Risky assets hit the skids on Monday, as oil, stocks and the dollar all fell in tandem. The notable out-performer was the Nasdaq, the US technology index, which reached a record high at the start of this week. After falling behind the rampant US banking and industrial sectors in the final quarter of 2016, the tech sector could be playing catch up, however, we are on the lookout for a pullback in stocks before Trump’s inauguration in less than 2-weeks’ time, so this could be a last hoorah for the tech sector before it succumbs to the same fate as the broader market.
Stocks look vulnerable in the short term
Futures markets point to a lower open for European and US stocks on Tuesday. We have mentioned in earlier notes, that there were some warning signs that the US stock market rally could be taking a pause. Firstly, price movement has been indecisive at these lofty highs, just below 20,000 in the Dow Jones index. Likewise, two lead indicators – the small cap Russell 2000 index and the Dow Jones Transportation index – have fallen in recent sessions, which did not bode well for the broader indices. At this stage this looks like a normal pullback, especially so close to a change to the administration in the US. The market has high expectations for Trump’s economic policy; perhaps they are booking profit just in case he throws in a curve ball at tomorrow’s much anticipated press conference.
Risk aversion rises as we wait for Trump inauguration
From a pure market perspective, the dollar and stocks have tended to rise together, on Monday they fell in tandem. Not even a decline in US bond yields, which should be good news for stocks, can push US markets back into record-breaking territory, which is a sign that some nervousness is gripping the markets.
Questions arise about Trumpenomics
Trump will give a press conference on Wednesday, to address his business interests. Earlier on Monday he met with the head of Chinese mega brand Alibaba, Jack Ma, who said he was looking into creating 1 million jobs in the US for small US businesses to build exports to Asia. One potential stumbling block for this aim is a rising dollar, even if it has had a weak start to 2017, expectations are for further gains, which could put the brakes on US growth. In fact, some are expecting the US to tacitly try and limit dollar strength if EUR/USD breaches parity in the coming weeks.
Fed changes could be more than rate deep
The dollar brushed off relatively hawkish comments from the Boston Fed chief Rosengren, who was speaking on Monday evening. He said that the US could cope with 3 rate hikes, and that the US economy risks running hot. This is nothing too noteworthy, however, what was interesting was his comment that he would urge the Fed to take up the balance sheet timing debate. This is the second stage to normalising US monetary policy, and if the Fed does announce when it will start to sell off some of its mega balance sheet, then this could lead to another leg higher in the USD, as it would put the Fed miles ahead in terms of monetary policy normalisation, compared to the UK and Europe.
GBP recovery could be futile
Talking of Europe, the pound was battered on Monday, falling to its lowest level since October. We expect GBP to remain the most volatile of the G10 currencies in the coming months while we wait for the triggering of Article 50. Essentially the market is likely to re-establish shorts in GBP, after a brief respite at the end of last year, until it is quite confident that Brexit won’t be ‘hard’ or disastrous for the UK economy. While Theresa May says that we can’t keep ‘bits of the EU’, sterling isn’t safe from the bears until we know what will replace the single market. We will have to see if today’s industrial and manufacturing data will help the pound to build on its mini recovery overnight; 1.2250 and then 1.2450 – the high from 4th Jan – are key resistance levels in these volatile times. However, heightened levels of political risk for GBP could scupper any potential recovery.
Watch Czech inflation
Also worth noting, at 0800 GMT Czech inflation data is out. While not our usual economic point to watch out for, the Czech Republic could drop its peg with the euro in the coming weeks due to rising inflation pressure. The market expects a jump in Dec CPI to 1.9% from 1.5%, anything bigger than this could see CZK bulls come out of the closet and test the Czech authority’s nerve to keep EUR/CZK around 27.