Can Italy Trump Brexit? – Nov 20th 2016
Last week was still largely dominated by the Trump effect, and the unstoppable rise of USD prompted by continued weakness in the US bond market. As we have said many times, non-US indices are affected by their denominating currency. The further fading of EUR and more prominently JPY kept the DAX steady and caused the NKY to rise all week.
On Monday, the DAX reached a high of 10800, and then faded. Draghi’s speech managed to put 1c back on EUR, but this effect was lost the next day. SPX also saw a 20 point drop, to touch a weekly low on 2156, however it then rallied for the rest of the week. DJIA however, which considerably out-performed SPX last week actually hit its (all-time) high of 18971 at the European open, and then ranged all week.
The NIFTY also faded down every day this week, to eventually settle around last week’s Trump panic spike low of 8040.
Tuesday’s German CPI miss had a slight effect on the DAX, but it rose again as EUR weakened to eventually rise back towards the 10800 top. The FTSE hit 6821 in a quiet 80-point range inside week. GBP was not helped by the CPI miss at 0930, but had already given up it’s USD counter-trend and faded all week touching pre-election lows on Friday. The US retail sales beat at 1330 just accelerated the US indices and USDJPY.
Wednesday started with AUD joining the currency fade after a couple of days of being flat. The European session saw a much larger 200 point fade in the DAX which then ranged for the rest of the week. One notable upward mover this week was Oil. The 1530 WTI EIA miss was hardly a blip in the constant upward movement, caused partly by hopes of an OPEC cut, but still less than half of the $10 (19%) fall in less than a month,.
By Thursday, the momentum was set, and the US Housing and Jobless beats were not needed. USD continued it’s relentless rise, as did, to a lesser extend the SPX. Gold had been holding steady after it’s huge fall last week, but as the US opened, it gave up and by Friday morning had dropped another 2% to hit a low of $1202, and finished the week at $1207.
Friday was quieter, but saw further USD gains as the indices held steady.
Thanksgiving week is fairly quiet for news, as the US moves into holiday season. As the market gets used to the prospect of a Trump Presidency, its focus should start to turn ostenisbly back to the prospect of a US rate hike in December. The market is also still watching Trump build his cabinet, particularly in the financial area.
ECB President Draghi speaks on Monday after the European session, and UK PSBR is at 0930 Tuesday.
The big day is Wednesday with German PMIs at 0830, US Jobless numbers and Durable Goods, WTI EIA Stock levels at 1530, and the main event, the FOMC minutes at 1900. A rate hike in December is largely priced in, so any dovishness could cause a sharp move down in USD.
Thursday is Thanksgiving, followed by Black Friday, the shopping day. There is no US news to speak of. German GDP is reported 0700 Thursday and UK GDP at 0930 Friday. As always, look for large beats or misses. We will start to monitor the usual Black Friday – Christmas template for stock indices to see if they can maintain their usual [deceptive] pattern.
The Italian Referendum on Sunday December 4th should however start appearing on people’s agenda. It is remarkable how late many funds leave managing their risk in front of such high risk events. These concerns typically have an increasing impact on markets the closer the get to the vote itself. Volatility is here to stay.