As short sellers of USA equities are heading for their worst annual performance since 2013, many investors and analysts will be asking the question; how much higher can equities rise in 2018, now the major reason for their stunning returns of 2017 is no longer a catalyst? The DJIA equity market in the USA has risen by circa 27% so far in 2017, due to the promise of the Republicans’ tax cut and the huge infrastructure spending plan. Both fiscal stimulus measures were viewed extremely favorably by investors and regarded as a potential boost for areas of America that have fallen behind the economic growth curve, or faltered over recent years.
We now know that the tax reduction plan is happening, the fiscal stimulus spend (as much as one trillion dollars promised to rebuild crumbling infrastructure), has curiously disappeared from the Republicans’ and Trump’s narrative over recent months.
The potential infrastructure spending plan has had a negative effect on the U.S. dollar throughout 2017, and despite the Fed keeping to its promise to raise rates by three times in 2017 investors failed to bid up the dollar, which has fallen considerably versus two of its main peers; euro and sterling throughout the year. The U.K. BoE and the Eurozone ECB have delivered dovish statements during the year with regards to interest rate rises. In terms of monetary policy actions; the BoE felt forced to raise rates by 0.25% to 0.5% in November, in order to counter inflationary pressures, whilst the only hawkish move the ECB conducted was to taper its APP (asset purchase program) by €20b a month. Despite this lack of action both central banks’ currencies rose versus the U.S. dollar during 2017.
The Fed has (once again) recently committed to a program of interest rate rises in 2018, suggesting another three rises of circa 0.25% throughout the year and stated that it’s also prepared to look for methods to divest from its $4.5 trillion balance sheet. And yet despite this mildly hawkish proposal, the U.S. dollar has still failed to make significant gains versus both peers. During 2018 it’ll be fascinating to observe if the dollar does in fact rise, should the three rate rises take place. If it does then the BoE and ECB may be forced to follow suit and begin their own program of normalization.
With regards to economic calendar news on Thursday, USA GDP growth missed forecast, by coming in at 3.2% YoY, whilst initial and continuous jobless claims data also missed the predictions. Japanese store sales beat forecasts, whilst the BOJ kept interest rates at -0.1%. Swiss import and export figures were favorable and beat expectations, as did the trade balance which also improved MoM. The U.K. public net borrowing figure for November improved slightly, and Eurozone consumer confidence rose moderately. U.K. car production has recorded the biggest yearly fall in 2017, since the 2009 recession.
Canada’s encouraging retail sales figures, showing a significant surge to 2.5% in October, twinned with CPI rising moderately, caused investors to buy the Canadian dollar based on the belief that the RBA now has the necessary ammunition to raise interest rates again early in the new year. CAD rose versus the majority of its peers, rising by circa 1% versus USD. Gold maintained its recent rise from the December 12th recent low of 1236, to at one stage reach the 200 DMA of 1269, before giving back some gains.
EURO
EUR/USD traded in a narrow 0.2% range, closing out at 1.186, flat on the day and close to the daily PP. EUR/GBP also traded in a narrow (approx. 0.3%) range during the day, with a bias to the upside, before closing flat on the day at 0.886.
STERLING
GBP/USD whipsawed in a bearish range, falling through S2 down 0.6%, before recovering to end the day down flat. GBP/AUD rose to R1, before falling through S2, to close the day out at down 0.6%.
U.S.DOLLAR
USD/JPY rose through R1, before falling back to end the day up 0.2%. USD/CHF breached R1, rising to a high up circa 0.5%, before giving back some of the gains to fall back to R1, up circa 0.3% on the day at 0.985. USD/CAD fell by circa 1% on the day whilst falling through S3, closing out the day at 1.273.
GOLD
XAU/USD whipsawed throughout the trading sessions, falling through S1, down 0.3%, then reaching a daily high of 1269 and finally reaching the 200 DMA up 0.3%, before giving up gains to end the day at circa 1266.
EQUITY INDICES SNAPSHOT FOR DECEMBER 21st.
• DJIA closed up 0.23%.
• SPX closed up 0.20%.
• FTSE 100 closed up 1.05%.
• DAX closed up 0.31%.
• CAC closed up 0.52%.
KEY ECONOMIC CALENDAR EVENTS FOR DECEMBER 22nd.
• GBP Gross Domestic Product (YoY) (3Q F).
• CAD Gross Domestic Product (YoY) (OCT).
• USD Durable Goods Orders (NOV P).
• USD U. of Mich. Sentiment (DEC F).
• USD New Home Sales (MoM) (NOV).
