“The market can remain irrational longer than you can remain solvent”. Supposedly the English economist John Maynard Keynes said this after suffering losses on a series of highly leveraged trades. He was then “humbled” by the market, a euphemism for losing badly. And yes, this is the Keynes often referred to under the description of “Keynesian theory”…
Keynesian economics was developed by Keynes during the 1930s, in an attempt to understand the cause and effect of the Great Depression. Keynes advocated increased government expenditure and lowering taxes, in order to stimulate demand and pull the global economy out of the Depression. A policy that has been aped by many central banks and governments since 2008 and sometimes maligned by his detractors.
However, the market has behaved in a rational manner since the Fed interest rate cut was announced on Wednesday evening; the dollar has risen sharply versus the majority of its peers, whilst the main USA equity market rises lost impetus and failed to take out recent highs. Some analysts are wondering when the dollar rally will actually fade.
Stuart Bennett, head currency strategy at Banco Santander SA in London; “at the moment it feels like going long dollar is free money, no one loses. The market believes it can push for another two to three percent relatively risk-free, a nice Christmas bonus. The market never appears to need a reason to be negative about the euro.”
The USA economy delivered some strong numbers on Thursday, adding weight to the belief that the DJIA could still take out the 20,000 before the end of the year, with the SPX also potentially finishing on a record high. The consumer price index rose 0.2%, in line with Fed expectations, while the New York Federal Reserve’s Empire manufacturing index came in at 9 in December, well above the consensus of 4 and the November figure of 1.5.
Weekly jobless claims in the USA fell for the second week in succession, falling by 4,000 to a seasonally adjusted 254,000; this is now the 93rd week in series were claims have been below 300,000, generally a level associated with a vibrant jobs market. The USA current account deficit fell from $118.3bn in the second quarter, to $113bn in the third quarter.
The UK’s bank of England’s monetary policy rate setting committee decided to keep rates at 0.25%, combined with the current monetary easing/asset purchase programme remaining steadfast at £425 billion.
The MPC still has concerns regarding the UK’s economy, stating; “since the Committee’s previous meeting, sterling’s trade-weighted exchange rate has appreciated by over 6%, while dollar oil prices have risen by 14%. All else equal, this would result in a slightly lower path for inflation than envisaged in the November inflation report, though it is still likely to overshoot the target later in 2017 and through 2018. Since November, long-term interest rates have risen internationally, including in the United Kingdom. The slowdown in growth remained likely, but there had been little news since the time of the November inflation report about domestic activity and, although the near-term global outlook had improved, this was counterbalanced by more elevated risks.”
The Russell index closed up by 0.77%, with “small caps” enjoying quite a rally over recent day. The DJIA clawed back some of Wednesday’s losses to close up 0.30% at 19,842. The S&P 500 Index rose by 0.4 percent to 2,262 in New York, after sliding 0.8 percent on Wednesday following the Fed’s statement. The FTSE 100 finished 49.82 points, or 0.72% higher at 6999.01, close to the 7000 level. Germany’s Dax rose by 1.08% to 11,366.40. France’s CAC closed up by 1.05% at 4819.23. Italy’s FTSE MIB jumped by 2.09% to 18,994.79, confidence in banking restructure remaining high. Spain’s Ibex ended up 1.33% at 9340.8. In Greece, the Athens market fell by 0.88%, to close down 613.76.
The dollar rose by 1.2 percent to $1.0415 per euro, reaching its strongest level seen since January 2003. The greenback advanced by circa 1.4 percent versus the yen. Sterling weakened by approx. 1.1 percent versus the dollar after the BoE said its inflation target is more attainable than previously predicted. Gold futures slumped by 2.9 percent to $1,129.80 an ounce, after touching their lowest level since February. Futures have slumped 15 percent since the end of September. WTI (West Texas Intermediate) crude fell by 0.3 percent to $50.90 a barrel. Libya is apparently preparing to ship its first cargo, from its largest export terminal, in over two years. The Bloomberg Commodity Index fell by 0.9 percent to a low for the month as a consequence of the dollar’s revival.
Economic calendar events for Friday December 16th which may effect market sentiment
It’s a relatively quiet day for potentially high impact news events and data releases, however, here’s potentially the most volatile.
10:00. EUR, Euro-Zone Consumer Price Index Core (YoY) 0.8%, 0.8%. At 10am London time Europe’s latest core inflation data is released, the expectation is for no change, with the figure of 0.8% as the annual inflation rate to be maintained.
13:30. USD, Housing Starts (MoM) (NOV) -6.8%, 25.5%. Naturally seasonal factors will come in to apply concerning housing starts in the month of November, analysts polled are expecting a -6.8% reduction.
13:30. USD, Building Permits (NOV) 1245k, 1229k. Building permits (similar to housing starts) also can tend to trend downwards due to seasonal factors, however, not as dramatically given the advance required by permits indicates a level of future confidence in the USA housing market for new builds. Analysts polled are not expecting a fall, but a modest rise in permits.
18:00. USD, Baker Hughes U.S. Rig Count (DEC) -0.10%. Although generally the final piece of data for the week, the rig count can create movements on the WTI oil market. And given the focus on oil over recent weeks and the fact that at a support level of circa $45 a barrel, USA shale producers are theoretically “back in the game”, this data does have the potential to surprise.