether the slow and steady pace of rate hikes will continue as per under Yellen’s stewardship, or something different. Currently the market is anticipating that interest rates will increase 3 times over the 2018 calendar with some outliers picking 4 Fed rate increases. This week will also bring Australian CPI data on Wednesday and a raft of data for China over the week. Read more
The main news of the week is the continued shutdown of the US government which has seen the USD remain under pressure. Funding for the federal agencies ran out on Saturday with Trump and Republican lawmakers locked in a standoff with Democrats. As the shutdown entered its second day, there appeared to be no clear path for a quick end to the crisis, however at the last minute a stop-gap deal was cobbled together that would fund the government through Feb. 8th. Advancing the spending bill clears the way to reopen the government after a three-day shutdown, although that could merely delay the fight over immigration, which has been the major point of contention for several weeks. In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund (IMF) has raised global economic growth to 3.9% in 2018 and 2019, up from the 3.7% per year it forecast last October. It lifted its forecasts for US growth from 2.3 % to 2.7% in 2018 and from 1.9 to 2.5 per cent in 2019. It commented that the short-term growth boost brought about by the US tax cuts will have a positive, albeit short-lived, output spill over for US trading partners. However, it also pointed out that it was likely to widen the US current account deficit, strengthen the USD, and affect international investment flows. Later this week there will be an ECB policy meeting and accompanying press statements (Thurs) and of Bank of Japan policy meeting and interest rate decision later today. These are expected to reaffirm the course of winding back monetary stimulus. Read more
What to take from the recent Bitcoin collapse
The past couple of days has seen some serious volatility in Bitcoin and other cryptocurrencies. Many, including Bitcoin, lost over 40% of their value and although the carnage seems to have halted for now, what are the broader ramifications?
The main point to note is that when ANY market goes parabolic, and starts to make exponential gains, the correction is usually swift and the declines significant. No market that’s gone exponential stabilises at the highs. No one knows where that peak will be made until after it’s been put in place, but it’s usually very short lived. Read more
It has been a quiet start to the week as US markets were closed Monday to mark Martin Luther King Day. CPI data for the US released Friday, showed that although headline inflation data was below market expectations, increasing by 0.1%, after a 0.4% increase in November and under economists’ estimates of 0.2% for the month, the core inflation rate was stronger than forecast increasing 0.3% on the month. US retail sales data for the December period increased, also released on Friday, printed in line with expectations coming in up 0.4% following an upward revision of 0.9% for the November figures. Friday’s inflation data should underscore the view that the Fed will continue to normalise interest rates over the course of 2018. The EUR surged higher as news emerged that German Chancellor Angela Merkel is likely going to be able to form a ‘grand collation’, with the SDP solidifying her position. The SDP has to has to approve the deal at a special party conference but the removal of the risk of another election saw buyers pile into the EUR. On the local scene there has been little in the way of data this week, but there is another Global Dairy auction on Wednesday morning with farmers looking for another rise to build on the previous hike in prices at the last auction. Read more
The 2018 year kicked off with the US Non-farm payroll data last Friday. The figure of 148,000 jobs created for the December month was below expectations of 190,000 however the unemployment rate was unchanged at 4.1%, remaining at its lowest level since December 2000 when it stood at 4%. The release saw the USD drop sharply against both the JPY and EUR, while precious metals prices jumped. However, there was relatively little movement in US stock indices with global stock indices continuing to rally as we get further into 2018. Investors continue to show little concern for high valuations (particularly across US equities) or the impact of tighter monetary policy preferring to focus on continued earnings growth and Trump’s business-friendly administration. So currently, leading on from last year, it appears there are few grey clouds to upset the current market exuberance, but it should be remembered that this bull run in equities is well extended, with every additional fresh record close-out bringing the market closer to the inevitable downside correction. Read more
Starting of this week’s Economic update is news that US equity markets continued to rally to new highs, with the tone remaining positive as investors grew increasingly optimistic that Congress would reach a deal to cut corporate taxes. All three major US indices, S&P 500, Dow Jones and Nasdaq all closed at record highs ahead of a vote on the proposed tax legislation later this week. European stocks were also higher, with the STOXX 600 index making the biggest gain in 5 months led by gains across car manufacturers, real estate and technology stocks. In the UK PM May addressed Parliament on plans for Brexit, giving the UK pound cause to rally. Markets will gradually start to thin as the holiday break approaches and from tomorrow we expect volumes to be significantly lower for both currency and equities. Read more
Economic update this week includes Friday’s Non-farm payroll data that was encouraging, confirming that the US economy continues to recover. The data showed that job growth continued to be solid with 228,000 jobs created over the month, unemployment levels held steady at 4.1%, but wage growth was below expectations. With conditions now set at around a 98% chance for a rate hike at the Fed meeting on Wednesday, we are now more confident that there will be another 3 hikes out over the 2018 year. Look for the accompanying revision of official forecasts and follow up press conference with Chair Yellen to provide any market moving indicators. Also announcing their final monetary policy statements for the 2017 year will be the ECB, Bank of England, Swiss National Bank and Bank of Norway. Read more
Commodity currencies were lower against the USD overnight, with the Australian dollar slipping to its weakest level since June. The AUD extended its losses after a disappointing trade surplus report which saw the data falling woefully short of expectations, coming in at 0.1B versus 1.4B expected. The sharp fall off in exports, down 1.8% for the month, indicates that demand from global markets such as China may be tapering, which is hardly supportive for the AUD long term. Read more
This week’s economic update shows choppy trading in markets overnight, with US equity markets easing from previous record highs spurred by the news of the tax legislation passing through the US Senate. Initially this week, the USD and equity markets traded at elevated levels, as the tax-cut legislation news shifted focus away from the continuing Mueller investigation into the Trump administrations Russian connections.
The S&P 500 Index reversed gains of as much as 0.9 % and the Nasdaq index fell as investors reassessed a rally that’s propelled stocks to numerous records this year. An index of the biggest tech shares dropped to a five-week low as investors switched out of the sector, overwhelming an advance by companies poised to benefit from proposed cuts to corporate taxes.