It's A Big Week For Donald Trump - And For Markets

Originally published by AxiTrader

Quick Recap

It's my first day back on deck for 2017 – so I hope 2017 is kicking off as well as you hoped and the time with family and friends over the past few weeks has been fun and rewarding. I know it has been for me.

To the markets. And it’s a huge week ahead with the inauguration of Donald Trump as the 45th president of the United States, Teresa May’s Brexit speech, Chinese President Xi heading to Davos as the first leader of the world’s second biggest economy to do so, and inflation data in the UK, US, Canada, and Europe.

We also have Earnings Season in the US ramping up as well as ECB and BoCanada decisions. And of course the Chinese data dump of retail sales, urban investment, industrial production, and GDP on Friday to round out the week.

It’s going to be huge. But first traders need to navigate the next 36 hours without the US which are off for Martin Luther King Day.

What you Need To Know

International

• Is the Trump rally going to end this week with the inauguration on the 20th? That’s the reasonable question many are asking. The reason its reasonable is that it’s the day words can actually start to become action. And while the S&P 500, and other markets, are still doing stonkingly well there is some caution about the potential negatives of a Trump presidency – especially on the geopolitical stage.

• That’s certainly something that was obvious in putative Secretary of State Tillerson’s Q&A session with congress last week during his confirmation hearing. Tillerson’s thought that China should be cut off from the islands it has created in the South China Sea when combined with Donald Trump’s WSJ interview over the weekend saying everything is negotiable with China – including the one-China policy it seems – puts the new administration on a collision course with China in the year that the current leadership of the President Xi and Premier Li hits the half way mark of their term appears to leave little room for negotiation. On the other hand the new administration appears to be aggressively cooperative with the Russians. That leaves plenty of room for geopolitical volatility in the year ahead. And lets face it – politics is the new black for markets.

• But I’d argue that the Trumponomics rally – and reflation in markets across the globe more broadly - is as much about timing and the global economy as it is about the 45th US president. This chart of the Citibank G10 economic surprise index – a measure of whether data is beating or undershooting expectations – means there has had to be some recalibration of expectations about the economic outlook. As the chart below shows the positive economics surprises are at their highest level since 2010 – THAT’S THE STORY OF THE LAST 2 MONTHS. Here’s the chart

Chart

• So the equity, bond and currency market moves are on relatively solid ground. For the moment at least. The question for me in this first week back is whether stocks will continue or like the US dollar pull back a little.

• Elsewhere
• The global confab for elites is on in Davos Switzerland this week.
• Barron’s 2017 round table is universally bullish – danger Will Robinson – with the experts expecting a move of between 5-7% by years end for the S&P 500

Australia

• Naturally I haven’t been paying much attention to economic data. But given my local supper is 100% in stocks since late November I guess the main thing I picked up on the high last week on the ASX 200 failed to break a trendline going back to the 200 index’s all time high. In SPI 200 terms the high was a reversal off the line that stretches back to the 2007 high of 6880. In ASX physical terms the high last week of 5827 was through the line but reversed off of it.

• Here’s the SPI chart:

Chart

• Interestingly the ASX is pulling back again while the S&P 500 hangs in…it’s only a small divergence at the moment but we’ll see if the ASX has a swoon as it has many times in the past 14 or so months.

• Here’s the ASX v SPX chart from my Reuters Eikon

Chart

• Looking at the week ahead we have a big event for the local market with the release of employment on Thursday. I’ll talk more about it later in the week but it will be interesting to see if the labour market slowdown is continuing.

Forex

• I left the desk in later December calling for a US dollar pullback and that is largely what we have seen in the past week or so. Certainly the Euro, Yen, Aussie and other currencies were under acute pressure as we started the year. But the technical view that largely underpinned my view that the US dollar needed a rest was compelling – based on my system anyway.

• It’s something I highlighted when I broke from my holiday a week or so ago to do an update on the Chinese yuan and the US dollar more broadly.

• So this morning we have the USDJPY at 114.24, euro at 1.0612, while the Australian dollar is back near 75 cents. The Canadian dollar and Kiwi dollars are at 1.3138 and 7098 respectively showing decent recoveries themselves from recent weakness.

• Why the reversal in the US dollar is not hard to understand. The stronger the US dollar gets the more chance there is that the expected lift in growth can leak out of the US and into the global economy via the exchange rate and net exports. Traders recognise that and when you throw in levels that were overbought – in a US dollar sense – some sort of retracement was on the cards. Add in Trump's recent rhetoric about the US dollar being too strong -he was talking in context of China in this sense but the message is a broad one – and you get a chance for further US dollar weakness.

• At this early stage in my 2017 I’ll use the USDJPY as an example. Technically it may be targeting a move under 112. Here’s the chart.

Chart

• Sterling is getting hammered this morning and has lost 1.5% from Friday's close. At 1.1990 it has come under pressure because traders fear that prime minister Teresa May is going to outline a very hard Brexit in her speech this week. The fact that Chancellor of the Exchequer Hammond said the UK might need to go to a low tax rate regime to retain corporates suggests the market's fears of hard Brexit talk from May could be on the money.

• 1.1839 is the post-Brexit low - and the level to watch.

Commodities

• Commodities have been interesting.
• Gold, like the Aussie and the Yen, has recovered from oversold levels – again based on my system – and recovered to $1197 this morning.
• Copper likewise based below $2.50 a pound and is all the way back at $2.68.
• While oil is relatively calm at $52.37 for the front-month Nymex contract. $51.19 is the key downside level to watch.

Chart

• On Sunday Reuters reported global oil prices will witness "much more volatility" in 2017 even though markets may rebalance in the first half of the year if output cuts pledged by producers are implemented, the head of the International Energy Agency (IEA) said on Sunday.

Today's key data and events (all times AEDT)

• Australia - TD Securities Inflation (MoM) (Dec), TD Securities Inflation (YoY) (Dec) (11am)
• New Zealand - Food Price Index (MoM) (Nov) (8.45am)
• China - Nil
• Japan - Domestic Corporate Goods Price Index (MoM) (Dec), Domestic Corporate Goods Price Index (YoY) (Dec), Machinery Orders (YoY) (Nov), Machinery Orders (MoM) (Nov) (10.50am); Tertiary Industry Index (MoM) (Nov) (3.30pm); Machine Tool Orders (YoY) (Dec) (5pm)
• Germany - Nil
• EU - Trade Balance s.a. (Nov), Trade Balance n.s.a. (Nov) (9pm)
• UK - Rightmove House Price Index (MoM) (Dec), Rightmove House Price Index (YoY) (Dec) (11.01am)
• Canada - Nil
• US - Nil