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.
So given the above, my view for the week ahead is as follows
10 Year US Treasury Notes
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.
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.
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.
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.
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.