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.

 

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