Once stock markets had absorbed the initial shock of last week’s surprise win by Donald Trump in the US Presidential election, the reaction was more positive than it was negative, however the sector polarisations were quite marked, with basic resources, banks and health care stocks doing well, while technology stocks slipped back.
The effect was such that the Dow Jones posted its best weekly performance since 2011 as well as a record high, and though other markets weren’t as enthusiastic, it would appear that investors appear to be giving the new President-elect the benefit of the doubt in terms of last week’s indications that a big infrastructure boost could be on the way, along with some significant tax reforms.
Whether this optimism can withstand the ongoing scrutiny leading up to next year’s official investiture is anybody’s guess, however bond markets already appear to be starting to price in the prospect of additional inflationary pressures, as US 10 year treasuries posted their biggest weekly loss since early 2015, as traders scrambled to reprice the timing of potential future US rate rises.
Early indications would appear to suggest that the Federal Reserve remains on course to hike rates next month after comments by Fed vice Chair Stanley Fischer on Friday that suggested additional fiscal stimulus could alter the rate dynamics for the US economy.
The tone of his remarks suggested that, unlike market expectations of a single rate rise that we could well see additional rate rises follow on quite quickly, if market measures of inflation expectations continue to increase.
This rise in inflation expectations hasn’t been confined to the US in recent weeks, it’s been a trend playing out in bond markets for a month or so now, with UK gilt yields almost back to their pre Brexit levels of 1.4%, while German bond yields back at levels last seen in March at 0.3%.
This rise in borrowing costs has also seen European periphery yields surge higher raising the pressure on the finances of vulnerable deficit countries like Portugal and Italy unwinding all the work by the European Central Bank to push yields lower.
The pound has also earned a welcome reprieve as the whipping boy of the FX market enjoying one of its biggest weekly gains against the euro this year, as market attention shifts to the shifting tectonics of the European political system and its weak financial system and recovery.
This would also help explain the slide in the euro last week as investors start to fret that the trend of so called populist politics that has given us Brexit and Donald Trump, now threatens to generate a contagion into Europe, ahead of next month’s 4th December Italian referendum and Austrian Presidential election.
Whatever happens in the next few weeks, there is a risk that last week’s optimism could well prove short lived particularly since we know very little of how the new US President intends to follow through on some of his campaign promises, as he goes about constructing his team to push through his economic program for the US economy.
As we start a new week Europe’s markets look set to open higher on the back of an Asia session that saw Japanese GDP come in better than expected and the latest Chinese economic data show a deterioration on some of the improvements seen in the previous month.
While we’ll have to wait another few weeks to see the effects of last week’s Chinese singles day sales. There seems little evidence from the October retail sales data that the Chinese consumer is set to pick up the slack from the manufacturing sector, in fact Chinese consumers appear to be reining back their spending.
A rise of 10% from a year ago, while decent is well down from September’s 10.7% and the levels seen at the beginning of the year. It also matches the lows seen earlier this year and in 2015 and shows that internal demand continues to remain weak. Industrial production was unchanged from 6.1%.
EUR/USD – last week’s slide to test the March lows could well see a test of trend line support from the all-time lows, now at 1.0720. We would need to see a recovery back through the 1.0950 area to stabilise.
GBP/USD – the pound hit a high of 1.2670 level last week with the prospect of further gains towards 1.2880 a real possibility. A move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.
EUR/GBP – last week’s decline through the 0.8780 area has the potential to extend even further towards 0.8380 in the short term. This suggests that euro could struggle to move back through the 0.8780 area in the short term.
USD/JPY – the move to test the 200 day MA at 106.65 could well see further gains in the short term, towards the July highs at 107.50, but it could struggle to go much higher, which suggests we remain in danger of a pullback towards the 105.30 area first.
FTSE100 is expected to open 55 points higher at 6,785
DAX is expected to open 87 points higher at 10,555
CAC 40 is expected to open 31 points higher at 4,520
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