Daily Economic Calendar – A Busy Day Ahead

We kick off a busy day with the Chinese Services PMI which came out at 53.4 above expectations of 53.3 and then during the London session we have the Services PMI from the UK which is expected at 54.7 and it remains to be seen whether it continues to throw up good data as it has been doing over the past few weeks. Then during the US session, we have the initial jobless claims which is expected at 260,000 and the ADP employment change which is expected at 170,000. This is likely to act as a precursor to the big NFP data that is due tomorrow.

Then we have the Services PMI and the Crude Oil inventory data from the US as well to round off a busy day in the markets.

A Highly Volatile Day Triggered by the FOMC

It all began slowly yesterday as the markets were in a consolidation mode and so there was not much movement in the market either during the Asia session or the London session yesterday. But the cat was set among the pigeons after the release of the FOMC minutes which came in towards the middle of the NY session. There was not much hawkish in the minutes while the markets had been expecting a very hawkish one, based on the FOMC statement that was released in December.

This disappointed the markets and though the dollar initially recovered, the tone over the last few hours has been one of dollar weakness across the board. This has helped the EURUSD pair above 1.0500 while the USDJPY has corrected and crashed through 117 and looks good for more correction in the near future. Gold has also been having a good time over the past few days as it has risen from the lows of its ranges and it trades above 1170 as of this writing. The dollar weakness seems to be the theme that has been set in the markets for now and this is set to continue for the rest of the day.

Looking ahead to today, we have the UK Services PMI during the London session and we also have the ADP Employment data, the Unemployment claims and the Non-Manufacturing PMI from the US later on in the day. The markets are still trying to sort out the short term trend and we believe that it will take a day or 2 more for the markets to settle down and show their hand on what it thinks will be the short term trend. Traders are advised to wait and ride out this volatility, as the larger fund managers and bankers return to their desks, and then initiate positions once the dust settles down.
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Traders Hoping for Insight from Fed Minutes

Traders will get a chance to take a look at the U.S. Federal Reserve’s outlook for 2017 with the release of the FOMC minutes of the central bank’s December 13-14 policy meeting at 1900 GMT on Wednesday. If you recall, at that meeting, the Fed raised rates for only the second time in ten years. It also forecast as many as three rate hikes in 2017.

The minutes are important to investors because they could offer insight on the timing of rate increases this year, the extent to which Trump’s fiscal plans could affect their interest rate projections and their assessment of risks as they pertain to inflation and the labor market.

In December, Fed Chair Janet Yellen said that policy makers weren’t getting ahead of themselves despite higher equity prices, a stronger dollar and rising longer-term interest rates since Trump’s surprise election on November 8.

Wall Street was reacting to Trump’s plan to rebuild America through fiscal stimulus and tax cuts. However, in December, the Fed’s latest projections for growth and inflation were nearly unchanged from September. “We’re operating under a cloud of uncertainty at the moment, and we have time to wait and see what changes occur,” Yellen said.

The minutes could inform investors as to what the Fed actually expects from Trump and how they plan to weigh the potential effects of Trump’s policy proposals as they move forward in 2017.

The Fed said it could raise rates three times in 2017. The minutes could reveal the timing of these rate hikes, or tell investors what they need to see from the economy.

The minutes could also tell investors about how willing the Fed will allow the jobless rate to drop before they have to take action. Finally, the Fed may tell investors about the risks the central bank is looking at into the new year.

Gold

February Comex Gold futures rose on Wednesday, nearing a four-week high in reaction to a weaker dollar and strong physical demand from major consumers China and India. Traders may also be buying gold as a hedge against the uncertainty of the Trump administration ahead of his inauguration on January 20.

Crude Oil

Crude oil prices recovered slightly on Wednesday on expectations that U.S. crude inventories have dropped and on optimism over OPEC’s plan to cut output, trim the global supply glut and stabilize prices. According to reports, the U.S. Energy Information Administration’s weekly inventory report is expected to show a 1.7 million barrel draw down.

 

Daily Economic Calendar – All Eyes on the FOMC Minutes

On the economic agenda, we had the BRC Shop Price Index from the UK in the morning which came in at -1.4% against the previous value of -1.7% which is a continuation of the improving data from the UK. Then during the London session, we have the French consumer confidence coming in which is expected at 99 and then we have the EU, Germany and French PMI data as well. Then the biggie for the day comes in as the Construction PMI from the UK which is expected at 53.

Then during the US session, we have the ADP Employment Change data and then to top it all off, we have the FOMC meeting minutes for December which will be released right in the middle of the US session.

U.S. Dollar Stretches to 14-Year High on Robust Manufacturing Data

The new year started with the U.S. Dollar surging to its highest level in 14 years against a basket of currencies. The move was primary driven by a steep drop in the EUR/USD. The Greenback opened steady to higher as trading resumed after a three-day holiday week-end, but the rally picked up strength after the release of key U.S. economic data.

Economic News

The major report was ISM Manufacturing PMI. It came in at 54.7, up from 53.2 and a full point over the 53.7 estimate. According to Markit, the new orders index rose by 7.2 points, the biggest increase in more than seven years. Manufacturers reported stronger hiring and higher prices for raw materials, which support other signs of labor-market strength and higher inflation.

Final Manufacturing PMI was 54.3, slightly better than the 54.2 estimate. Construction spending was up 0.9%, well above the 0.5% estimate and 0.6% previous read. This was its highest level in more than 10 years.  ISM Manufacturing prices were 65.5, also higher than the 55.6 estimate and 54.5 previous read.

U.S. Equity Markets

U.S. stock investors came in strong early in the session, producing triple-digit gains in the Dow, however, the market traded well off its highs later in the session as oil prices gave back their initial gains.

Telecoms and healthcare stocks led the S&P 500 Index higher. The Dow Jones Industrial Average was supported by Walt Disney and Goldman Sachs.

Crude Oil

International Brent crude oil and U.S. West Texas Intermediate crude oil rose to 18-month highs on Tuesday amid hopes that a deal between OPEC and Non-OPEC countries to cut output would trim some of the excess supply while stabilizing prices.

After the initial rally, crude buyers lost interest, sending the market lower on concerns that increased production from Libya would offset much of the cuts from the other OPEC members.

U.S. Treasurys

The benchmark 10-year U.S. Treasury Note yield rose to 2.45 percent and the short-term two-year note yield traded at 1.222 percent. The rise in the yield was related to the better-than-expected U.S. economic data which came in strong enough to suggest the Fed will be on track to raise interest rates perhaps as early as its meeting at the end of the month. The deciding factor could be Friday’s U.S. Non-Farm Payrolls report.

Stocks Rally as 2017 Gets Off to a Fast Start

European stock markets are moving higher, following on from broad gains in Asia where Japanese markets remained closed, but most others re-opened after the New Year break. Eurozone markets, moved already up Monday in extremely quiet trade, and U.S. stock futures are also posting gains, after stronger than expected PMI readings out of China and the U.K. The final Eurozone manufacturing PMI on Monday brought no surprise, but also confirmed that economic activity is expanding and growth optimism is keeping equities underpinned as 2017 gets underway.

Oil prices have rallied over 2% to 18-month highs. January 1 was the official start of the OPEC and other major oil producers output-trimming accord, and the anecdotal signs of compliance have been encouraging. Oman, for instance, told clients last week that it would be cutting its oil term allocation volumes by 5% in March, which followed other similar notifications from other key suppliers. WTI is presently up by 2.3% at $54.95, down slightly from the earlier high at $55.24.

The Caixin/Markit Manufacturing Purchasing Managers’ index unexpectedly increased to 51.9 on a from 50.9 in November and easily beating analysts’ forecasts of 50.7. The Private survey provide reported that output increased at the fastest pace since January 2011, with a reading of 53.7, and new orders also increased significantly.

December UK Manufacturing PMI Beat Expectations

The December UK manufacturing PMI smashed forecasts in rising to 56.1 from 53.6 in November, which was revised up from 53.4. The median forecast had been for a 53.4 outcome, while the 56.1 reading is the best since June 2014, indicating brisk expansion in the sector. Markit, the compiler of the data, reported that new orders and output components hit record levels in the 25-year history of the data series. New business came in from both domestic and export markets, the latter continuing to benefit from the post-Brexit vote weakness in the pound.

German state inflation numbers higher than expected. First CPI numbers from German states came in higher than anticipated, with monthly rates ranging from 0.7% to 0.9% and annual rates jumping between 0.7% points and 1.1% points. One major states is still missing, but the data already suggests that the pan German rate, will come in higher than the 1.4% year over year expected, which also leaves an upside risks to the HICP rate, which was expected to jump to 1.3% from 0.7% year over year.

The French reading came in a tad below expectations, but still saw the HICP rate rising to 0.8% year over year from 07% year over year and the Spanish number last Friday surprised on the upside with a jump to 1.4% year over year from 0.5% year over year, so that the overall Eurozone number is set to rise sharply higher, largely on base effects.

Quiet Start to the Year

Its been a quiet start in the morning so far. Though the markets did begin yesterday, it has to be said that the official start for the new trading year has to be today as most of the markets around the world were closed for the holidays yesterday. The London market was closed and the NY market was closed as well.There were only a few Asian and European markets that were open and so the liquidity continued to be thin as we had been seeing in December.

It is only today that many traders and fund managers are expected to return back to their seats after the long holidays and they might try and do a bit of trading today and so we should be able to see some decent liquidity today which will help us to find out the direction and the overall theme in the markets for this month. For the past 2 weeks, we have been seeing a correction in the dollar strength but these moves were done during thin markets and so they are not to be considered as a true indicator of the actual trend. We believe that the dollar strength will return today and affect the markets all over the world.

Looking ahead to today, we have the Manufacturing PMI data from the UK and the US and these will be viewed closely by the traders to see if there is any weakness in any of this data. If the data is as per expectations, then expect the markets to trade with an overall bias towards the USD which could place the pairs like the EURUSD and GBPUSD under severe pressure and if the stock markets continue their bullish tone, then we could see the yen continue to weaken as well.

 
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10 Events to Watch Out For in 2017

  1. OPEC Begins Plan to Cut Production

Coming off of its biggest annual gain since 2009, crude oil will be one market to watch in 2017. After breaking sharply at the start of 2016 then treading water for most of the year, crude oil prices surged from mid-November to the end of the year into prices not seen since mid-2015.

In late November, OPEC and non-OPEC countries reached a deal to cut output by 1.8 million barrels a day in 2017 beginning on January 1. The plan is designed to reduce the global supply glut and stabilize prices.

Since this is considered a landmark deal and it begins on January 1, we’re going to make this event number 1.

  1. The Inauguration of Donald Trump

The second event to watch in 2017 is the inauguration of Donald Trump as President of the United States on January 20. Trump inauguration speech could move the stock market in a major way if he sticks with the campaign slogan that helped get him elected, “Make America Great Again”.

  1. OPEC Compliance Meeting in Vienna

OPEC will be back in focus again in January for event number 3. On January 21-22, the first meeting of a committee of OPEC and non-OPEC nations responsible for monitoring compliance with a global agreement to reduce oil output will be held in Vienna.

Since the deal relies on 100% compliance by the nations involved, this committee was set-up to catch any cheaters and to fix problems that may arise quickly. Given OPEC member history of non-compliance with agreements in the past, this meeting will be important because the deal may need to be reinforced early to set the right tone for the rest of the year.

  1. First Fed Meeting of 2017 (and others)

The first U.S. Federal Reserve Bank monetary policy meeting for the year will be held in January. At this meeting, the central bank will have the opportunity to raise its benchmark interest rate a little more than a month after its last rate hike. Since it projected as many as three rate hikes in 2017, every meeting will be important because of the possibility of a rate hike.

There is no doubt that investors remember last year at this time when the Fed was promising four rate hikes in 2016 and delivered only one in December. This being said, investors will be paying close attention to the Fed at each meeting and especially at the quarterly meetings in March, June, September and December because the Fed is expected to make is projections at these meetings.

Any reduction or increase in the frequency of rate hikes could cause volatility spikes in the markets.

  1. End of March: The U.K. Government Triggers Article 50

In June 2016, the U.K. voted to leave the European Union and this triggered a volatile response in the markets while driving the British Pound sharply lower. In October 2016, the British Pound dropped sharply again after U.K. Prime Minister Theresa May said she would file Article 50 no later than the end of March 2017.

The negotiations needed for Britain to leave the EU can only begin with the formal filing of Article 50. The complicated negotiations are expected to take two years to complete. This is a long time for investors to remain patient so I expect renewed volatility and a further decline in the British Pound in reaction to this event.

  1. European Elections

In keeping with the political theme generated by Brexit and subsequent events, several key elections in Europe could stress the European Union and the Euro Zone economy. Last year, we had the Brexit vote, a referendum in Italy and a run-off presidential vote in Austria. This year, France will elect a new president on April 23.

The low approval rating of current President Francois Hollande gives far-right National Front leader Marine Le Pen a chance to win the election. She has said that if she wins, she would hold a referendum to leave the EU and the Euro currency.

On March 15, Holland will hold a general election that could alter the outlook for the European economy. And Germany must hold a federal election before October 22. Current Chancellor Angela Merkel will be going toe-to-toe with the nationalist Alternative fur Deutschland party. The key issues surrounding the election are Germany’s EU membership and the “open door” immigration policy.

  1. Iran Holds Presidential Elections on May 19

Currently, the front-runner in the election is President Hassan Rouhani. After negotiating the 2015 nuclear deal with several Western nations and getting the economic sanctions lifted, he is likely to bump heads with U.S. President Donald Trump, if he decides to scrap the current nuclear agreement. Rising tensions could disrupt the crude oil market.

  1. Trump, China and Trade Issues

China’s economy in 2016 stabilized and deflation pressures eased. The People’s Bank of China may even lower interest rates further while attempting to ease the pressure from high debt levels. However, all of this could come to a screeching halt if Trump gets into a major trade riff with China.

Donald Trump candidate called China a currency manipulator and promised to add a huge tariff to all Chinese imports. He also talked about ending, what he considers to be unfavorable trade agreements. Trump could create a major anti-trade situation with China that could spread to other emerging markets.

  1. End of the Global Monetary Policy Easing Cycle

Will 2017 see the end of rate cuts and quantitative easing? 2016 ended with the global economy showing signs of an upturn. However, the U.S. was the only country that raised its benchmark interest rate. Questions remain about the other major central banks. Will the Bank of England be forced to take action to prop up the U.K. economy or the British Pound? Will the European Central Bank begin to taper or set an end date for its quantitative easing program? Will the ECB and the Bank of Japan be forced by rising interest rates to abandon its negative interest rate policy? Are the Australian and New Zealand economies ready for a rate hike?

  1. Trump’s Economic Policies will Clash with Fed Policy

Trump went head to head with Fed Chair Janet Yellen during the presidential campaign, but both seem to have made nice since Trump won the election. Although the Fed has said there is nothing wrong with stimulating the economy through fiscal spending like Trump plans to do, they have said that the spending carries a lot of responsibility.

Trump’s policies are expected to be inflationary. The Fed has some leeway there since consumer inflation is currently below their 2.0% target, but how high will the central bank allow inflation to rise above this level before it takes action to drive inflation back down?

Trump has also promised jobs, but Yellen says that the U.S. labor market has improved enough so that it will not need big government spending to reach full employment. She even went as far as to say that her predecessor at the Fed, Ben Bernanke, called for fiscal stimulus when “employment was much higher than it is now.”

Trump and the Fed are going to fight this year over how much stimulus is appropriate which could cast doubts on whether Trump gets the $1 Trillion he has promised to rebuilt the infrastructure of the U.S.

U.S. Equities Face Roadblocks in Early 2017

In the final economic report for 2016, the Chicago Purchasing Manager’s Index in December posted a reading of 54.6. This was lower than the consensus forecasts of 56.8. It was also down from November’s reading of 57.6. At the start of the year, the Chicago PMI for January stood at 55.6.

U.S. Equity Markets

The three major U.S. equity markets were trading lower on Friday in the final session for 2016. If they all close lower, this will mark the first three-day losing streak in two months. Low trading volume was the major factor contributing to the weakness.

In the cash market, the benchmark S&P 500 was trading 2241.48, down 7.78 or -0.35%. The blue chip Dow Jones Industrial Average was trading at 19785.42, down 34.36 or -0.17% and the tech-based NASDAQ Composite was last reporting a price of 5385.06, down 47.03 or -0.87%.

As we end one year and begin the next on Tuesday, January 2, traders may not pick up the rally right away. Some Pension funds still have to make reallocation adjustments to reflect Trump’s new plans for the economy. There could be volatility early in the sessions, or we could be looking at a smooth trade. It all depends on whether the pension managers make the adjustments all at once or a little at a time.

Investors will also get the chance to react to the hearings for Trump’s nominees, more details on his policies and renewed political fallout issues.

For 2016, the biggest gaining sector in the S&P 500 Index was energy. It is up 23.99 percent. It was followed by the financial sector, up 19.86% and telecom, which gained 18.39. The Energy sector received a boost near the end of the year with the announcement of the OPEC production cuts for 2017. Financial stocks received support after Trump won the election because investors are counting on the new Administration to go easier on banking regulations. Telecom may have posted the third best gain, but gains could be capped in 2017 because of rapidly rising interest rates.

In 2016, the healthcare sector lost 4.01 percent, real estate was down 0.87 percent and consumer staples were up only 3.06, lagging behind the overall market. The uncertainty over Obamacare and the attack on the price of drugs may have hurt the healthcare sector. Real estate weakened on the thought that higher interest rates would drive up mortgage rates, hurting demand for homes.

In 2017, the key issues affecting the economy and the stock market are likely to revolve around cyber security after last year’s security breaches tied to hacking and email safety scandals, drug pricing, aging infrastructure repair and rebuilding and geopolitical issues with Russia, China and Israel as well as continuing problems in the Middle East involving ISIS.

Russia Decides to Wait and See

President Obama decided to sanction Russia over email hacks by expelling 35 Russian intelligence operatives and closing two Russian related compounds. This followed intelligence reports that show specific evidence of methods used to steal information, and manipulate the Presidential election. The Russians responded by stating the Obama administration was trying to completely ruin Russian-American relations.

Russia has decided not to retaliate immediately to the Obama Administration’s expulsion of 35 Russians based in the U.S. and closure of 2 facilities, with Putin preferring to wait now for the inauguration of Trump before taking any further action following this diplomacy. This follows earlier reports that the Russians would retaliate. Since the U.S. action was backed by intelligence evidence and Republican leadership, this could put Trump in an awkward position upon taking office. Notwithstanding the algo-related pop in the euro amid scant liquidity in Asia overnight, there has been little direct impact on markets related to this diplomatic action. Equity futures remain firmer and yields above lows.

Oil prices have recovered Thursday’s losses, which were seen following an unexpected draw in weekly U.S. inventory data. WTI is showing a gain of 0.4%, at $53.99, slightly down from the $54.07 high. The week’s high is at $54.37 and the 15-month peak on December 12 is at $54.51. Prices have gained 45.8% year-to-date, and the yearly gain is set to be the biggest since 2009. Prices are expected to climb based on estimates that there being sufficient compliance among OPEC and non-OPEC nations to adhere to the accord to trim production, though expectations for the dollar to continue to rise, along with a likely revival in U.S. output as higher cost production becomes viable, are seen as curtailing upside potential.

Preliminary December Spanish inflation hotter than expected, rising to 1.4% year over year in the HICP gauge from 0.5% year over year in November. The median forecast had been for a 1.0% year over year reading. This is the first of the big Eurozone countries to release preliminary December price data, and the sharp acceleration sets the stage for the release of Eurozone numbers next week.

The Day of the EUR

It’s the final day of the year and many will be breathing a sigh of relief, the year having been a particularly tough one, rounded off in style with a Trump victory that has driven the Dollar through to the final week of the year with some sizeable gains, the EUR faring pretty well, down just 5.2% going into Christmas, when compared with the Yen or the Australian Dollar, which have fallen 11.6% and 7.6% respectively over the same period.

The lighter trading volume this week has placed the Dollar under pressure as the markets look to lock in profits ahead of the New Year, with some degree of uncertainty on whether the rally can continue weighing on the Dollar in the final days of the year.

It’ certainly a treacherous period for trading, the EUR hitting an intraday high of $1.0653 in the Asian session before easing back to $1.0531 at the time of the report, with no economic data or market news to cause the spike, which wasn’t quite as dramatic as the pound’s flash crash, but certainly unwarranted.

Macroeconomic data out of the Eurozone has been relatively stable in recent weeks, but the reality remains that there are plenty of headwinds for the European markets to navigate through in the coming year, with geo-political risk expected to be on the rise from the turn of the year.

The known risks are of course, possible downside to the European economy should the pound continue to weaken and Britain be forced into a hard-Brexit, the UK considered a key trading partner with the EU, reflected in its trade deficit, with elections in Holland, France and Germany also there for the markets to consider and that’s before considering the impact of any trade war with China and a review of trade terms by the Trump’s administration come January 20th.

With economic data out of the Eurozone this morning limited Spain’s inflation figures for December, the stats are unlikely to be given much attention by the markets, with the Dollar likely to claw back some of the day’s losses before the close, though any upside for the Dollar is unlikely against the EUR with the markets locking in profits before the end of the year.

It will certainly be an interesting start to the year, the real question likely to remain whether the Dollar has been overbought.

The lack of macroeconomic data has hindered the Dollar’s rally, with November’s goods trade deficit widening according to figures released on Thursday a reminder of the effects of a stronger Dollar on the U.S economy and corporate earnings.

The markets will be looking for any indications on when Trump will be rolling out the anticipated fiscal stimulus package and begin to speculate on the timing of the FED’s first of a likely 4 rate hikes, the combination expected to dictate the direction of the Dollar and bring the Dollar in sight of parity with the EUR in the first quarter, all of which will be dependent upon how China’s economy responds to Trump, capital outflows, tightening monetary policy and a possible credit crunch.

Market Reaction Mixed after U.S. Announces Sanctions Against Russia

On Thursday, investors had the opportunity to react to the announcement of sanctions by the U.S. against Russian individuals and organizations it believes were responsible for the alleged hacking of several U.S. websites designed to allow Russia to interfere in the 2016 presidential election. The results in the markets were mixed because the sanctions were not financial or trade-related, but rather diplomatic.

In U.S. economic news, weekly unemployment claims came in lower than expected at 265K versus an estimate of 277K. The Goods Trade Balance increased unexpectedly to -65.3 billion. Traders were looking for a read of -61.5 billion. Preliminary Wholesale Inventories were up 0.9% versus a 0.1% forecast.

Crude Oil

Crude oil was trading mostly lower on Thursday after the U.S. Energy Information Administration announced a surprise increase in U.S. inventories. The news reversed an intraday uptrend that had pushed prices to their highest levels on some charts to their highest levels since July 2015.

Volume and volatility are low because of the New Year holiday, but we could see a pick-up in activity on Friday because of the expiration of the February heating oil and gasoline futures contracts on Friday.

According to the EIA, crude stocks rose by 614,000 barrels in the week-ending December 23. The government report imports fell as refineries cut output. Before the report was released, traders had priced in a drawdown of about 2.1 million barrels.

Inventories at the futures hub in Cushing, Oklahoma rose for the fourth out of fifth week by 172,000 barrels.

Gasoline stocks surprised traders with a 1.6 million barrel draw down versus a 1.3 million-barrel gain that was forecast. Distillate also came out lower than expected. Traders were looking for a 1.8 million barrel increase and were presented with a 1.9 million barrel draw down instead.

Gold

A combination of short-covering and light speculative buying helped drive gold prices to their highest levels in more than two weeks as investors took advantage of relatively cheap prices, thin trading conditions and a decline in U.S. Treasury Bond yields. The lower yields helped drive the U.S. Dollar lower, making the dollar-denominated gold contract a more attractive investment.

Forex

The U.S. Dollar fell against a basket of currencies on Thursday, led by a steep rise in the Japanese Yen and the Euro as investors sought protection in lower-yielding assets. The AUD/USD and NZD/USD also posted solid gains in what can best be described as end-of-the-year position-squaring and profit-taking. The GBP/USD also recovered slightly after a sell-off earlier in the week related to concerns over Brexit.

U.S. Equities

The three major U.S. stock indices continued their price slide on Thursday as the Dow Jones Industrial Average futures contract pulled away from the elusive 20,000 level. The lack of buyers on the investment side of the equation was behind most of the weakness. Selling pressure wasn’t shorting per se, but rather long liquidation, profit-taking and tax selling before the end of the year.

 

 

Stock Markets Struggle in Final Days of the Year

European stock markets are slightly down, after weaker than expected U.S. data Wednesday weighed on global sentiment and sent USD and oil prices down. WTI up from earlier lows, but still struggling near the USD 54 mark per barrel, despite looming production cuts. The larger than expected build in crude oil inventories as reported by the API weighed on prices. The concomitant rise in the Yen weighed on Japanese markets which closed with losses of more than 1% and renewed risk aversion is also weighing on European stock markets, although losses have been relatively muted so far and in the case of the DAX not managed to seriously dent the yearend rally that was sparked by Draghi’s re-assurance of continuing bond buying through 2017.

The DAX is still poised for a solid annual rate with levels 11500 contrasting sharply with the low of around 8700 seen in early February. The FTSE 100 is also not far away from this year’s high of 7130, seen in October and far above the low of 5500 from February 11. Trading volumes perked up a bit and U.S. stock futures are narrowly mixed on the last full trading day of the year with many centers closing early tomorrow.

Italian refinancing costs decline in 10 year auction. Italy sold EUR 1.5 billion of 10-year bonds with a coupon of 1.25% at an average yield of 1.77%, down from 1.97% at the previous auction. The bid to cover ratio dropped to 1.42 from 1.58 on November 29. EUR 1 billion of 2016 bond with a coupon of 7.25% were auctioned at 1.72%. At the same time EUR 2.5 billion of 5-year bonds with a coupon of 0.35% were auctioned at an average yield of 0.54%.

Eurozone M3 Accelerated in NNovember

Eurozone M3 money supply growth accelerated to 4.8% year over year in November from 4.4% year over year in the previous month. The pickup was stronger than anticipated and reflects to a large extend a sharp rise in overnight deposits. The counterparts of M3 show that loan growth accelerated, with lending to non-financial corporations up 1.8% year over year, versus 1.7% Year over year in October, while lending to households rose 2.1% year over year, up from 1.9% year over year in October.

Risk Off and The Dollar

U.S equities took a large step in the wrong direction on Wednesday, the Dow closing at 19,833.68 with any hopes of a late Christmas present for the bulls dashed, 20,000 seemingly elusive during the holiday period.

While the Dow slipped, the Dollar recovered from early losses through the Asian session on Wednesday to close out the day with solid gains, with the EUR sliding to a new 2016 low of $1.03719 before closing out the day down at 1.04110.

The slide in U.S equities on Wednesday left the markets jittery through this morning’s Asian session, the Yen pulling back to ¥116 levels, with Asian equities spending the day in the red, as Dollar gains reversed through the morning session, the Dollar Spot Index easing 0.42% from Wednesday’s 103.3 close to 102.87 at the time of the report.

While some may consider Wednesday night’s fall in the Dow a holiday blip, concerns are building over the weakness in the Yuan, which closed out CNY6.9613 on Wednesday, down 1.04% for December, together with the continued sell-off in China equities, as the PBoC looks to tighten credit conditions in support of the Yuan, while also looking to ease credit appetite, which ballooned through 2016 at an unsustainable rate.

We saw similar issues at the start of the year, market turmoil stemming from concerns over China and one does wonder whether we are in for another rough patch going into the New Year.

If the Yen and gold are any guide for the markets, the 3rd consecutive day of gains in gold, which could end in a 4th, gold up 0.63% at the time of the report, with the Yen up 0.69% at ¥116.46, we could well see the Asian sell-off flow through to European and U.S equities, with some further easing in the Dollar.

The Dollar may not fall as far as it did in the 1st quarter, should market turbulence prevail, with market expectations of a Trump fiscal stimulus package providing some degree of support, but ultimately, a shift in market sentiment towards the timing of the first rate hike by the FED will hand a heavy blow to the Dollar rally, the FED having shown reluctance in the past to make any moves during periods of market stress.

While the lack of macroeconomic data and the low trading volumes have certainly not helped the Dollar or the Dow’s cause, one does need to question how much of the U.S economy can be isolated from China’s woes.

The upside from any credit crunch in China will be that Trump may need to do less on the trade war front, but the downside will be the immediate impact to the U.S economy, China being a key export market for the U.S, not to mention the impact of China woes on other economies, the U.S yet clear of globalization, the protectionism mandate likely to take some time to feed into the U.S economy.

Economic data out of the U.S is somewhat more relevant this evening, including the weekly jobless claims figures, though any risk-off sentiment will likely lead to further easing in the Dollar through the European and U.S sessions.

Higher Mortgage Rates, Low Inventory Lead to Unexpected Drop in Home Sales

On Wednesday, the National Association of Realtors reported an unexpected drop in its Home Sales Index. The index was down 2.5 percent in November from October. Forecasts called for a 0.4 percent increase in home sales contracts signed by not yet closed. In October, the index rose 0.1 percent. Realtors blamed low inventory and rising mortgage rates for the decline.

Forex

The U.S. Dollar rose against a basket of currencies on Wednesday. The primary catalyst behind the move was a break in the British Pound to a two-month low. Sterling sellers were responding to concerns over uncertainty next year over Brexit negotiations. The last time the British Pound was down in this price territory was back in October after Prime Minister Theresa May announced she would trigger Article 50, or the process to leave the European Union by the end of March.

The uncertainty over the Brexit negotiations stems from the fear that the process will take at least two years. Also the UK expects “hard negotiations” over immigration.

Traders also bought the dollar on expectations that U.S. President-elect Donald Trump’s incoming administration would boost the U.S. economy through fiscal stimulus.

The Euro was also under pressure on Wednesday as investors reacted to rumors of problems in the banking industry. Traders also reacted to the European Central Bank’s estimates of the amount of capital it will need to secure the Italian bank Monte dei Paschi di Siena.

Gold

Despite the spike in the U.S. Dollar, gold remained steady and inside yesterday’s wide range. Weaker equity prices may have offset the dollar’s strength. The price action this week suggests buyers may be coming in to support the market due to concerns over Brexit and the Euro Zone banking system. Furthermore, there is some nervousness over Trump’s ability to run the country.

Crude Oil

March West Texas Crude Oil moved higher on Wednesday, putting the market within striking distance of the December high at $56.24. The market was boosted by optimism at the start of OPEC’s plan to cut production and stabilize prices which begins on January 1.

Trading was thin due to the upcoming holiday so there was some uncertainty over whether the price action actually represents the real tone of the market.

There were no weekly oil reports on Wednesday, both the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA) reports were postponed a day because of the holiday on Monday. The API report will be released later today and the EIA report on Thursday. Both are expected to show a drawdown of about 1.5 million barrels for the week-ending December 23.

Higher Oil Prices Buoy Riskier Assets

European stock markets are mostly slightly lower. Eurozone markets are underperforming, and the DAX is correcting somewhat after reaching new highs for the year on Tuesday. The FTSE 100 is holding on to a small gain in catch up trade and as markets return from their extended Christmas break. The DAX may be correcting slightly today, but the index is still set to end the year with a solid gain after Draghi managed to inject new life into markets with his confirmation that the ECB will continue its asset purchases through 2017. Asian markets were also mixed overnight. Japanese indices closed little changed, mainland China remains under pressure, but Hang Seng and especially the ASX managed solid gains as markets re-opened. The ASX closed at the highest level since August 2015. U.S. stock futures are also higher and Oil prices managed to recover early losses with WTI climbing further above USD 54 per barrel. Italian confidence surprised to the upside while UK Mortgage data disappointed.

WTI crude advance further, climbing to $54.26, a better than two-week high. The December 12 top of $54.48, which represented a 16 month peak is the next upside target level. Hopes that OPEC will implement its agreement to cut production at the start of 2017 has given the market its support, though it remains to be seen how long, and to what extent the agreement holds up. In the meantime, weekly API inventory data is due in the evening in the U.S., and is expected to reveal a 1.5 million barrel draw in U.S. supplies.

Italian Confidence Was Stronger than Expected

Italian confidence data came in higher than expected, with consumer confidence jumping to 111.1 in December from 108.1 and manufacturing confidence rising to 103.5 from 102.2 in the previous month. The referendum result may have led to the demise of yet another government and for now erased all hopes that a sweeping reform of the country’s political system could pave the way for the first meaningful structural reforms in a long time, but that doesn’t seem to have dented optimism among producers and consumers. And with Draghi continuing to lend its helping hand to a country that is crippled by high levels of private and public sector debt, the ECB’s commitment to bond buying through 2017 is likely to have played a key role in the renewed improvement.

U.K. BBA mortgage approvals lower than expected. The total number amounted to 40.7K in November, while October was revised down slightly to 40.8K from 40.9K. More signs then that the housing market is slowing down, even if most forecasts still project a slight rise in house prices next year, London’s luxury house market has already been hit by the Brexit scenario and prices in the most desirable areas are down more than 10%. If financial services companies should start to relocate offices to maintain pass porting rights when the U.K. leaves the EU, this process will likely accelerate.

The Dollar Spot

A majority of the markets opened on Tuesday, adding some much needed volume and liquidity to the markets, though we don’t expect any major moves in the week, many taking the opportunity to take a break ahead of what is likely to be another chaotic year ahead.

The markets continued to lack direction overnight on Tuesday and through the Wednesday morning session in Asia, with the Dollar giving up Tuesday’s gains, the Dollar Spot Index easing 0.04% to 102.98, having closed Tuesday up 0.05%, at 103.02, before recovering to 103.2 ahead of the European open.

The exception to the rule through the Asian session remained the Yen, which has been on a downward trend though the week, despite mixed risk sentiment across the markets.

Overnight on Tuesday, the Dow came to within 20 points of the coveted 20,000 only to ease back, while crude oil prices rallied through to the close. This morning, crude was on the back foot, before recovering ahead of the European open, WTI up 0.35% at the time of the report.

It certainly makes it a tough few days for those not having taken a Christmas break, the risk on, risk off, Dollar up, Dollar down doing little to instil confidence going into the New Year, the markets providing few clues on what’s to come.

One thing is for sure, the markets will be hoping for some smooth sailing through the early days of the New Year, though with the extent of the gains the Dollar has made and the rally in U.S equities and crude oil, one does wonder whether a correction is on the horizon.

We have seen it countless times, the markets overshooting and the reality remains that, while Trump may be about to unleash a fiscal stimulus package to bring the U.S economy out of the shadows of the global financial crisis, it’s going to take more than a few months before the impact of any stimulus package is felt.

Outside of the stimulus package, Trump has also selected some controversial politicians for key positions, particularly trade and this is unlikely to bode well for the U.S economy, assuming Trump’s rhetoric translates into an all-out trade war, China seemingly the main target, though there are likely to be others.

While China may be dependent upon the U.S from a trade perspective, the trade deficit hitting record levels, U.S exports to China are also quite significant, any tit for tat on the imposition of trade tariffs likely to hurt both and that’s before considering the quantum of U.S Treasuries that China currently holds.

2016 was the start of a new era and 2017 looks set to continue along the same path, the only question being how successful new governments will be in delivering the voters desires without creating a crisis like no other.

The Dollar may be the currency of choice through the political headwinds that appear to be circling overhead, concerns over emerging economies and Asia in general likely to shift capital flows West, and with the EU entering into a period of political uncertainty and Britain on its way out of the EU, there are few other options for the markets to consider.

Economic data through the European and U.S sessions are limited to November’s pending homes sales figures out of the U.S this afternoon, the data unlikely to have a material impact on the direction of the Dollar, with the Dollar likely to make further gains through the European and U.S sessions.

Low Institutional Participation Leads to Volatility Spikes in Gold, NASDAQ Composite

The financial markets were still in holiday mode on Tuesday as traders kicked off the last week of trading in 2016. Although volatility and volume were below average, investors still had the opportunity to react to a few U.S. economic reports. There was not a lot of institutional participation in the markets early in the session so the markets were exposed to the possibility of volatility spikes due to the light volume and traders took advantage of this in a few markets.

The S&P/Case-Shiller U.S. National Home Price Index rose 5.6 percent in October from the previous year. This was well-above the 5.0% estimate and previous read.

The Richmond Manufacturing Index rose to 8 points in December from 4 points in November. The Dallas Fed reported that its production index, another key measure of manufacturing, rose to 13.8 points in December from 8.8 in November.

Finally, according to the Conference Board, consumer confidence for December came in at 113.7, up from an upwardly revised 109.4 read in November.

U.S. Equity Markets

The three major stock indexes were up on Tuesday with the NASDAQ Composite leading the way. It reached a new all-time intraday high early in the session, breeching the 5,500 level for the first time. It was led higher by a surge in shares of Apple, which traded nearly 1 percent higher. The iShares Nasdaq Biotechnology ETF (IBB) also contributed to the rally with a half a percent gain.

In the cash market, the S&P 500 Index was trading at 2269.73, up 5.94 or +0.26%. The blue chip Dow Jones Industrial Average was at 19953.39, up 19.58 or +0.10% and the NASDAQ Composite was trading at 5492.36, up 29.67 or +0.54%.

 U.S. Treasurys

The strong economic data helped boost U.S. Treasury yields on Tuesday but gains were limited because of the light holiday trade. The benchmark 10-year yield moved to near 2.57 percent and the short-term 2-year yield touched 1.22 percent. Traders are expecting an upside bias this week, but low volatility because of the lack of fresh economic data and low institutional participation.

Gold

February Comex Gold futures spiked to $1151.70, its highest level since December 14 as investors took advantage of the light volume. The market has since given back most of its early gains to trade at $1137.30 at the mid-session. Most traders agree that the rally was likely due to an over-reaction to reports of Chinese demand in Asia.

Monte Paschi Grabs the Headlines in Very Quiet Trade

European stock markets are narrowly mixed in very quiet trade. The FTSE 100 remains closed for the Christmas holidays and elsewhere trading volumes have been very low with many centers operating with skeleton staff between the holidays. The DAX is nearly unchanged, the CAC 40 is up 0.15%, the Italian MIB nearly unchanged. U.S. stock futures are also posting marginal losses, following an equally quiet session in Asia where Australia, New Zealand and Hong Kong were closed. In Europe Monte Paschi and the Italian banking sector remain in focus, as the ECB reportedly sees capital needs of EUR 8.8 billion and suggests, EUR 4.5 billion cash injection from the state and a EUR 4.3 billion contribution from bond holders, while some reports suggests that the government wants to inject EUR 6.3 billion.

Oil prices moved slightly higher, thus extending the longest run higher since August, ahead of the start of output cuts intended to stabilize the markets. OPEC and 11 other nations including Russia agreed to cut back around 1.8 million barrels a day starting next week and Saudi Arabia’s Energy Minister Khalid Al-Falih voiced hope last week that the production cuts will help prices to recover next year. WTI is currently trading at USD 53.22 per trading, while trading in a narrow range today between USD 53.04 and USD 53.38. Gold prices are higher, trading off their recent lows, while the dollar remains unchanged versus the Euro and the yen.

Monte Paschi Needs Approximately 9 Billion Euros

The ECB says Monte Paschi needs around EUR 8.8 billion of capital. The Italian bank said in a statement late Monday that based on the results of the 2016 stress test, the ECB sees EUR 8.8 billion of capital needs and that while the central bank saw worsening liquidity at Monte Paschi between November 30 and December 21 it still considers the Italian bank to be solvent because it meets Tier 2 capital requirements. Italian daily Il Sole 24 Ore reported that the Italian government plans to invest EUR 6.3 billion in the bank, after saying Monday that the ECB called for a EUR 4.5 billion contribution form the Italian state and a EUR 4.3 billion contribution from bondholders.

The fact that the ECB still views Monte Paschi as solvent is encouraging, although this is likely to be a test case for the Eurozone’s new regulations for government cash injections, which foresee investor bail-inns and Bundesbank President Weidmann already warned against a hasty rescue, stressing that if government funds are used, there should be matching funding from investors.

Post Holiday Blues and the Dollar – Yen

A majority of the markets opened on Tuesday, adding some much needed volume and liquidity to the markets, though we don’t expect any major moves in the early part of the week, many taking the opportunity to take a break ahead of what is likely to be another chaotic year ahead.

The Dollar saw some softness against the Yen on Monday, thin volumes leaving the Dollar mixed against the majors, with the Dollar Spot Index easing 0.1% through the day, while Monday’s declines were reversed through the Asian session Tuesday, the Dollar Spot Index up 0.08% at the time of the report, with the Dollar up across the board against the majors, the Yen leading the declines, down 0.21% at the time of the report, reversing Monday’s 0.2% gain.

Economic data out of Japan this morning included November core consumer prices, which continued to decline and a relentless decline in household spending, both of which are likely to be of further concern for the BoJ.

The November monetary policy meeting minutes released on Monday morning could be considered to be relatively upbeat, the Board taking a more optimistic view of the Japanese economy, the weaker Yen being a contributory factor to expectations of increased demand for Japanese goods in the months ahead, with global economies also considered to have seen a pickup in momentum.

This morning’s figures suggest that the BoJ remains some way off being in a position to reduce purchases of 10-year JGBs, despite one Board member supportive of some form of tapering.

Added into the mix is Trump’s inauguration in the New Year and his foreign policy intentions. The appointment of Navarro to head up a newly created trade council, with Wilbur Ross as the new trade chief, certainly spells trouble for U.S trade partners, the U.S having already pulled out of the TPP Agreement.

The optimism from the BoJ may well be short lived should the Japanese fail to get the U.S support it has become accustomed to and the Yen may receive some unnecessary attention should Trump, Navarro and Ross go ahead with a new Trade War with China, which may go beyond trade alone, Trump clearly intent on ruffling China’s feathers.

Either way, the BoJ and the Japanese government are going to need to find a way to spur household spending, which continues to weigh on the economy. Household spending fell by 1.5% year-on-year in November, the decline coming despite disposable income rising by 1.4%.

While the slide in the Yen, since Trump’s election victory has led the BoJ to take a more positive outlook on inflation, November’s core consumer price index fell by 0.40% according to data released this morning and without a rebound in household spending, not only will inflation continue to lag well behind the Bank’s 2% target, but economic growth prospects will also remain on the weaker side and heavily reliant on trade partners including China and the U.S.

Economic data out of the U.S this evening includes December’s CB Consumer Confidence figure, together with October house price index data. The markets are likely to brush aside house price data, focus being on consumer confidence, which is forecasted to see further upside in December supporting the Dollar ahead of this evening’s release.

A Dollar at ¥120 is certainly a reasonable forecast over the near-term, the only question now being at what stage the BoJ will need step in, anything beyond ¥125 likely to lead to speculation of the BoJ needing to stabilize the Yen. What a difference a president makes, the Yen having hit sub-¥100 levels back in August.