What moved the market in the past week?
Monetary and Fiscal Policy drove markets
Policy was a particularly active theme over the past week from a headlines perspective (just as in the week before) as there were predictable rate decisions from the Fed, ECB and BoE and unexpected headlines from RBNZ and BoC Governors.
Equities
Wall Street’s three major indexes climbed to record closing highs on Friday with broad-based gains as the long-awaited bill to cut corporate tax rates looked set to win enough support from lawmakers to pass.
The S&P 500 and the Dow closed higher for the fourth week in a row, while the Nasdaq saw its first weekly gain out of three.
Quadruple witching; the simultaneous expiration of U.S. options and futures contracts for stocks and indexes, boosted volume to 10.7 Billion shares, well above the 6.73 Billion average over the last 20 trading days, and the highest in 12-months.
U.S. congressional Republicans who had previously held a hostile view started to offer support. However, one wonders how long before concerns about the bill’s impact on the federal deficit will return to be a spectre at the party?
Pre-holiday conditions are already sedated with US equities holding their highs and the VIX closing well below 10 as the year peters out is not unreasonable given it is a measure with a time frame for the month forward and of course we will effectively lose two-weeks with Christmas and New Year.
Forex
Despite stronger economic data and upgraded economic projections, the Euro failed to extend higher after breaking out of Wednesday.
The latest reports show service and manufacturing activity accelerating, leading to greater investor confidence. Next week one may see the optimistic view of the ECB overflow to lift the Euro, however, at this time of year the technicals may dominate and so the EURUSD could well favour weakness and retest 1.1700.
Also boosting the U.S. Dollar was a 0.84% slump in Sterling to $1.3220 as investors brace for the next round of Brexit negotiations, which European Commission President Jean-Claude Juncker warned be “harder”.
Commodities
Crude oil saw another rally fizzle out for a third week, with prices stalled near $57/barrel as concerns over excess supplies next year temper enthusiasm for OPEC’s extended production curbs. Prices are lingering below two-year highs for even though the outage of a North Sea pipeline gave support, climbing U.S. output and weak gasoline demand kept a lid on gains.
Gold prices were roughly unchanged on Friday as gains were capped by a rise in the U.S. Dollar amid growing investor optimism on tax reform.
Gold prices were on track to snap a three-week losing streak after rising sharply following the Federal Reserve interest rate decision to raise rates and make no hawkish changes to its outlook for monetary policy. The metal is sensitive to moves in U.S. rates, which lift the opportunity cost of holding non-yielding assets such as bullion.
Of course, we cannot overlook the first week when Bitcoin Futures were trading. Indeed, as this is typed at 18:54 on Saturday, December 16thBTCUSD is at 18,665.0, +1095.5 or +6.23%.
There hasn’t been major short-selling surge, for now, yet it will surely come. That said the news leads are becoming ever more curious as property developers have sold the first two luxury homes in the UK using Bitcoin currency. It follows an increasing trend in the last few months for developers to place new homes on the market in the cryptocurrency.
The wild and heady days may be drawing to a close, however, as the head of the Securities and Exchange Commission this week warned investors on the risks of investing in largely-unregulated digital currencies. And another federal agency is now proposing to regulate bitcoin trading like other regulated commodities such as wheat, oil, gold, and silver.
The big question is what will we see in 2018
In this regard, fixed income dealers believe they are more sophisticated than their equity colleagues. When it comes to the economic outlook, they state that the bond market is smarter than that for equities.
This view is held as they say equities appears to focus on a guidance and dividend vantage point. In contrast, key indicators in the fixed-income markets interpret signals from the economic cycle. The yield curve is widely considered to be among the most prescient indicators. That’s why it’s flattening this year has been troublesome.
Optimistic analysts from equities dismiss the yield curve’s signal claiming that inflation expectations have been declining in recent years and foreign central banks like the European Central Bank and the Bank of Japan are artificially suppressing their mid to longer-dated bond yields, pulling down the equivalent U.S. yields.
That is a tough sell, especially as equities, are at such high levels and the arguments are nothing more than a call to ignore the slowdown signals emanating from the fixed-income markets.
I think equities will make further gains, indeed I can see now the day when dealers on the floor of the NYSE sport baseball caps proudly stating, DOW 25,000 however, it is certainly not going to be a straight-line rise.
The week ahead
In this last full trading week before Christmas, there really is little on the economic calendar to set the pulses racing. Certain data points from the US and Europe are truly set to match the last reading so the market needle will not move by much.
While it is possible to see some modest breakouts or reversal develop over next week; it would demand a remarkable depth of complacency or data points to be well out of line to spring a surprise.
That said, there are, two U.S. metrics that have the scope to move markets, after all, trading will be thinner than usual, especially at the end of the week and so please watch:
Wednesday, December 20th at 15:00 GMT US Existing Home Sales for November. Expected at 5.52 Million cf. 5.48 Million in October. The shortages and disruptions from recent hurricanes have fully dissipated.
Then on Friday at 13:30 …if anyone is still watching there is US Core Durable Goods (MoM) for November. This should fall back to a gain of 0.5% from 0.9% in October, that may just knock some steam out of the Dow and S&P.
Have a great week, a Merry Christmas and A Happy New Year in 2018!
Written by Stephen Pope, LAT Senior Lecturer.
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