Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

The Long And The Short Of It

Published 16/01/2017, 01:45 pm
Updated 19/05/2020, 06:45 pm

Originally published by IG Markets

What a week ahead of us and the event risk by which investors and traders have to navigate themselves through is huge. That political risk comes in the form of Trump’s inauguration speech, which promises to once again be one that we simply have to watch, but is likely to stop short of anything that gives more on the fiscal timeline. UK PM Teresa May’s speech on Tuesday is absolutely shaping up to be the markets highlight though and looking at the moves in GBP this morning we can see that for those who like volatility then the UK is where you want to look.

GBP/USD is trading below $1.2000 this morning, but the bigger moves are seen in GBP/JPY, which has fallen 1.9%. GBP/AUD fell 3.5% last week and is trading just above A$1.6000 in early trade and this remains my preference for trading GBP, given we saw bulk commodities once again have a strong night on Friday (iron ore, steel and coking coal futures closed up 4.9%, 0.9% and 4.3% respectively). Keep an eye on iron ore futures this week though as we could be staring a break of the December highs of 650 and into blue sky territory, although copper also looks really bullish. This should support AUD/USD, which is threatening to break above $0.7500 and I suspect it will stay above here in the week ahead if we do see a closing break.

It will be interesting to watch the open of the FTSE 100 futures at midday (AEDT) too as we could be staring at a 15th consecutive gain in the cash market. This is clearly a reflection of a weaker GBP given some 80% of company’s source revenue from outside of the UK, but I am not sure we have reached a point of maximum euphoria, although the market internals at concerning levels (91% of stocks above their 50-day moving average).

The market is now positioning for some fairly punchy rhetoric from Teresa May and this idea of “hard Brexit” and a clean break from the single market seems increasingly likely, with the government making a bid to gain full control over immigration. Brexit minister David Davis also adding fuel to fire, with calls for priority around negotiating ‘third country’ free trade deals, which by all accounts are very hard to achieve unless there is full separation. We also hear from the UK Supreme Court this week amid a market is starting to head towards a “hard Brexit” and the great unknown. Forget the run of good UK data, GBP is an out-and-out political currency (it has been for a while) and the prospect of volatility here is now very high.

Aside from the political risk, we also get a number of key economic releases, including China Q4 GDP (expecting 6.7%) on Friday, US core CPI, Aussie employment and policy meeting from the ECB and Bank of Canada. Of course, we also start seeing US Q4 earnings ramp up with 9% of the S&P 500 market cap due to report, predominantly in the financials and industrials, although energy also gets a look. We also get a number of Fed speakers and global leaders speaking at Davos. As I said, the event risk is real.

The lead for the Asia markets open is fairly upbeat, with the S&P 500 closing in the middle of the day’s trading range of 2278 to 2171. US Financials had the standout performance, thanks largely to good results from Bank of America Corporation (NYSE:BAC) and JPMorgan Chase & Co (NYSE:JPM), although the KBE ETF (SPDR S&P Bank ETF), which has been my preferred vehicle for trading the US banks (and reflation), and the ETF failed to close above the top of the recent trading range and was hit with a wave of sellers into $44.50.

Chart

There isn’t much to make us feel US futures markets are going to gap to greatly on open at 10am (AEDT), with most of the weekend news focused on Teresa May. Recall US equity markets are shut tonight for Martin Luther King Day, but S&P 500 and commodity futures do open as usual but close early. This suggests our call for the S&P/ASX 200 at 5750 (+0.5%) looks fair, with SPI futures closing Friday’s night session up 18 points. We are likely to see good gains in the mining and industrial space, while energy and financials should see fairly flat open.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.