It’s been a busy week for capital markets. Investors have had to deal with direct intervention rhetoric by the U.S president elect that the dollar is too strong, “hawkish” comments on Wednesday by Fed Chair Yellen and then followed by somewhat “dovish” comments on Thursday.
In Europe, the ECB has stuck to its super-easy monetary policy, telling those calling for a tightening – like economic powerhouse Germany – to be patient as the union slowly regains its economic health. Investors even had the time to pull -$3.1B from U.S based stock funds this week, showing a waning appetite for risk ahead of Mr. Trump’s inauguration as 45th U.S. president.
The market is looking for clarity from the Trump administration. Today all eyes were on the content and style of President’s elect inauguration speech looking for indications that the administration will follow through on pro-growth campaign promises.
Will the new POTUS focus on protectionist policies, or again mention a too-strong dollar? If Trump focuses on fiscal stimulus, the dollar should find support, if he talks trade restrictions and penalties, expect much more volatility with some deep pullbacks for the ‘mighty’ buck.
1. Equities provide mixed results ahead of Trump’s inauguration
Asian bourses have generally closed out the week lower as investors continue to wait and see what the Trump administration is about to bring.
A solid economic Q4 finish for China (GDP +6.8% vs. +6.7%) has helped equities climb after bouts of selling over the past fortnight. The Shanghai Composite closed up +0.7% after declining six of the prior eight sessions while the Shenzhen Composite gained +1.5%.
Elsewhere, Hong Kong’s Hang Seng was down -0.6%, while the Aussie S&P/ASX 200 index fell -0.7% amid declines in commodity stocks. Japan’s Nikkei Stock Average rose +0.3%, notching a third-consecutive gain, as insurers rose on rising yields of long government bonds.
In Europe, equities are trading higher as market participants digest ECB Draghi’s dovish comments yesterday. The market is also nervous ahead of Trump’s inauguration ceremony scheduled later today. Financials are leading the sector gains in the Eurostoxx 600, while commodity and mining stocks are trading lower in the FTSE 100.
U.S futures are trading in the black (+0.2%).
Indices: Stoxx50 +0.2% at 3,295, FTSE flat at 7,208, DAX flat at 11,600, CAC-40 +0.1% at 4,844, IBEX-35 flat at 9,382, FTSE MIB +0.1% at 19,510, SMI +0.1% at 8,278, S&P 500 Futures +0.2%
2. Oil finds support ahead of compliance meeting
Ministers from OPEC countries are scheduled to join their counterparts from Russia and Oman in Vienna over the weekend to discuss whether oil producers are complying with the agreement reached last year to cut production to prop up prices.
The meeting is an effort to convince skeptical markets that the oil exporters are serious about cuts.
The Saudi’s, which are expected to attend the meeting along with fellow OPEC members Algeria, Kuwait and Venezuela, have already said they have cut production below +10m bpd for the first time in nearly two-years.
Brent crude future prices are up +68c at +$54.84 a barrel, while U.S. West Texas Intermediate (WTI) crude oil futures are trading up +63c at +$52 a barrel.
Gold (+$1,199.64) prices are holding steady, supported by a weaker dollar. The yellow metal is heading for its fourth weekly gain, with investors waiting for Trump’s first steps as president after he takes office later today. Market remains wary of the potential impact of his policies. The metal is on track to end the week up nearly +1%.
Silver is also poised for a fourth consecutive weekly gain.
3. Sovereign yields continue to push higher
Germany’s benchmark 10-year government bond yield have rallied to a one month high ahead of the U.S open as U.S. Treasuries come under renewed selling pressure.
The 10-year Bund yield has backed up +3bps to +0.333% with other euro zone bond yields also giving up earlier falls to trade higher in the European session.
U.S. Treasury yields have been pushed higher this week by stronger-than-expected economic data and by comments by Fed Chair Janet Yellen signaling a “steadily rising path” for U.S. rates.
Ahead of the open, U.S 10’s are trading at a two-week high of + 2.506%.
4. Bouts of ‘Big” dollar volatility ahead of Trump’s speech
The FX majors have been more volatile over the past 24-hours, with comments by incoming Treasury Sec Mnuchin calling the dollar “very, very strong” weighing on USD late in U.S hours yesterday, followed by somewhat less hawkish Fed Chair Yellen stressing continued uncertainty on the fiscal side and ongoing short-term headwinds.
Ahead of the U.S open, Europe’s single unit is little changed outright (€1.0650), not even that vulnerable to the ECB’s Survey of Professional Forecasters who sees 2019 inflation remaining below both ECB staff projections and target.
Their comments basically reinforce ECB President Draghi’s comments yesterday – he noted inflation had increased lately, but the underlying pressures remained subdued.
Sterling is on the move lower after this morning disappointing data – retail sales for December missed expectations (see below) – GBP outright is -0.57% lower at £1.2283.
5. Weakest U.K Retail Sales in five-years
U.K. retail sales fell last month, slipping -1.9% which is a whopping -1.7% miss on market expectations. The headline print is the biggest month-on-month slowdown since April 2012.
Digging deeper, analysts note that the main drivers of the poor figures include a -7.3% drop in sales for household goods stores (i.e hardware, furniture, and appliance) as well as weaker clothing sales, partly thanks to rising prices.
A slowdown in Internet sales, due to a more spread out Black Friday-Cyber Monday discount period has also played a part.