A look at a chart for EUR/USD from last week would probably tell you all you needed to know about the markets as traders got topped and tailed trying to follow conflicting fundamentals. In spite of President Trump’s immigration ban, the dollar strengthened early in the week while equities and US Treasuries sold off. However, any fear that Trump’s ban would dent the giants in the technology sector were waylaid when Facebook smashed earnings (and successfully swept a small $500 million law suit under the rug). However economic data in Eurozone continued to show signs of strength, and the Euro further rallied as Wilbur Ross called the Dollar too strong. But the effect was only short lived as ADP Employment data foreshadowed a strong NFP report (227k vs. 157k expected), making the Fed appear overly cautious in holding rates on Thursday.
The week ahead starts with some sentiment indicators from China, giving us the first idea of whether the risk on sentiment has carried on into the new week. It’s very unlikely that these points will come in below expectation, but traders will be looking for an overshoot in order to get long European equities. With the Trump Administration labelling Germany a “currency manipulator” more eyes than usual may be watching German data points this week, the first of which being Construction PMI expected at 54.5.
Tuesdays first market mover may come in the form of German Industrial Production for Dec, expected at 0.5%, this figure should support the positive sentiment gathering pace across Europe. The Halifax House Price Index for the UK may draw additional scrutiny this week in light of the Brexit White Paper, with the year on year figures expected show positive growth of 6.2%. On Tuesday evening traders may also look at the US Balance of Trade. This figure really shouldn’t change too much from the previous ($-45.2B) however given President Trump’s penchant for mentioning trade this could become an interesting indicator of President Trump’s impact.
On Wednesday, we’ll focus once again on Crude Oil, with the previous week printing a build in US inventories of 6.466 million barrels, inventories are only expected to grow mildly as OPEC production cuts continue to take effect.
German Balance of trade data for December is due on Thursday morning, but by this stage, December data perhaps may not have as much of an impact as more forward looking data points. US Initial Jobless Claims for February are expected at 247.4k, and should be relatively stable in light of last week’s NFP data.
It may be worth getting up early on Friday to see the China Balance of Trade data drop. Previously, exports were down 6.1% while imports increased by 3.1%. Traders will be keen to see how this will balance as China now bizarrely takes the US’s place as the champions for global free trade. We also get the UK Balance of Trade data at 09:30 on Friday, expected to show a deficit of £2.7 Billion, but this will be 2016 data, and although may cause some knee jerks, should not have any long last direction effect. And we close the week with the preliminary US Michigan Consumer Sentiment figure for February, expected at 97.8. This figure has been riding high for a few months now, suggesting the current Dollar/Equities bull run may not be over.
Given the above, my view for the week ahead is as follows
10 Year US Treasury Notes
Markets have priced in the current rate of inflation, and scheduled rate rises. But have not factored in the Trump effect. As the risk of more executive orders grows, investors may begin to return to safe heaven assets, pushing bond prices up. This could be especially true if more comments emerge claiming a strong dollar is hurting the US economy.
There are a few fundamental factors pulling on the S&P500 at the moment. The prospect of reduced regulation and strong company earnings pushes the index up, but system risks from rogue tweets, and the impact of executive orders keeps the index from rallying strongly. The S&P could range between 2280 and 2250
Keeping in mind cable spent most of the week pricing in a bumper NFP figure and unchanged BOE interest rates, there could be some surprises here. MPs may not like the Brexit White paper, but it is the document that many had asked for. And with conditions of Brexit now required to go through Parliament, the expectation of harsh Brexit continue to decrease. The UK currently is benefiting from the devalued currency, and so data points are expected to further support the current bullish momentum.
The Euro continues to grind higher since the start of the year, and right now going Long Euro on the 1st of Jan seems like it would have been the best trade of the year. There may be a technical limit to this as price reaches some near term resistance. But the positive fundamental picture in Europe continues to support the single currency – especially when you consider the current situation with Italian Banks, and Deutsche Bank.
Oil prices should remain supported by the OPEC production cuts, but let’s not forget that at these prices, competitors will be getting back into production. Considering the last Baker Hughes rig count added 18 facilities to the already present 712, some downward pressure could start to creep in. However for now, it is still winter in the northern hemisphere which will help OPEC’s cause.