02 January 2018 at 15:43 GMT
USD stumbles into New Year; macro traders looking at US fiscal outlook?
- It is still tough to judge the quality of the recent USD weakening move as much of it occurred in thin market conditions into year-end.
- US treasury market should offer clues on USD as 2018 gets under way; would expect much higher long US yields if weak USD is about fiscal worries.
- JPY nearly as weak as the USD as BoJ kept foot on monetary accelerator at December BoJ meeting. EURJPY hit new cycle high.
- In AUD some fairly obvious drivers of recent strength include the RBA rate outlook shifting higher, strong commodity prices, and a pick-up in China December PMIs.
- Key data into the end of the week: Friday sees Eurozone Flash December CPI, US payrolls/average hourly earnings
- NOK and SEK: big question for the two Scandies on whether new calendar year, return of liquidity finally bring some relief.
- ZAR: plenty of drama as ANC elects its new leadership and decides South Africa's future direction. A Ramaphosa win could drive further ZAR strength.
Tech levels on watch for developments
- EURSEK and EURNOK look pivotal for whether downside engages, particularly EURSEK in 9.80-85 zone.
- AUDUSD sees the last major Fibo level just ahead of 0.7900. USDCAD similar level at 1.2390.
- EURUSD nominal high for the cycle was 1.2092 in September; next level above perhaps 1.2300-plus.
- Short USDJPY as strong Japan economy/current account divergence argues for more JPY strength relative to USD.
- EURUSD longs to hang on for new highs.
Goldilocks environment to come to an end
- Short-term negative on US equities despite tax reform and weaker USD.
- Positive on emerging market equities as segment is making new highs on China and the weaker USD.
- Positive on UK equities driven by strong momentum in the mining sector.
- Short-term negative on European equities as stronger EUR is hurting cyclical industries.
- Reiterate short-term bullish view on Hong Kong equities as momentum cannot be ignored and valuation is still low.
- Remain bullish on Japanese equities due to strong profit growth although recent momentum has faded.
- Slight overweight cyclical sectors but investors should consider increase defensive exposure in case of a correction.
- Our top three most preferred industries: software, semiconductors, technology hardware.
- Our top three least preferred industries: energy, telecommunication, media.
- Momentum continues to be strong on US tax reform / China, but we expect PMIs to soon disappoint.
- Euro area economic activity rises to its highest level since April 2006.
- China continues to be mixed on macro although financial markets have strong sentiment.
- Realised inflation is a key indicator to watch in Q1 as it will set direction.
- Cross-asset class implied volatility is touching new lows.
- Core bond yields are on the rise on the year's first trading day, sparking speculation and focus on inflationary pressure.
- Italian yields are continuing higher, now closing in at 2.05% in 10-years.
- A continued hawkish European Central Bank will be hard to see with a continued stronger EUR.
- The selloff in US HY corporates last month didn't change much in this space as the US HY corporate spread remains at its lowest since 2014 and close to multi-year lows. This implies junk bonds are the most expensive ever.
- Astaldi may increase capital structure of €200million.
- Total volume in IG primary is expected to decelerate as we approach year-end. This week we will see Germany coming up with two-year, Spain
with 3/10/15-year, and the US with 3/10/30-year issuances.
- The weaker dollar is expected to help investor inflow into EM asset classes, including bonds.
Supply worries keeping oil supported... for now
- Oil is in need of continued supply disruptions to maintain current momentum.
- A record long and a pickup in US shale production are currently the biggest risks to bullish sentiment.
- A balanced supply and demand outlook leaves no room for Opec and Russia to increase production.
- Focus: the current protests in Iran, weekly US stock and production data.
- Gold is breaking higher on a weaker dollar and a subdued outlook for US real rates.
- Political and economic news out of Washington continues to provide a key source of support.
- Synchronised global growth and China's pollution fight supporting industrial metals but Chinese growth concerns into 2018 risk capping the market.
- Bloomberg Grains Index trading at a record low on ample global supply.
- Speculators holding a record net-short across the three key crops.
- Focus on monthly WASDE reports and potential impact of freezing US weather.