Three months back, shortly before the USA November 9th election, the DJIA was at circa 18,000. This time last year (early March) the index was at 16,800. The index has now risen circa 26% year on year. The rise (since the USA election), has been in the region of 17.5%, which may prove to be unprecedented in the modern era, in terms of a post presidential election rise.
Scanning back through the key economic readings over the past twelve months relating to the USA economy, it’s difficult to establish where the earnings are being generated, in order to justify the exponential rises in all the main USA equity indices. The overwhelming readings suggest a rather unimpressive stagnating economy, therefore the rise is partly confidence, but moreover possibly relates to the significant corporate tax cuts Trump has promised. But why fight it?
“The markets can stay irrational longer than you can stay solvent” is a quote from Maynard Keynes that many of us are fond of quoting. However, who is the judge of what represents an irrational market? Perhaps we should quite simply trade what we see, not what we think.
In terms of fundamental news, once again the USA data published on Wednesday was mixed. Construction spending missed expectations of a modest rise, falling by a significant -1.0% in February. Personal income is up, personal spending is down, as an increase in inflation begins to hamper consumers’ disposable income. The Markit manufacturing PMI missed expectations at 54.2, but the ISM manufacturing reading came in at 57.4, the highest growth rate witnessed since August 2014. As expected Canada’s central bank kept the key interest rate at 0.5%.
In Europe the main indices also rose strongly, whilst the economic calendar news was (similar to the USA) mixed. Both France and Germany’s manufacturing PMIs missed forecasts, as did the Eurozone manufacturing PMI, coming in at 55.4, a small slip from the previous month. The UK’s manufacturing PMI fell to 54.6, from 55.7 in January. Germany’s inflation rose to 2.2% annually.
The DJIA reached a fresh intraday high of 21,171 during the New York session, to close at 21,115, up 1.46% on the day. The SPX also reached a new intraday high of 2,401, to close at 2,395, up 1.37% on the day, both indices closing at record highs. At 5,904 the NASDAQ also closed at a record high. In Europe the STOXX 50 closed up 2.13%, the DAX closed up 1.97%, CAC up 2.10% with the UK’s FTSE closing up 1.64%.
Sterling slumped versus its major peers during Wednesday’s trading sessions, falling to a six week low versus the dollar. GBP/USD ending the day at approx. 1.2286, with many analysts being quoted on Bloomberg and Reuters citing that a return back to the recent thirty one year lows of circa 1.20, could be a realistic short term target. EUR/GBP rose to 85.081, whilst GBP/CHF ended the day sharply down, ending the day close to 1.2401.
The dollar index, the basket of six major peers versus the U.S. dollar, rose by circa 0.6% on the day to reach its highest level since mid January, USD/JPY rose by circa 1.05% to reach 114.04. EUR/USD fell to 1.0535 towards the end of Wednesday’s trading sessions. Dollar strength has returned across the board, with bets now rising to as high as 80% that the Fed will hike rates in March.
Economic calendar events for March 2nd, all times quoted are London (GMT) time
06:45, currency effected CHF. Gross Domestic Product (YoY) (4Q). The Swissie has made significant gains versus many of its peers recently. The prediction is for GDP to have remained static at 1.3%.
09:30, currency effected GBP. Markit/CIPS UK Construction PMI (FEB). The prediction is for the UK’s construction reading to have slipped marginally to 52, from 52.2 previously. Any significant miss could suggest that Brexit fears are beginning to hamper construction efforts.
10:00, currency effected EUR. Euro-Zone Unemployment Rate (JAN). The current rate is expected to remain static at 9.6%.
10:00, currency effected EUR. Euro-Zone Consumer Price Index Estimate (YoY) (FEB). Inflation is anticipated to come in at 1.9%, up from 1.8% previously. Any significant breach above this level may impact on the value of the euro, versus its major peers.
13:30, currency effected CAD. Gross Domestic Product (YoY) (DEC). GDP is predicted to come in at 1.7%, up from 1.6% previously.
13:30, currency effected USD. Initial Jobless Claims (FEB 25). The weekly job claims came in higher than forecast last week, at 245k this week it’s a prediction in line with the median claims over recent months.