21 November, 2016
The reflationary trade or as some like to call it “Trump trade” probably led some big name bearish investors who were calling the end of 8-year bull market to reconsider their judgments.
Since Trump won the elections on Nov-9, the dollar index gained 3.6%, the Dow Jones traded at new record highs, and yields on U.S. 10-year treasury bonds rallied 25%. The shift in market sentiment was based on hopes that Trump presidency means businesses profits skyrocketing due to sharp cut in taxes, more capital expenditures, and finally some inflation supported by aggressive government infrastructure spending. It’s difficult to know how much further this bull can run especially that it’s driven by animal spirits, and yet no fundamental evidence. However, when everybody turns bullish, this is the time when you should get worried.
The week ahead likely to see markets cool down a bit as U.S. breaks for Thanksgiving and economic calendar is relatively light, but here’s the top events to watch.
On Wednesday, the Federal Reserve will release its monetary policy minutes for Nov 1-2 meeting, and with markets already pricing in 95.4% rate hike in December’s meeting, reiterating the phrase used in the statement “to wait for further evidence” won’t change sentiments. Chair Janet Yellen already signaled that a rate increase is becoming appropriate soon, and voting member James Bullard said that the Fed will raise interest rates in December barring major shock. A rate hike appears to be a done deal in December unless something destructive occurs.
In a year, full of surprises with the Brexit vote shocking markets in June and Trump winning the elections in November, it’s time to start taking French elections seriously as it tests the rise of populists in EU. Today voters head to the polls for the first round of a centrist and conservative primary to nominate a presidential candidate who will be facing far-right leader Marine Le Pen. The Euro is already under lot of pressure and if populist continues to gain traction in Italy and France this will lead to further selloff in the single currency and parity against the dollar will be the topic to discuss in the weeks ahead.
UK’s Autumn Statement
Back in the UK, all eyes will be on the Chancellor of the Exchequer, Philip Hammond, on Wednesday as he unveils his first Autumn Statement. The statement is likely to end years of Austerity measures and focus back on spending that’s likely to end Osborne’s hopes of achieving a budget surplus by 2020. Sterling traders will be concerned about how much further the deficit will increase, which is likely to put some additional pressure on sterling.
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