Is The Trump Effect Over? – Jan 15th

The Trump Effect has not resumed in the New Year. Is it Over? No.

The start of the year is often characterised by an apparent break in sentiment from the previous year as traders seek new trends. Often these trends do not materialise as the fundamentals have not changed from the previous year. The first two weeks of the year often also therefore sees a temporary break down in correlation as traders pursue these different often conflicting possible new trends.

This has been the story of 2017 so far. The key US triangle of rising rates, rising stocks and rising US Dollar that dominated the last 7 weeks of 2017 has not been maintained. The dollar has inverted falling more as stocks rose and yields recovered from retracement for most of the week. Perhaps prophetically we expect this to be a feature later in the year.

The reason why this disconnect has happened in the last week or two has primarily been uncertainty surrounding the extent to which Donald Trump will pursue his expansionist election rhetoric and therefore maintain the Trump Effect. We expect almost the opposite this week in anticipation of his inaugural speech with yields recovering after Monday and the Dollar on hold. One of the key variables for the week will be stock volatility and whether they continue to fail or indeed break their recent highs. Momentum will also therefore be key after next Friday.

The other joker in the pack this week is Brexit: initial hardline Brexit leaks over the weekend possibly followed by the anticipated UK Supreme Court Ruling. Sterling has similarly been caught up with and skewed by market sentiment. As Sterling has continued to fall into what is widely seen as a bullish ruling against the government, opportunity abounds for potential 2 way volatility. (See previous UK Ruling Email and our condensed Forex Outlook for 2017.

The fuller version of our 2017 Forex Outlook is available to subscribers in premium posts as are Indices and Commodities 2017.

LAST WEEK

The week started on Sunday with the UK Prime Minister indicating a more hardline Brexit and the possibility the UK could leave the European single (trade) market. Sterling closed Monday over a cent down driving the (inverse) FTSE) higher to successive new highs all week. Monday was otherwise mixed for equities. German trade figures at 0700 kept the DAX flat (as was EUR until late into the US session when it rallied, SPX and NKY faded through all three sessions. All currencies and gold rose against the dollar except CAD, probably because WTI faded all day. 10-year bond yields were down. NIFTY started an uptrend which lasted until Wednesday.

Tuesday was a flat day for currencies and yields, except EUR which gave up Monday’s rally. DAX and SPX were also flat, although the latter managed a 14 point (0.62%) rally at the US Open which had faded by the close. FTSE made another all time high, gold and oil continued their Monday patterns.

Wednesday saw FTSE open with a slight gap down on Wednesday, but this was soon recovered as it joined DAX and SPX to rise firmly. USD reasserted itself, and all currencies and gold fell, although EUR, AUD and CAD recovered in the US session. GBP ignored the trade beat at 0930 and the GDP estimate as expected at 1500. CAD was following oil’s reversal (despite the EIA miss) which rose sharply until the end of the week. The NKY and 10-year yields fell, the latter affected by the auction at 1800. The major event of the day if not the week was Donald Trump’s first news conference as President Elect. With the market seeking confirmation or denial of his expansionist policies, the erratic and volatile belied the absence of detail. The end result was disappointment and a sharp but shortlived sell off into Thursday, reminiscent of the Trump inspire spike down then ramp surrounding the election.

DAX gave up all its previous day’s gains on Thursday fading 163 points (1.39%), the sharpest pullback for over a month and a 2017 low. SPX, ignoring the Jobless beat at 1330, also faded 17 points (0.75%) although unlike DAX, it recovered this completely by the close. NKY also faded through all sessions. NIFTY was flat for the rest of the week, after opening 0.9% higher and immediately giving it up. USD opened by fading against gold and currencies, and bond yields rose. It recovered against all except AUD by the end of the day. EUR which had been rising all week reversed after the ECB MPC accounts at 1230.

Friday largely reversed Thursday in equities. Although NKY was flat, SPX, DAX and FTSE were up. USD was flat against everything, except CAD which rose slightly despite oil fading. The US Retail Sales and other misses were ignored. FTSE finished the week with another ATH of 7133, 118 points (1.63%) up on the week. Save two minus 2-point doji’s this index has not posted a red daily candle since Dec 14th.

NEXT WEEK

The two dominating events this week are Donald Trump’s Inauguration speech and the possible UK Ruling. Indeed with reports on the weekend front running Theresa May’s Tuesday speech as hardline Brexit we should see another weak opening for Sterling. But as Monday is Martin Luther King day and US markets are closed this should again prove shortlived. Also on Monday the India trade deficit and inflation figures at 0630 could be a possible catalyst for a continuation of our long held Nifty outlook. BoE Governor Carney speaks on policy issues at the LSE at 1830, when US and European markets are closed. In the very unlikely event that he says anything momentous, it will be picked up in the Asian session. Also the UK Brexit Supreme Court ruling could come any day this week but more likely Wednesday and less likely Friday.

Tuesday sees UK PPI and CPI at 0930 and German ZEW sentiment at 1000. UK Prime Minister May is speaking again on Brexit. Has the time for saying ‘Brexit means Brexit’ finally passed. Sources apparently suggest otherwise. Keep GBP on your watchlist.

The annual Davos Summit starts on Wednesday thru Friday, where speakers are important enough to move markets. The agenda is on weforum.org. The day also sees a lot of economic releases: German CPI at 0700, UK earnings and unemployment at 0930, US CPI at 1330, CAD rate decision at 1500, and a Janet Yellen speech at 2000. This is Yellen’s final speech under the Obama administration. If she has been given her marching orders by Trump, she may be more forthcoming than usual.

Thursday has Australian employment and unemployment at 0030, and the ECB rate decision at 1245 followed by a Draghi press conference at 1330, although little action is expected

Friday’s main news is Chinese GDP at 0200. We have German PPI at 0700, followed again by UK news at 0930. This time it’s retail sales. Finally Indian USD reserves are reported at 1130.

Expect markets to slow right down at 1700 (1200EST) as Donald Trump is sworn in as 45th President of the US, and the world listens carefully to his inaugural address. Will it be anodyne and statesmanlike, as his victory speech was, or will we hear rhetoric in the manner of his tweets? Given his track record so far, all bets are off. The themes are foreign trade, deregulation (particularly for energy), and ‘draining the swamp’ (includes reducing the effect of lobbying). We will be watching EM currencies (particularly MXN of course), and defence (indeed all heavily lobbied) stocks, as well as SPX and the dollar generally. What he doesn’t say can be as significant as what he does.