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The week ahead in macro — #SaxoStrats
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From the Floor: Strong data powers equities, hurts bonds – #SaxoStrats

●  Strong global data is driving positive Asian sentiment – Moltke-Leth
●  PBoC sets weakest Yuan fix since mid-2008 at 6.9526 – Moltke-Leth
 China pushback against market may be theme ahead of Jan 28 New Year – Hardy
●  Very high expectations for financials/materials drives FTSE 100 breakout – Garnry
●  Big long oil positions are a big risk if Opec & Russia get caught cheating – Hansen
●  Investment metals all rising despite rising yields and stronger dollar – Hansen
●  Strong data over the last 24 hours see global yields rising across the curve – Boye
●  At the money Put premiums on US equities very low for Feb and March – Larsen

By Clare MacCarthy

Big moves and new records characterise global markets today as strong US and European data drives equities higher and undermines global sovereign debt. The unexpectedly bullish economic indicators include yesterday’s ISM manufacturing PMI which evidenced new strength in US factory activity, as well as a German CPI reading that indicated growing energy in Europe’s biggest economy. These numbers, and others, helped send the FTSE 100 to an all-time high while bund, Treasury and gilt yields all went pop too.

“The Nikkei rallied on catch-up buying with this strong global data sending sentiment positive,” reports Christoffer Moltke-Leth. A weaker yen was an additional source of encouragement and the Nikkei ended 2.51% higher at 19,594.16 on its first day of trading in 2017.

China’s onshore currency, the yuan, which trades within a fixed band, came under pressure as the country’s central bank encouraged it lower by setting the weakest fix since mid-2008 at 6.9526. “The Chinese government has hiked the overnight financing rates and this has caused higher T/N swaps, reflecting the pressure on the yuan and increased yuan devaluation fears,” Moltke-Leth said.

And just how real are those devaluation fears? “You have to remember that although the yuan is closest to the weakest it’s been for the cycle, it’s been very flat for the last couple of weeks, let’s look at where we are. We’re ahead of the Chinese new Year on January 28th so maybe we’ll see some stability up until that. And the risk (if there is a risk) that the Chinese will tire of this slow grind downwards and have a devaluation, possibly in February. I’m not calling for a devaluation but you have to wonder just how comfortable they are with their policy up to this point,” explains John J Hardy, Saxo’s head of FX strategy.

USDCNH T/N swap points are rising sharply:
 Source: Bloomberg 

Meanwhile, over in the cheery world of stocks, shares and companies, Peter Garnry, Saxo’s head of equity strategy reports that the FTSE 100’s strong breakout yesterday to a fresh all-time high was driven by very strong expectations of performance within the financial and materials sectors.

“While technically thighs look pretty strong from a fundamental perspective if we don’t continue to see positive demand for materials and we don’t get higher inflation data we could see the FTSE 100 come back again because if you look at the valuation matrix it looks pretty stretched based on the past 12 months’ data,” he says.

UK100.I weekly prices since 2012

Source: Saxo Bank

In commodities, crude oil got off to a poor start to the year, hitting, as Ole Hansen, Saxo’s head of commodity strategy puts it “a brick wall on opening day”. After an initial strong opening yesterday, the market ran out of sellers and was suddenly down 5% for no apparent reason, he says. “It does give an indication of the extreme positions we have in oil markets at present. The market is priced to accepting that Opec and Russia will cut production as pledged but if we see any signs of cheating then we could have some serious moves in the market and yesterday was just a sign of that,” Hansen explains.

Finally today, global sovereign debt is being hammered by a raft of strong data and worries that even European inflation releases later today will continue that theme. “Germany’s CPI yesterday rose by the most since July 2013 so if the Eurozone CPI is also strong we could see a continuation of the selloff in core bonds,” says Michael Boye, of Saxo’s fixed income trading desk. “Bear in mind, though, that if we are to adjust to a world without QE that we still have a long way to go to in terms of a correction in the euro denominated bond market,” he concludes.

 Supersized expectations of financials' performance are propelling the Footsie into new territory. Pic: iStock


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