It’s a well-known phenomenon that economic forum meetings convey an air of confidence to investors. Once the forums close we’re generally left with an impression that the political leaders of the world have got our backs and that they’re experts, completely in control and in charge of their brief. The end result is that during and at the close of the forums, markets rise. Last week’s meeting at Davos Switzerland was no different to meetings of the G7 and G10; USA equity markets rose to new heights, as investors were ultimately seduced by the rhetoric and the delivery of president Trump’s speech, during his closing appearance.
As to what was actually achieved during the three day/week long jamboree, is up for debate and none of the market commentators at the expensive gathering, appeared to be able to pinpoint any specific achievements. Other than Trump proclaiming that the USA was: great, better than every other country and blazing a trail, despite so many inequality and poverty metrics proving that the USA is becoming an increasingly difficult place to live, for a huge percentage of its population. As an example of the USA’s precarious situation, Friday’s economic calendar revealed that the USA balance of trade has deteriorated dramatically; rising to a -$71.6 billion for the single month of December, whilst annualized GDP fell sharply; to 2.6% from 3.2%, missing the forecast of 3%.
Over the coming week we have the first NFP job numbers release of the year, January’s reading is forecast to come in at 180k, an improvement on the surprising 143k for December, whilst unemployment is forecast to remain unchanged at a decades low level 4.1%, whilst various earnings data will also be monitored for signs of improvement. However, the highlight of the week is undoubtedly the FOMC announcement regarding their interest rate decision; currently at 1.5% there’s no expectation for any change this early in the year. The FOMC/Fed did commit in their December meeting to a program of rate rises in 2018, therefore any accompanying statement from the FOMC with the interest rate decision will be carefully monitored, for any forward guidance in relation to future rises.
Both president Trump and his Treasury Secretary made contradictory and conflicting statements regarding the U.S. dollar last week at Davos; Steven Mnuchin stating it was too high and the govt were determined to see it lower, Trump stating that this position was wrong as he wants to see the dollar higher. Witnessing two such highly placed individuals not reading from the same hymn sheet, should have been viewed by the financial media with a mixture of disbelief and incredulity, instead it was hardly mentioned. But once again we witnessed a situation which had never been witnessed before in modern times until the Trump presidency; careless words causing consternation in FX markets.
If you only view the performance of an economy through the prism of rising stock markets, then the USA is performing well; SPX, NASDAQ and DJIA closed at record highs last week and if we observe the indices’ performance on a weekly chart, the exponential rise over recent years becomes apparent. In 2017 there’s evidence of an occasional stall on a weekly chart, but no serious pullback or retrace. In terms of the SPX the last modest pullback was in August 2017, and amounted to less than a 1% fall. Before that late October early November 2016 represented the last serious retrace. We are (without doubt) living through a time when equity market indices in the USA are experiencing unprecedented and continual growth.
The reasons why markets have enjoyed such growth over recent years has been debated many times before and in detail; earnings, corporate buy backs, tax cuts, emergency base rates and asset purchase programs, as to when the next pullback will come, how deep it’ll be and what will be the catalyst, is impossible to predict. In 2017 the equity markets were impervious to interest rates doubling from 0.75% to 1.5%, therefore any rise in 2018 is no guarantee that markets will arrest their growth. Neither is there any evidence that the USA administration is concerned with regard to the U.S. dollar index collapsing to three year lows, as USD has versus the EUR early in 2018.
Another country which delivered declining GDP performance at the end of last week was the U.K., which saw annualized 2017 GDP fall to 1.5% from 1.7%, a reduction in growth that is surely too early to blame on the impending Brexit. Similar to the USA, UK equity markets consistently breached record highs during 2017, however, unlike the U.S. dollar the pound made considerable improvement in the year, gains that have accelerated in 2018 to date.
The U.K. Tory Party Brexit negotiators enter perhaps their most difficult stage so far over the coming weeks, as they attempt to broker a deal to satisfy all the fractious factions in their divided party. Rumors that prime minister May is now pursuing a Norwegian style transitional period deal (thereby negating the reason for the referendum), has caused consternation amongst her fellow MPs. Many in her party view a Norwegian deal as the ultimate betrayal of the referendum result, given that it is in fact remain, by any other name.
An agreement on the transitional agreement must be reached by the end of March, therefore the value of sterling may come under pressure over the coming weeks, as each nuanced change in the U.K. and E.U.’s position comes under far more scrutiny than during 2017. Moreover, certain vultures who have aspirations on the prime minister’s job, appear to be circling. If a challenge is made versus her position by way of a vote of no confidence over the coming days, then sterling could experience significant pressure.
