MORNING ROLL CALL

Feb 15 • Morning Roll Call • 165 Views • No Comments

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Investors’ optimism reaches 2011 highs, as Janet Yellen’s testimony propels USA markets to fresh record highsbetween-the-lines1

“Everything is awesome” is a sarcastic and ironic phrase that many renegade investors and analysts, use to describe the markets when they appear to be in an irrational state of hysteria. But as many seasoned investors are only too aware; “markets can stay irrational longer than you can stay solvent” – J. Maynard Keynes. The famous economist also stated; “when my information changes, I alter my conclusions. What do you do, sir?” Both quotes should be considered essential when making investment decisions.

Is it our job to predict markets, to try and outsmart them, to trade with our gut feelings, or to simply trade what we see and not what we think? Whether or not we think the dollar and the main USA equity indices are overvalued, the market “is what it is”. It’s our ‘job’ to (simply) profit from the movements.

On Tuesday the Eurozone published some concerning data regarding Germany’s current economic performance, the non seasonally adjusted annual GDP figure came in at 1.2%, missing expectations and below the 1.5% previous reading. The quarterly figure was 0.4%. Similarly Italy’s GDP reading missed the forecast, coming in at 0.2% for the last quarter of 2016 and 1.1% annually.

Wider European news concerned the UK’s economy; although the inflation figures marginally missed estimates, coming in at 1.8% annually, this is still the highest rate since mid 2014 and a significant rise from the benign 0.5% during the majority of 2016. On current trajectory the UK’s inflation rate could breach 4% by the end of 2017. Whilst retail inflation, currently printing at 2.9%, could breach 5% before 2017 closes, outstripping wage inflation of circa 2.7%. Hidden beneath the headline numbers was an alarming figure; the prices paid by UK factories for fuel and materials rose at an annual rate of 20.5%, the biggest leap since 2008, adding evidence to the belief that the UK’s recent manufacturing and exporting rise has been living on borrowed time.

The respected ZEW surveys, covering sentiment for Germany and the Eurozone, published far lower readings than anticipated on Tuesday. The Eurozone sentiment reading came in at 17.1, a fall from the 23.2 previously, whilst Germany’s sentiment survey came in at 10.4, missing the forecast of 15 by some distance. However, over in the USA, investor sentiment is extremely bullish.

According to the latest Merrill Lynch survey 23% of investors expect an outright “boom” in 2017. The numbers expecting only negligible growth have halved to 43%. And it’s not just investors that are extremely bullish regarding the USA economy; the National Federation Of Independent Businesses has reported levels of optimism not witnessed for over a decade. Now given that many economists consider small business to be the engine of growth in the USA economy, this news release possibly deserves more credit and coverage.

With predictable regularity the main USA equity indices reacted positively to Janet Yellen’s testimony in front of lawmakers by reaching record highs. She effectively stated that rates will rise sooner rather then later. The SPX closed at 2,337, the DJIA at 20,504 and the NASDAQ at 5,782. In Europe Germany’s DAX closed flat, France’s CAC closed up 0.16% and the UK’s FTSE 100 closed down 0.14%, as inflation data moderated the recent bullish sentiment.

Gold was 0.2% up at $1,228 on Tuesday, after suffering a 0.7% sell off on Monday. The metal is reacting in classic risk on risk off fashion to main equity market sentiment. Silver closed up marginally on the day at $17.945.

Sterling initially suffered a sell off versus its major peers during Tuesday’s trading sessions as a consequence of inflation data missing forecasts, the conclusion being that the BoE will hold back on base rate rises until inflation breaches a level above their target of 2%. However, other than versus the USA dollar, sterling recovered versus the majority of its peers. GBP/USD ending the day down circa 0.5% at circa 1.2470. EUR/USD weakened by circa 0.2% at 1.0577.

Economic calendar events for Wednesday 15th February, all times quoted are London (GMT) time

09:30, currency effected GBP. ILO Unemployment Rate (3M) (DEC). The UK’s unemployment rate is expected to remain static at 4.8%. Any deviation from this could effect sterling’s value.

09:30, currency effected GBP. Weekly Earnings ex Bonus (3M/YoY) (DEC). Annual inflation earnings are currently running at 2.7%. With retail inflation at 2.9% a tipping point in terms of consumer spending may hit the UK’s main engines of growth; the service and retail sector over the coming months.

13:30, currency effected USD. Consumer Price Index (YoY) (JAN). Annual inflation in the USA is predicted to have risen to 2.4%, from 2.1% previously.

13:30, currency effected USD. Advance Retail Sales (JAN). Retail sales are predicted to come in at only 0.1%, from 0.6% previously.

14:15, currency effected USD. Industrial Production (JAN). The prediction is for zero growth, from 0.8% previously.

15:00, currency effected USD. Fed Chair Yellen Delivers Semi-Annual Testimony to House Panel. Janet Yellen concludes her testimony in front of USA lawmakers.

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