Analysis written BY retail traders FOR retail traders
I almost didn’t bother!
I almost didn’t bother wringing an article this week because it was so quiet in the market last week, that is of course if you went to bed on Tuesday night and slept for 24 hours! 🙂 It’s been a strange week to what has been frankly an amazing political year, they are going to need to extend the year in review programs we have each year to 3 hours I suspect this year.
So we now have President Trump and the markets reacted in the way we expected, however, I think what shocked everybody was the turnaround the next morning when the markets pretty much recovered everything it had lost. There are probably 2 major reasons behind this, firstly the acceptance speech from the new president was heavily focused on policies encouraging growth, ending austerity and internal infrastructure investment. Secondly, the market could be encouraged by the fact that for the 1st time in 8 years one party has complete control in the US, with a Republican president, Congress and Senate. This is quite a positive position for the country to be in and should end 8 years of relatively stagnant policy making.
Of course with that comes risk, and much of the risk will be related to rhetoric over the next few weeks. There is already talk about his cabinet, and with someone who was passionate about a new era of government, some of the names certainly don’t suggest that. People like Chris Christie and Rudy Giuliani, while initially popular with the public, do have a significant skeletons in their respective closets. We also need to wait and see what happens with the numerous trade negotiations being had across the world with high-profile negotiations such as the Transatlantic Trade and Investment Partnership (TTIP), something that Donald Trump has been quite critical about during campaigning, being put on hold. There are also likely to be increased robustness around negotiations with China and conversely possible closer partnerships between the US and UK, of which Donald Trump is a big proponent.
As things stand as present it is too early to make any significant judgements about what the impact of a Trump presidency will be, but from what appeared to be very much a risk off environment during the night on Tuesday and subsequently early Wednesday morning has very much reversed to a risk on environment. The CBOE volatility index has recovered back down to 14 which is very low, the dollar index has recovered almost all of its pre-election losses, US 10 year bond yields have increased to their highest level since the beginning of the year and equities have also recovered, and in places surpassed, pre-election jitters. For now the market is happy and buoyant and focus now switches back to inflation and interest rate rises.
All of the above doesn’t appear to have changed the opinion that December will see an interest rate rise from the Fed, with futures now pricing in an 81% chance of an increase. Most of the Fed members have also come out this week and confirmed that they see no reason to hold back. It almost feels like a sure thing that they will increase in December which, on the back of it, suggests that the increase is priced in. A failure to increase in December could have a significant bearish shock on the dollar.
In terms of news last week outside of the election, it was quiet for the USD with the only significant release being the University of Michigan Consumer Sentiment which exceeded expectations but most notably crude oil inventories increasing again by 2.4 million putting further pressure on oil prices.
The single currency took a significant back step to everything else going on last week politically, but the US election does have an interesting side-effect potentially: It once again indicates an increase in right wing thinking and isolationism which, considering there are French and German elections next year, could spell significant difficulties for the Eurozone. Once again the EU commission cut its 2017 GDP growth forecast this week from 1.8% to 1.5%. The only other significant release last week was the German factory orders which came in very sluggish with a reduction of 0.6%, far below the increase of 0.2% expected. There remain significant headwinds for the Eurozone both politically and economically.
Once again the GBP had a good but quiet week last week, and was actually the best performing currency last week. Manufacturing production beat expectations coming in at 0.6% against a forecast of 0.5% and the Halifax house price index also showed a 1.4% increase in house prices. Most notably sterling appeared to benefit significantly from the election result.