Will the Trump rally and dollar rally fade during earnings season?
Without a doubt a state of hysteria has gripped the USA equity markets since the presidential election result in November and that hysteria overlapped into the value of the dollar. The rise in the dollar cannot be singularly credited to the 0.25% base rate rise conducted by the FOMC in mid December, as the currency began to make gains versus its major peers even before the election result. If we pull up a weekly chart on EUR/USD, then we can clearly visualise a dramatic collapse in the euro from mid September onwards, a similar collapse took place in the value of yen versus the dollar.
We’ve witnessed signs (over the preceding week) that the extreme bullish nature of USA equity markets was beginning to fade; the rejection of the mythical 20,000 DJIA level has been witnessed several times. Ironically, the rejection could be regarded as the text book example of a trend line refusing to be broken to the upside, if there wasn’t so many unnatural factors generating the price action we’ve witnessed over recent months.
The questions investors and traders are facing, now Donald Trump is finally inaugurated as the 45th president of the USA, are several and various. Will markets (primarily the dollar and USA equities) now revert to a mean? Will a new reality set in, or will his promise to: repatriate jobs, fund and indulge in the two trillion USD government fiscal stimulus, to build the tattered infrastructure that lies in ruins across the length and breadth of America, increase confidence in the largest economy on the planet? If we maintain neutrality and suspend suspicions as to his suitability and ability to be president, should he pull off his promise to put tens of millions of unemployed and underemployed Americans to work, by way of a fiscal stimulus plan not witnessed since the days of Roosevelt and his new deal programme, then America could indeed be “made great again”.
It’s what’s termed “earnings season” in the USA, a window when many major corporations reveal their annual performance statements. This period may also provide some checks and balances for those with bullish tendencies. The major USA banks reported mixed performance figures last week, this week it’s the turn of many household names; Amazon, Alphabet (Google) and Microsoft deliver their latest revenue and profit figures, as do Yahoo and Verizon, who are in the process of merging. The results of these corps. will be monitored carefully for signs that the USA supposed economic recovery is still on track and extends beyond their ability to support their share price by buying up their own stock.
Another currency that has been under the microscope and rarely out of the news since June 23rd 2016, has been the UK’s pound. Since the Brexit referendum result the pound has been hammered, albeit it has enjoyed periods of recovery, to then be sold off again. We witnessed a modest recovery in sterling last week, as a consequence of prime minister May finally revealing her plans, with regards to the hard Brexit the UK will endure. Sterling enjoyed a relief rally due to her commitment to give the UK parliament the right to vote on certain issues. However, they won’t get the right to vote on Brexit, to in effect get the right to vote to overturn the result of the referendum.
That decision is before the highest court in Britain, the Supreme Court, this week. A loss for the government could scupper its unilateral decision making, a win would strengthen its hand. The decision is expected on Tuesday at circa 9:30am. Before and after the announcement sterling currency peers could experience increased volatility, akin to what’s often witnessed when base rate decisions or NFP data is released. Therefore traders need to be extremely vigilant in relation to their sterling positions during this period.
The other major economic calendar event releases of the week concern the final fourth quarter 2016 GDP data. In the UK PMI numbers have recently out performed analyst expectations and consumer spending appears to be holding up. However, there was a shock outlier for retail spending last week; the UK’s stores saw sales fall by 1.5% in December. Many analysts are pencilling in growth of circa 1% – 1.5% for the UK economy in 2017, therefore a slight reduction in the UK’s GDP from the 0.5% in the previous quarter (2.2% annually), wouldn’t come as a major shock to the markets. In the USA the GDP data is published on Friday. The expectation is a final 2016 annualised figure of 2.2%, a fall from 3.5%.
Economic Calendar (all times are London times)
Monday, 23 January
04:30 – Japan all industries activity report
15:00 – Eurozone consumer confidence
Tuesday, 24 January
– Brexit Supreme Court ruling (expected around 09:30)
00:30 – Japan flash manufacturing PMI
08:00 – French flash manufacturing & services PMIs
08:30 – German flash manufacturing & services PMIs
09:00 – Eurozone flash manufacturing & services PMIs
09:30 – UK public sector net borrowing
14:45 – US flash manufacturing PMI
15:00 – US existing home sales, Richmond Fed manufacturing index
23:50 – Japan trade balance, imports, exports
Wednesday, 25 January
00:30 – Australia CPI inflation
07:00 – UK Nationwide house price index
09:00 – German Ifo business climate
15:30 – US crude oil inventories
21:45 – New Zealand CPI inflation
Thursday, 26 January
07:00 – Spanish unemployment rate
07:00 – German GfK consumer climate
09:30 – UK preliminary 4th quarter GDP reading
13:30 – US weekly unemployment claims
15:00 – US new home sales
23:30 – Japan core CPI, Tokyo core CPI
Friday, 27 January
06:30 – French preliminary GDP reading
07:00 – Spanish flash GDP reading
07:45 – French consumer spending, preliminary CPI inflation
13:30 – US advanced fourth quarter GDP reading, core durable goods orders
