December 2016

Dec. 28, 2016 (Amplify Trading) – Amplify’s Head of Trading, Piers Curran, provides his 2017 insights. Below is a summary of what Piers thinks for some of the biggest issues facing the global financial markets in 2017.

We close out a extraordinary year for global markets. Several of the key economic risks materialised with the UK’s Brexit vote, Trump’s stunning election win, Renzi’s lost referendum and the Fed hike to cap it all off. Who would have dared predict that given these outcomes US equities would be surging to new all time highs as we march into Christmas. The notable takeaways from 2016 are Sterling weakness, markets pricing in Trump’s stimulus package with a steeper Fed rate hiking trajectory resulting in a sharp spike in bond yields, a surging US Dollar and rampant equity markets. One can’t help think of one word: complacency.

EUROPEAN POLITICS

Unfortunately, the probability of further terrorism in Western Europe is rising, which will impact Angela Merkel’s ability to win a record fourth term in the German election in H2 2017. I believe that, outside of Brexit, this now becomes the biggest European political risk. Italy: After their referendum it will likely be an unchanged scenario, no reform and no growth. France: Presidential elections in April/May 2017 will be a temporary distraction, ultimately I don’t think Le Pen can win as France has a two stage election process which makes it much more unlikely for a shock result to occur a la Brexit and Trump. But for sure European politics stays at the top of the global risks list for 2017.

BREXIT

Sorry to be bah humbug but I expect the first half of 2017 to show a notable change for the worse in market sentiment on this issue! As we approach the trigger date for article 50, I expect politicians on both sides of the Channel to posture for the forthcoming battle. This should trigger the next leg lower for Sterling (GBPUSD to sustain a break below 1.20 and head towards 1.10), which in turn will exacerbate a growing unease over rising inflation and, although FTSE100 stocks may stay supported due further currency weakness, I see the economic risks outweighing the cheap currency benefits to weigh on global equities.

CRUDE OIL

I believe the most significant factor is that Saudi Arabia’s strategy has now reversed for the first time in two years, whereby they are actively supportive of sustaining a move above $50 per barrel. This is tied into both their desire to diversify their economy, which involves a Saudi Aramco IPO in early 2018, and the fact that the market share they lost to US Shale producers has been returned to them via increased Asian demand. However, history tells us that OPEC implementation risk should never be ignored so whilst there is likely to be volatility in Q1, I believe the price of oil will spend most of 2017 between $50 and $60 per barrel.

TRUMP AND THE FED

US equities are finishing 2016 on all-time highs. Whilst I think that this can continue in the first few weeks of 2017, I believe that the 2017 high for the year will be printed in the first month of the year. Markets are irrationally pricing in a full and quick Trump fiscal stimulus package, and I expect the reality to be much more disappointing. Whilst Congress is Republican, they will want to remind Trump he doesn’t have free reign by  stalling and trimming his fiscal package. As a result, I expect to see equities give back some H2 2016 gains, the US dollar to do the same and for the Fed as a result to be more dovish than the three 2017 hikes projected.

ITALIAN BANKS

Italian Banks need at least €52 billion to clean up their balance sheet which is a much larger amount than the Italian Government’s proposed €20 billion rescue package outlined on the 19th December. I think it is inevitable that Banca Monte dei Paschi di Sienna gets fully bailed out and becomes stated owned in 2017. However, even though in the long run this continues the slow motion demise of the Eurozone’s third largest economy, in 2017 the ECB should have enough ammunition to delay the eruption of this longer term ticking time bomb. In the  meantime the Italian economy continues to flatline with an on-going inability drive through any much needed reform.

 

 

 


USA 

Dec. 24, 2016 (Commerzbank AG) – China grapples with capital flight

China is still battling a major exodus of capital. As we expected, the government has responded by reversing recent steps to deregulate capital movements. Since the beginning of this month, companies face the prospect of no longer being able to transfer dividend payments abroad. These measures may help to apply the brakes in the short term, but in the longer term they will deter potential investors. In the medium term, further capital controls seem more likely than a return to the cautious deregulation of recent years.

Further topics:

Gold: better times ahead

Recent pressure on the gold price is likely to become less significant over the course of next year. Indeed, ultra-loose global monetary policy, which results in low real interest rates, and great political uncertainty are likely to provide a tailwind for gold prices. We expect gold to rise to 1,300 USD per troy ounce by the end of 2017.

Outlook for the week of 19 to 30 December 2016

  • Economic data: We look for a further rise in the German Ifo business climate index in December, which would be a further signal that the German economy has picked up more momentum at the end of the year.
  • Bond market: The latest Fed rate hike may prove a good opportunity to increase duration. In the euro zone, 10y benchmark yields will follow an erratic path in the current low liquidity environment.
  • FX market: The markets are taking the Fed at face value when it suggests that rates are likely to rise more sharply. The market will therefore probably react asymmetrically: good data should help the dollar more than poor data will harm it.
  • Equity market: DAX dividends in FY2016 are expected to rise by 5% versus the previous year, which is a key bullish signal for German equities.
  • Commodity market: The price of Brent oil is likely to remain virtually unchanged until year-end as only January will tell whether OPEC will in fact reduce its supply. Base metal markets, too, are likely to extend their current-year gains into the New Year.

Dec. 23, 2016 (Tempus, Inc.) – The U.S. dollar reverted to its status as a traditional safe-haven in recent days as terrorist attacks in Turkey, Switzerland and Germany rattled investors.

The greenback has long benefitted in times or financial or geopolitical chaos for its perceived safety. The dollar also received a boost yesterday when Federal Reserve Chair Janet Yellen expressed optimism that U.S. wages were set to extend gains.

We expect the dollar to continue to take its cues from events abroad. There is a slew of data set for the second half of the week that will help dictate the dollar’s momentum over the last week of the year.

EUR

The Euro came under renewed pressure as geopolitical events are likely to put additional pressure on pro-Europe governments. A truck crashed through a Christmas market in Berlin yesterday, killing 12. German Chancellor Angela Merkel said that the act is “assumed” to be an act of terror. Merkel is up for re-election next year and a terrorist attack on her watch will add to the anti-European party’s arsenal. The rise of populism across the continent has market participants worried and widespread political uncertainty is sure to fan the flames.

JPY

The Japanese yen tumbled more than one percent against the U.S. dollar overnight. As expected, the Bank of Japan kept its policy on hold. Interest rates are currently at -0.1% and the central bank plans to continue to purchase 80 trillion yen of government bonds annually.

The central bank did upgrade its assessment on the overall economy, partly due to a weakening yen. The yen has weakened 11% against the U.S. dollar since the election of Donald Trump on November 6th. A weaker yen will lift import prices and could provide a much-needed boost to inflation.

Dec. 17, 2016 (Commerzbank AG) – Gold: better times ahead

Recent pressure on the gold price is likely to become less significant over the course of next year. Indeed, ultra-loose global monetary policy, which results in low real interest rates, and great political uncertainty are likely to provide a tailwind for gold prices. We expect gold to rise to 1,300 USD per troy ounce by the end of 2017.

Outlook for the week of 19 to 30 December 2016

  • Economic data: We look for a further rise in the German Ifo business climate index in December, which would be a further signal that the German economy has picked up more momentum at the end of the year.
  • Bond market: The latest Fed rate hike may prove a good opportunity to increase duration. In the euro zone, 10y benchmark yields will follow an erratic path in the current low liquidity environment.
  • FX market: The markets are taking the Fed at face value when it suggests that rates are likely to rise more sharply. The market will therefore probably react asymmetrically: good data should help the dollar more than poor data will harm it.
  • Equity market: DAX dividends in FY2016 are expected to rise by 5% versus the previous year, which is a key bullish signal for German equities.
  • Commodity market: The price of Brent oil is likely to remain virtually unchanged until year-end as only January will tell whether OPEC will in fact reduce its supply. Base metal markets, too, are likely to extend their current-year gains into the New Year.

Dec. 16, 2016 (Tempus, Inc.) – After an historic rally over the past day and a half, the U.S. dollar opened this morning slightly weaker against its European counterparts. Nevertheless, the greenback remains at historically strong levels. The rally begun late Wednesday after the Federal Reserve’s “dot plot” showed the central bank was slightly more dovish than earlier in the year. The rally continued yesterday and saw the Dollar Index (DYY) reach its highest level since 2002. The dollar touched its strongest level versus the safe-haven yen since February.

The fundamental data also help reinforce the “buck” as consumer inflation continues to build and give the Fed reason for additional rate hikes. This morning’s data disappointed but is unlikely to seriously dent the dollar’s bullish run. Housing starts fell by 18.7% in November, missing an already bearish expectation of a 7.0% contraction. Expect the focus to continue to remain on the Federal Reserve and policy divergence. While the dollar may still have room to improve, it would be prudent to watch for a forceful reversal if U.S. data begins to slip.

EUR

The Euro managed to stop the bleeding against the U.S. dollar overnight but remains near historically weak levels against its American counterpart. The common currency broke fresh 13-year lows during yesterday’s session on broad dollar strength and diverging monetary policy.

The European Central Bank extended its quantitative easing program last week as the Fed tightened policy for the first time this year on Wednesday. The Euro may have found minimal support after a report showed service and manufacturing expanded last month.

GBP

The British pound was also able to recoup some losses against the U.S. dollar but remains lower than earlier this month. The Bank of England kept rates unchanged yesterday; a day after the U.S. raised interest rates. While the Bank of England said that the Brexit vote had a limited initial effect on consumers, we may soon see proof to the contrary as U.K. companies look to hike prices.

Indeed, the Confederation of British Industry’s December survey shows that manufacturers expect to lift prices by the most in more than five years over the next six months as the pound’s plunge is boosting companies’ costs and forcing them to respond. The CBI said the sterling’s 17% depreciation “continues to ramp up pressure on prices.”

Dec. 11, 2016 (Commerzbank AG) – Trump-o-meter – what will Trump deliver?

A Fed rate hike next week appears to be a done deal. It is however less obvious how Donald Trump’s policies will impact the US economy. We have developed a “Trump-o-meter” designed to demonstrate how far US economic prospects may improve or deteriorate as a result of the proposed policy measures, and will update it on a regular basis.

Further topics:

ECB: The beginning of the end of QE?

The ECB is extending its bond purchases by nine months, but reducing the monthly purchase volume from €80bn to €60bn. This is the start of the enforced exit from bond purchases. However, the ECB will no doubt maintain a lax policy stance via other means. The underlying causes of the government debt crisis have not after all been resolved, and the euro zone outlook remains uncertain.

Outlook for the week of 12 to 16 December 2016

  • Economic data: The euro zone economy seems to be growing somewhat more quickly in the final quarter of 2016 compared to the summer half-year, profiting from stronger global demand in particular.
  • Bond market: Trading patterns in Bunds and peripheral spreads should become increasingly erratic as the low liquidity season kicks in and with the final tier-one risk event still pending in the shape of the FOMC decision.
  • FX market: The movement of CNY exchange rates in the recent past is often interpreted as reflecting the renminbi’s weakness. This is the wrong way of looking at it. However, this does not mean that unsecured CNY positions are without risk.
  • Equity market: The German equity market should show higher volatility again at times in 2017. Investors should remain focused on themes such as restructuring and M&A, interest sensitivity, continued weakness of the euro and dividend policy.
  • Commodity market:Oil prices should settle above $50 a barrel in the wake of the OPEC agreement to cut output.

Dec. 9, 2016 (Allthingsforex.com) – The initial results from the Italian referendum may have failed to add additional pressure on the EUR but the European Central Bank’s decision to expand its QE program until December 2017, did the job later in the week.

In the trading session today, the EUR continued its decline spurred by the ECB announcement. The single currency re-tested support at 1.0516 and once again bounced higher. This is the fourth unsuccessful attempt to break the 1.05 mark since November 2015, with the big long-term support level to watch still standing at 1.0469.

Will the Fed’s December 14 monetary policy announcement provide the catalyst for a bearish breakout below 1.0469, which could open the door to further EUR weakness?

For the last few weeks, Fed fund futures have been showing nearly 100% probability of a 0.25% rate hike next Wednesday, which means that such expectations may be already fully priced into the EUR/USD exchange rate.

However, should the Fed hint of a faster pace of rate increases throughout 2017, the market could consider it as a sufficient enough reason to send the EUR one step closer to parity with the USD.

The ball is now in the Fed’s court…

 

 

Dec. 3, 2016 (Commerzbank AG) – ECB Council meeting: Dr Draghi to extend the therapy

At next week’s meeting, the ECB Council will likely decide to extend the bond purchasing programme (QE), probably by six months. This would make it necessary to lift the issuer limit (33%), but this is difficult for legal reasons. We outline a possible solution.

Outlook for the week of 28 November to 2 December 2016

  • Economic data: It is likely that German industry got off to a good start in Q4 and we look for solid October figures for orders and production.
  • Bond market: We expect 10y Bund yields to remain within their recent trading range, despite the Italian referendum and upcoming ECB decision.
  • FX market:If the Italian electorate says ‘No’ in Sunday’s referendum, there will be downside risks for the euro, especially given the danger of renewed political instability.
  • Equity market: Thanks to the powerful tailwind from monetary indicators we expect the DAX to rise to 11,700 by the end of 2017.
  • Commodity market:Oil prices should settle above $50 a barrel in the wake of the OPEC agreement to cut output.

Dec. 2, 2016 (Tempus Inc.) – A decent NFP report showing the U.S. economy adding 178k new jobs in November and the unemployment rate falling to a nine-year low of 4.6% failed to lend support to the USD, as markets focus on the outcome of the Italian referendum.

The Federal Reserve is widely expected to raise interest rates later this month, but attention will then shift into 2017. Questions about the economy’s overall strength and inflation pressures created by some of Donald Trump’s proposals are likely to dominate interest rate speculation going into the New Year.

This morning’s economic docket was unable to change the greenback’s fortune. Weekly jobless claims came in higher than expected and touched the highest level since June. Claims increased by 17K to 268K. However, the four week average was mostly unchanged. Jobless claims this year have averaged near the lowest levels in four decades.

EUR

The Euro recovered slightly overnight playing its role as safe-haven to tumbling equity markets across the ancient continent. Investors are concerned that Italy’s referendum will not pass; risking the loss of a key pro-EU leader in Italian PM Matteo Renzi whose political existence is dependent on the “Yes” succeeding.

As discussed in the last few days, Brexit rhetoric from both sides of the equation has been less than friendly as both sides continue to accuse the one another of lack of cooperation. Britain’s incessant interest to remain a player in the single free market while reducing people’s mobility has struck the wrong chord with many EU lawmakers. The shared currency is likely to remain fragile and volatile in the days ahead.

GBP

The British pound was the biggest winner overnight, gaining a full percent against the U.S. dollar. The sterling traded to its strongest level since November 11th after Brexit Secretary David Davis said the U.K. would consider making contributions to the EU in order to secure the best possible access to the single market. Most EU officials have taken a hard line regarding access to the single market but recent commentary may show a thawing. Dutch Finance Minister Jeroen Dijsselbloem was quoted as saying that Britain might be able to participate in the internal market, albeit at a cost.