Weekly Trading Forecast 30 January 2017

In a week where President Trump signed his wall building mandate, and Prime Minister Theresa May made her way to the US to meet him, we’ve also had the momentous moment of the Dow Jones Industrial Average Breaking 20,000 – and looking like it’s staying up there. From my perspective, equities seem to be dangerously overvalued, with indices rising with very little fundamental justification in terms of earnings etc., and still none whatsoever in the form of US policy from the White House. Markets seem fine to ride this for now, but at some point, someone will need to hit sell!

Looking at the week ahead we start in small hours of Monday morning when the Chinese Business Sentiment Indicator is released. With a previous score of 55.9, this could provide a good indication of the European session’s opening ahead of the Eurozone Business Confidence figures. Given that the previous week saw house lending in the Eurozone increase, this data is largely expected to continue the so far so positive data from Europe. Sticking with the Eurozone, German inflation data also appears on Monday, giving us a look at prices in the first month of 2017. For Yen traders, let’s also keep an eye on the Japanese unemployment rate arriving late on Monday evening, where traders will be keen to see if there is an increase on the previous figure of 3.1%.

Sticking with Japan, early Tuesday morning will see the Bank of Japan release their interest rate – expected to be unchanged, but more importantly followed a few hours later with the BOJ’s Quarterly Outlook. If there is to be any change in the BOJ’s bond purchasing strategy, it will be telegraphed here. Later on Tuesday morning we then have the German and Eurozone unemployment figures for January, previously 6% and 9.8% respectively. For the story of continued price support in the Eurozone to gain traction, these figures need to show a sustainable decline. 10am on Tuesday we will also get the flash GDP and Inflation figures for the Eurozone. The year on year GDP Growth Rate is forecast to come in above 1.6%, while the inflation figures for January are expected above 1.18%.

Wednesday morning starts with Chinese Manufacturing PMI data expected at 51.2, offering the potential to boost European equities on Wednesday’s open. To this extent, keeping an eye on the German Manufacturing PMI will also be essential for Euro traders. Expected at 56.5, there is potential for a downside surprise unless data from China and elsewhere supports it.

Wednesday afternoon, is when we start to get some big US data. The ADP Employment Change figures for January will be expected to show the US added a further 168k jobs. The ISM Manufacturing PMI for January is then expected to come in at 54.5. A strong turnout for these data points is unlikely to boost the chances of a rate increase during the Fed’s Interest Rate Decision Announcement on Wednesday evening, but barring any Dovish commentary, it will only fuel speculation for action at the next Fed meeting.

On Thursday, it will be unlikely that Bank of England Governor Mark Carney will change the base rate of 0.25%, but traders and investors will be keen to see how this decision was arrived within the MPC when the minutes are released.

Then on Friday, February 3rd, the big event of the day will be the US Non Farm Payrolls data in the afternoon. In general, as long as the ADP figures on Wednesday are supportive, speculation for the NFP data to come in above the 168K expected will increase. Keeping a keen eye on the unemployment rate expected at 4.7% will also be essential. If these figures come in as expected, or just below, we may have a situation where attention rapidly turns to the slew Of survey data for the US due around 14:45 on Friday. As these can be considered forward looking, they could outweigh a lacklustre NFP data set.

 

Forecast

Given the above, my view for the week ahead is as follows

 

10 Year US Treasury Notes

Bearish.

Price failed to break above 125’00’0 and has since fallen on the prospect of further rate increases. Outperformance of US data in the week ahead could see a test of 123’00’0 by the end of the week.

 

S&P 500

Bullish

Despite corporate fundamentals still not backing the epic rises in equities, the slow grind upwards of oil and increasing consumer prices for the time being seems to be all that is necessary to push equities forward. 2300 is the big level to break, which given the move of the previous week is not impossible, but is possibly lacking the fundamental justification. That being said, with Bonds expected to fall, a move upwards in equities is more likely as traders reallocate.
Currencies

Cable

Bearish

With the worst of Brexit over for now, economic data can once again show its impact. There isn’t much to move the pound this week, so it could only be traded on the strength/weakness of the dollar. 1.28 is the next target for cable, but it may need to consolidate a little before reaching there.

Euro

Bullish.

The Euro has been one way traffic north since the start of 2017, helped by President Trump’s comments that the Dollar was too strong. Both the US and the Eurozone are currently putting out some good data points, so the balance could tip in what is said by representatives of the respective areas. Strong US data could encourage another Tweet storm by the President

 

Crude Oil

Bullish.

Oil seems to like the space between $53.40 and $51.00, even with price supportive comments from OPEC. With US Crude Oil Inventories Expected to show a draw for the week ahead, we may see some more upwards drift for oil.

 

Time to Buy The Pound?

A week after PM Teresa May’s speech in which she outlined Britain’s preferred course through the Brexit negotiations, she has had an incredibly tough session in Wednesday’s PMQs.

With her hands now tied into delivering a “white paper” for parliamentary scrutiny, the nuts and bolts of Brexit will at last be laid bare.

But by no means has this been a bad thing for the pound.

With GDP expected to come in at 0.5%, as well as an uptick in Business Optimism, the UK continues to produce strong economic data. And the recent high court ruling and rhetoric surrounding Brexit continues to suggests that Britain’s divorce from the EU will be a far more civilised one.

Clearly what is being priced into the markets now is the likelihood that any plans to sever access to the single market will be rejected by parliament. How valid this view point is, remains to be seen, but for the time being, the pound is recovering.

 

Sterling Price Action 25 Jan 17
Sterling Price Action 25 Jan 17

Source: tradingview.com

 

Make no mistake, cable has fallen a lot since June 23. But this chart shows how much it has recovered since the start of the year. However, sterling is not out of the woods yet. We can see two key price resistance levels – 1.27 and 1.34.

If Cable can manage to break above 1.27, and is further supported by positive data, then we can reasonably expect 1.27 to become the next key support area possibly even by the end of the week.

Beyond that, and there is a clear path to 1.34, the high of the initial post Brexit range.

It seems, despite the Brexit shadow, this could be a goof point to start backing the bulls on the pound.

Weekly Outlook 23 January 2017 

Two things dominated trading last week – Brexit and Trump – two themes that will seemingly be around for a long time.

With PM Theresa May outlining her plans for Brexit, the pound saw some huge intraday swings. Where it was expected that her speech would for tell all doom and gloom, the PM delivered a much more level view than was expected. Coupled with the positive inflation data, and by Tuesday afternoon, the pound had completed it’s largest rally against the dollar since 2008.

Leading up to inauguration of President Trump, the dollar weakened, with both Sterling and the Euro gaining on the dollar for the week. In the case of the Euro, this was partly due to President Trumps concerns about dollar strength, and partly because of the ECBs decision to leave rates unchanged and announce no further stimulus – meaning that the time may soon arrive when the ECBs bond purchasing program will need to be reigned in.

Looking ahead, the market moving data points are a little spaced out this week. Tuesday morning we have the Manufacturing PMI from Germany, expected at 55.4. This figure has been well over 54 for some time, and it may take a reading perhaps below August’s 53 to shake confidence in the Eurozone. On Tuesday we will also have the US existing home sales figures, which will be monitored for follow through on the positive US economic data.

On Wednesday morning the CBI Business Optimism index will be monitored for any impacts from Brexit, but for the most part is not expected to change the current sentiment on cable. Later in the day US Crude Oil stocks are then expected to decrease by 1.67million barrels, vs the build of 2.347 million the previous week. Wednesday will end with BOE Governor Mark Carney speaking – so there could be a last minute end of day bout of volatility for cable.

For cable traders, Thursday will be the highlight of the week, with UK Year on Year GDP for 2016 expected at 2.1%. This has been on the up since Brexit, but is still massively down from the 3.5% of January 2015.

Friday then ends with US Q4 2016 GDP Growth Rate figures – Expected at 2.1% vs 3.5% previously, but a figure north of Q3’s 1.4% should be enough to suggest sustainable growth in the US.

 

Forecast

So given the above, my view for the week ahead is as follows

 

10 Year US Treasury Notes

Bearish.

US Treasuries ended the previous week lower, and there is so far no reason to suggest otherwise, as inflation and GDP figures point to strong economic growth, the prospect of future rate hikes will be further priced in.

 

S&P 500

Mixed.

Equities are still in the record high territory, and it will need something of significance to push them further, which doesn’t seem likely this week. We are in earning season, and so expect any surprises for the S&P to come from here.
Currencies

Cable

Bullish

Given how over priced the hard Brexit possibility was, this trade still needs to unwind. And with positive economic data, the pound could rally further, but is still heavily exposed to political risk.

Euro

Bullish.

Strong Germany data and rising inflation will keep the Euro buoyant against the dollar, and with no Fed speakers this week, there is reduced chance for any US hawkish surprises.

 

Crude Oil

Bullish.

We can expect oil to continue to remain above $50.00 a barrel, and with an expected draw in US supply, and the potential for another round of production cuts to be discussed by OPEC, there’s still further upside in crude.

 

Carney’s Brexit Dilemma

“Brexit, Brexit, Brexit!” – say it’s name three times in the mirror, and hope for it to go away.

Well, that’s probably what Bank of England Governor, Mark Carney would want. More than half a year since Britain’s vote to leave the EU, and the shadow of Brexit still looms large for the UK economy and political landscape.

Carney now seems caught between Scylla and Charybdis. Widley condemned by the Remain camp for acting too soon in August 2016 to reduce the Bank of England’s base rate to 0.25%, he now stands to be accused of not reacting quick enough to the rising inflation issue.

For anyone who was watching or listening to PM Theresa May’s address regarding Brexit on the 17th of January, the below chart will look familiar.

 

GBP Price Action 17 Jan 2017
GBP Price Action 17 Jan 2017

Source:tradingview.com

 

To put this chart in some context, towards the tail end of the prior week, elements of PM Theresa May’s speech was leaked, causing markets to further price in the possibility of a hard Brexit. This sentiment carried over into the open of the Asia session on the preceding Monday (16th), resulting in the pound/dollar cross trading as low as 1.19875 – and raising fears of a retest of the October Algo spike low towards 1.16. However most likely due to lower volume on account of the US Martin Luther King holiday, the pound ranged and failed to move lower. Tuesday saw the onset of inflation figures delivering an increase of 1.6% vs. the expected 1.4% – and in a sign of what some may consider insider dealing, cable rallied massively in advance of the data from 1.20400 in the Asia session to 1.21880 by 9:30 GMT.

Just looking at the chart below, it doesn’t require a genius analyst to see the effect Brexit has had on consumer prices already.

 

2016 UK inflation rate
2016 UK inflation rate

Source:tradingview.com

And then came the main event, PM Theresa May’s speech despite being partially leaked, delivered some surprises. While the market had priced in hard Brexit rhetoric, May delivered a mostly balanced speech, and importantly for Cable, indicating that the conditions under which Britain will leave the EU will be put to vote. The markets had not priced this vital piece of information in, and cable rallied for the better part of the day. The key take away here is that the pound is still massively politically sensitive

So, what to do?

Inflation is rising, on account of the currency, and at its current rate there is a risk of inflation overshooting the BOE’s target rate of 2%. Let’s not forget, that during August, the BOE also implemented a large chunk of QE, to the tune of some £435 billion.

And so Carney’s dilemma is this: Can he risk a rise in interest rates to curb an overshoot in inflation, when the underlying causes for this inflation are not from rapid economic growth, but more from a heavily devalued currency?

There is no doubt that the pound’s current value has made the UK “cheaper” for some investors, but the uncertainty and political sensitivity of the Brexit issue has not made the UK more secure, and long term investment is still a concern – especially in the financial and property sectors. Raising interest rates too soon could stifle the easy credit many smaller companies have been relying on, but leaving it to overshoot could start to cause widespread consumer issues. After all, do we really need another Marmite Gate??

Weekly Outlook 16 January 2017

As expected, the previous week was a tale of two halves, beginning with the continuation of the risk on theme or Trump rally that saw the S&P continue it’s mostly buoyant setting. Similarly for European equities, the Dax for the most part stayed between 11500 and 11600. This was aided by positive PMI data from China early in the week, and then further boosted by the surge in oil

We did start to see some easing in the Dollar strength against the Euro as German GDP came in at 1.9% and Italian production figures came in 1.2% above the expected 2%, signalling that there is still some fight left in the Eurozone ahead of the next ECB Policy meeting. This is against the backdrop of hawkish Fed rhetoric, so it could be that market players are seeing the Fed rhetoric as just that – especially as several of these speakers will be trying to catch the attention of Mr Trump.

The pound tumbled as speculation increased that a hard Brexit was on the way, undoing the impact of the positive data prints. Theresa May is scheduled to speak on the Brexit matter on the 17th – and all eyes will be watching.

Elsewhere, President Elect Donald Trump held a press conference that didn’t give too much away on economic policy, but none the less got people talking on the potential security concerns his presidency may pose. One thing is sure, the next 4 years promise to be politically very interesting.

For the week ahead, the big stuff starts on Tuesday the 17th with slew of UK data at 9:30 including the Retail Price Index, Producer Price Index and chiefly the Inflation Rate. With a consensus figure of 1.4%, it is almost a given that the figure will match or exceed this given that there has been ample time for the effects of Brexit and the devalued pound to kick in (remember Marmite-Gate??).

30 minutes later there will also be the ZEW Economic Sentiment Index for Germany. This will  be focusing on January data, so will provide an assessment of sentiment in the fledgling new year. But if current trends continue, it is difficult seeing this figure coming in under the previous value of 13.8.

Tuesday also features three Fed speakers – Dudley, Brainard and Williams – but given the current climate, the surprise here would be if they were not hawkish in tone. Of more importance on Tuesday will of course be the speech on Brexit by Prime Minister Theresa May. It’s safe to assume that this will move the pound, and with her previous stance putting immigration ahead of the economic factors, this could get ugly for cable.

Wednesday we have the final inflation data for the Eurozone, expected at 1.1% for the year 2016, and then later that day we have inflation data for the US. This could make things interesting for fixed income and currency traders, as the expected year on year figure of 2.1% would be the highest since 2014, and could send bond prices falling. Let’s also keep an eye on Janet Yellen’s planned speech at 20:00 GMT.

Thursday really kicks off with the ECB interest rate decision, followed by press conference. Where it is likely that no changes will be made to the rate, traders will be listening attentively to the words of Mario Draghi, and looking for any signs that the bond purchase program needs to be tapered. Later in the day, initial Jobless claims for the US will become a key data point, with the figure expected to increase to 253k claimants compared to 247k previous. The Philadelphia Manufacturing Index will then provide a good barometer of manufacturing sentiment, which is still expected to be positive, but perhaps not as positive as previous with an expected figure of 16 vs 21.5 previous.

For the oil traders, Crude Oil Stock Change for the US would be the key data point today, with anticipation of another build growing following last weeks build of 4.097 million barrels.

Friday could have a risky start, with China GDP figures expected early morning. Expected at 6.7%, it’s likely they will come out at 6.7% – stable, and predictable, but some may argue engineered and not reflecting the real economy. Either way, it could be expected that as long as this figure is not below expectation, a risk on theme could develop in European equities come Friday morning.

UK retail sales figures will provide some flavour to the Brexit soup, but most likely cable would be exhausted by this point.

Friday ends with speeches from Fed Harker and Williams, where further hawkishness can be reasonably expected. Oil traders will also wan to keep an eye on the Baker Hughes Rig count, which increased last week to 522. As oil creeps up in price, more and more manufacturers will be able to restart production they were previously priced out of.

Forecast

So given the above, my view for the week ahead is as follows

10 Year US Treasury Notes

Bearish.

Yes, I have been bearish on T Notes for some time, even though prices have risen mildly over the last few weeks. However the outlook still seems bearish. This week in particular with so many inflation data points and Fed speakers, we may see the shift in market players as they seek to unload treasuries ahead of any potential increase in interest rates.

S&P 500

Mixed.

…However, with a bullish lean. The current market climate has pushed many into equities, however as inflation continues to rise and yields continue to increase, other options may start to seem more attractive. Especially as earnings season starts to kick in.

Currencies

Cable

Bearish.

Unless Theresa May shocks the world by declaring her love for all things immigration, it is likely she will deliver a speech in keeping with her previous ones. Hard on immigration, tight lipped on the Brexit negotiation. Any calls for unity and the like will of course be sprinkled over the message, but wont stop the pound from dipping below $1.20

Euro

Bullish.

The Eurozone is not as weak as many would want others to think, and the data supports this. Positive data from Germany and the Eurozone on the whole will not bring a change in rate on the 19th, but it will signal that very soon things will need to change. Even the slightest hint of the word taper or anything that could come even close, may see a rally in the Euro and sell of in the Bund.

Crude Oil

Mixed.

The cost of oil could be reaching a near term equilibrium as producers adjust to the recent supply and price changes. Even an increase in the rig count may not be enough to cause oil prices to drop significantly.

Is Oil on The Boil?

Looking at a chart of crude oil futures, you could be forgiven for thinking 2016 did not end with OPEC agreeing to a cut in production.

And although price over the previous week was buoyant above $52.00, since Monday it seemed as though price could easily peak back below the $50.00 level.

 

cle-11-jan-17
Crude Oil Futures Jan 2017

Source:tradingview.com

 

The early decline in the week was a direct result of the continued rig count growth in the US, threatening to create another over supply situation.

As was expected by some, OPECs decision to cut output to 32.5 million barrels a day pushed up the price of oil, but at the same time has now made production a viable option for competitors that were previously priced out when oil was below $50.00

 

crude-barrels-jan-17
Crude Oil Inventories Jan 2017

Source: tradingeconomics.com

 

However despite this, and despite a rise in US crude oils stocks of 4.097 million barrels as the above chart shows. This figure was higher than the expected build of 1.162 million barrels, and should have triggered a another bearish move for the black stuff. However crude oil futures rose from an intra-day low of $50.74 to $52.77.

The reason for this being two fold, firstly There was news that Saudi Arabia will reduce February crude sales to China and southern Asia countries as it slows supply in accord with the November output cut.

Secondly, although the stock rise of 4.097 million barrels at first appeared bearish, there has been an increase in the amount of crude oil being used by refineries across the US. Bloomberg reports some 17.1 millions barrels being used each day last week –  all ahead of planned seasonal maintenance.

This is all good news for oil bulls, as where it seemed prices may struggle above $50.00, they now seem well supported by a number of fundamental factors, for the time being at least. It will be important to maintain a view on supply levels in particular from the non OPEC countries in the coming weeks as producers get used to the higher cost of oil.

 

Weekly Outlook 9 January 2017

The first week of the year, as expected was somewhat mixed. Dollar and US treasury markets brushed aside decent manufacturing and service sector ISM surveys to instead focus on the minutes from the December FOMC meeting. The minutes went on to reveal the Fed were not as hawkish on the economy as markets had been lead to believe. As a result 10 Year Treasury Yields which started the week at 2.51% fell to as low as 2.34% before a solid print of 156k for the US Non Farm payroll data, accompanied with a 0.1% increase in hourly earnings and an unemployment rate meeting expectation of 4.7%. This seemed to change the perception of rate increase outlook as the US labour market appears to be in good shape, coupled with the spectre of global price rises, 10 Year Yields ended the week at 2.41% up from it’s Thursday low.

The Euro experienced a somewhat roller coaster week, initially weakening as the post Trump 2016 sentiment continued, before rallying from the low of 1.03411 to above 1.06 in the aftermath of the Fed minutes. However the rally was short lived, as the single currency ended the week down at 1.05319.

Cable shared a similar ride, rallying as economic data continued to suggest that the world after Brexit has not yet ended, and although Sterling rallied to a midweek high of 1.24247 it ended the week trading down at 1.22799.

Elsewhere, Crude Oil started the week with a surge in price as the OPEC production cut began to kick in. This then gave way as price fell from above $55.00 a barrel to just above $52.00. However US Oil Inventories cam in at a draw down of –7.05 million barrels compared to the draw of –2.15 million. This spurred oil onto a weekly close of $53.67 a barrel.

This rise in oil helped equities on their continued upward trajectory, with the Dow Jones ending the week just shy of the record figure of 20,000. In addition, the prospect of rising producer costs is currently still seen as a profit boosting factor for most companies.

For the week ahead, it seems the first market shaping data point will be the end of year inflation data for China. The China inflation rate has been steadily creeping upwards since the second half of 2016, and given the rise in oil prices since then, there is no reason to suspect this trend to falter just yet. A strong figure, year on year figure of at least over 2.0% could see European markets open on the front foot on Tuesday.

On Wednesday, Brexit is back in focus as a slew of production and manufacturing data points for the UK will be released in the morning. Given recent trends for good post Brexit data, it is unlikely we will see significant rallies unless figures come in substantially better than expected and accompanied by some type of political shift. With all the UK data points for Wednesday expected to come in positively, the better trading opportunity could present itself in the event of a miss on expectations.

Wednesday also sees the return of the US Crude Oil Stock Change. With the previous figure being a draw of 7.05 million barrels, oil bulls will be monitoring this for further evidence of a decrease in supply of the black stuff. But let’s not forget, with oil over $50.00 a barrel, production could soon start kicking up again at refineries that were previously priced out.

Thursday starts with German Full Year GDP 2016. Expected at 1.9%, anything matching or beating the previous figure of 1.7% will act as a shot in the arm for the Euro. Anything below the 2016 low of 1.5% and it could signal trouble ahead for the single currency.

After midday on Thursday, things will start to get busy when we get a dump of data from the US. All of these will help paint the picture of the US economy in 2017, but all eyes will initially be on the Initial Jobless Claims figure. Expected at 258k. Dollar bulls will need to see this come in below expectation to show steady uptake in the jobs market. This figure has averaged 257k over the last 12 months, so it may take a figure closer to the December high of 275K to put the dollar in bears in control. Thursday also ends with a few Fed member speeches from Evans, Lockhart and then Bullard. It will be interesting to see if they reshape the market view of 2017.

On Friday, it’s time to sign off with a bang, as we get US Retail Sales and Core PPI data. Month on Month retail sales are expected at 0.7%, 0.6% above previous. Fed Harker speaks at 14:15 on Friday before we get the Michigan Consumer Sentiment Preliminary report. The previous report came in at 98.2% as US consumers anticipated the Trump effect as a positive. So far there doesn’t seem to be any reason for this to change, however at nearly 100% already, perhaps the only way is down??

Forecast

So given the above, my view for the week ahead is as follows

10 Year US Treasury Notes 

Bearish.

Prices are rising, and with positive production and consumer sentiment figures, the US may need to consider rate increases perhaps sooner than anticipated.

S&P 500

Bullish.

Barring some shock news, equities will continue forward on the anticipation of decreased regulation and increased profits from rising consumer costs

Currencies

Cable

Mixed.

The pound could rally on better than expected manufacturing data, but as has been the case for some time, with limited upside, as any political risk or dollar strength can quickly draw it down.

Euro

Mixed.

The Euro could see some strength in the early stages of the week as good data from China and Germany creates a positive sentiment for the Eurozone. However, the strength of the dollar may weigh on the single currency towards the end of the week, especially if Fed speakers put forward hawkish rhetoric.

Is 2017 The start of the Inflation Game?

It is only the start of 2017 and already analysts are questioning what the impact of higher inflation will be.

With preliminary year on year inflation figures for Germany jumping from 0.8% in November to 1.7% in December and Eurozone inflation rising from 0.6% to 1.1% the ECB are now in a difficult situation. The current rise in inflation has been linked to the rise in energy, with Crude Oil futures trading above $53.00 a barrel at the time of writing. And with the OPEC production cut only just starting to kick in, we can anticipate some further bullish momentum when it comes to the black stuff.

With ECB President Mario Draghi having only recently said that tapering the current bond purchasing program was not discussed at the last ECB meeting, it is anticipated that this view point may need to change if inflationary trends continue. After all, the Eurozone economy is starting to see the uptick in prices that the central bankers have been trying to engineer all this time.

 

eu-inflation
2016 EU Inflation

Source: tradingeconomics.com

 

Of course, this is still some way from the ECBs target inflation rate of close to 2%, but if 2017 continues where 2016 left off, then this won’t be too far away. It will take some time to reel in the large amounts of spending, but traders will now be expecting the rhetoric from the ECB to begin to change.

If we keep in mind that currently the Euro is trading at €1.04 against the dollar, there is risk of a fall towards parity should there be any signs of weakness in the Eurozone recovery. Whereas the ECB’s case for a weakened Euro to stimulate inflation and boost exports is valid, any benefits this may bring could be quickly undone if the Euro begins to fall uncontrollably. It will be interesting to see how exactly Mario Draghi and the ECB tackle this, with their next scheduled monetary policy meeting on the 19th of Jan.

So is this all because of that US Election thingy??

By the looks of it, no. It’s quite possible that the amount of event risk in 2016 took everyone’s eyes off the data points for a while, but inflation has been creeping up across the globe …even in Japan!

The culprit, in no small part, has been the price of oil – which has been on fire since February 2016’s lows of $26.00 a barrel, to where they are now, comfortably over $50.00.

The below chart gives a good insight into this. Through the latter half of 2016 we can see the price of oil and the yield of the US 10 Treasury Note increase in tandem. The sudden surge in yield in November of course coming off the back of the US election result, but we can see that the two have experienced a certain level of correlation.

 

10-yr-yield-and-crude-oil-jan-2017
10 year yield vs. crude oil futures

Source: tradingeconomics.com

 

So what does this mean going forward?

If we continue to see the rise in oil, and the associated impact on consumer prices, then we are likely to see the continuation of yield rises. Some would argue this is long overdue given the distorted pricing of bonds as a result of various bouts of QE. Either way it seems the bears are gathering outside the doors of the bond bulls.

Weekly Outlook 2 Jan 2017

And so the first week of 2017 begins relatively quietly. If on the hunt for trading opportunities, it may be best to sit on those hands. However, despite the Christmas and New Year hangover, there could be some interesting data points to keep an eye on.

On Tuesday morning we have the release of the Caixin Manufacturing PMI. Expected at 50.7, the figure decreased to 50.90 in November from 51.20 in October of 2016.  If this figure comes in above expectation, it will be considered another positive boost for the recent rally in equities. It will be interesting to see if the Dax responds to this in anyway. That being said, if the number is a miss, I don’t foresee this derailing the bullish sentiment on equities at the moment as this seems to be driven more by what President Elect Trump tweets or doesn’t tweet.

Tuesday also gives us our first data point of note for the US, in the form of the ISM Manufacturing PMI. The Manufacturing PMI rose to 53.2 in November 2016 from 51.9 in October – the highest reading in five months. Expected at 53.5, it will interesting to see if the recent run of strong figures can continue. Despite the increased outlook for inflation, the better trading opportunity may arise in the event PMI comes in below expectations as this may not be fully priced in given the recent optimism around the US economy.

On Wednesday the 4th, it’s time for the UK Construction PMI. This figure has been solidly above 50 since August 2016, and is expected at 53. But there is a somewhat mixed sentiment when it comes to Cable and the UK economy on a whole. Whereas inflation is a certainty given the currency depreciation, the recent data points have implied a certain level of optimism. But still the Brexit shadow has proven to be a long one, and any sign of economic fragility threatens to knock the legs from under the Sterling currency.

Wednesday evening we will then get to see the minutes from the recent FOMC meeting. Here we will be given the opportunity to pick amongst the bones of the decision, and look for any additional clues as to forward expectations. However it seems no surprises are expected.

To end the week, we have some jobs data for the US, starting with the ADP Employment Change on Thursday, and the US Non Farm Payrolls. This data is currently expected to come in worse than previous, with ADP expected at 170k down from 216k, and Non Farms expected at 175k down from 178k. However average hourly earnings are expected to increase by 0.3%.

US Treasuries

Bearish

Given the above, I will maintain a bearish viewpoint for US 10 Year Treasuries through the week, unless the data (and possibly FOMC minutes) suggest otherwise. There is still reason to expect further inflation in the weeks to come, which will only serve to increase yields. An Ideal entry price to sell could be 124’160, which is in the area where price fell sharply on the 14th of December

S&P 500

Neutral

For the last few weeks, the Trump rally has been the big thing with Equities, as companies anticipate higher profits from the increased spending and deregulation Trump has pledged. However just at the end of 2016, we saw a strong sell off in the S&P500. Although expected data appears positive, the sell off towards the end of the year could have been a sign indicating some traders feel the S&P is overvalued. It could be that the next real driver for US equities will once again come from Mr Trump or one of his tweets. Meaning the S&P could be range bound in this first week. As such i’ll keep an eye on price between 2256 and 2230.

Currencies

Sterling: Neutral

There is not much data from the UK this week, so in the event of positive US data, we can expect cable to retreat a little. However as the big US event risk comes towards the end of the week it can be expected that cable ranges between 1.2300 and 1.2420 until then. However in the event of poor US jobs data, there would be limited upside in this pair, unless there is further evidence of the “soft Brexit” or other comments to suggest a more robust UK economic plan.

Euro: Neutral

Although there are more data points for the Euro this week, there doesn’t appear to be anything that can change the fundamental outlook for the single currency. It’s quite possible that the Euro is at a price that the ECB are happy with right now, and the prospect of increased inflation in the Eurozone should be enough to prevent the Euro coming to parity with the dollar. Considering the information that has already been priced in, it would take a significant unplanned announcement to bring the Euro to parity anytime soon. Expecting price to range between 1.05400 and 1.06890.

 

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