• Equity rally continues – AM Briefing

    Early moves

    - Fresh record close on Wall Street

    - Eyes turn to Yellen testimony

    US stock index futures are firmer in early trade with investors seemingly uninterested in booking profits following Friday’s sharp rally. European equities are also playing catch-up with Wall Street. All the US majors closed out at fresh record highs last week after President Trump promised some big news on tax within the next few weeks. He also spoke to Chinese premier Xi Jinping and promised to honour the “one China” policy. This has helped to restore positive sentiment after investors suffered a rocky fortnight thanks to Trump’s attempted travel ban and protectionist rhetoric.

    But it’s unlikely that a vague promise on tax will be enough on its own to keep equities heading higher. Investors will want to see some meat on the bone. But before that happens attention will once again turn to the US Federal Reserve and the outlook for monetary policy. Janet Yellen testifies in Washington tomorrow and Wednesday and investors will be listening out for clues over future tightening. The Fed has signalled that it expects to raise rates by 75 basis points this year. However, recent data suggests that wage growth is tepid and won’t be adding to inflation anytime soon. This could stay the Fed’s hand for now, although Yellen may well hint that the central bank is keeping an open mind when it comes to next month’s meeting. If so, then this should give the dollar a lift and may take some of the recent gloss off equities.

    Stock Index Update

    - US indices post fresh records

    - Trump rally resumes on tax promise

    The US majors hit fresh record highs at the end of last week as investors continued to respond to the promise of fiscal stimulus from the Trump administration. On Thursday President Trump said his administration would be announcing “something over the next two or three weeks that will be phenomenal in terms of tax.” This had investors forgetting their concerns over the president’s protectionist rhetoric and his thwarted attempt to impose a travel ban on individuals from seven predominantly Muslim countries. Instead, the focus turned back to the prospect of a more business-friendly environment than the US has seen for many years. But despite the stock market getting a second wind after trading sideways since mid-December, there are concerns that equities are becoming overvalued. This is particularly the case as the fourth quarter earnings season has been decidedly mixed with disappointing forward guidance.

    Meanwhile, the European majors (with the exception of the Italian MIB) ended Friday modestly higher. Overall, investors were able to capitalise on the positive sentiment coming out of Wall Street. Also adding to this was the news last week that Trump had spoken to Chinese premier Xi Jinping and promised to honour the “one China” policy. This should diffuse some of the tension that has existed between the two leaders following Trump’s call with Taiwan’s president back in December and his criticism of China concerning supposed currency manipulation.

    Commodities Update

    - WTI and Brent retest resistance

    - Gold and silver post further gains

    Brent and WTI performed a complete “round trip” over the course of last week. Both started off testing resistance at $57 and $54 respectively, then plunged to support around $54 and $51 before soaring back up to resistance again on Friday afternoon.

    Oil was on the back foot after the Energy Information Administration (EIA) forecast a fall in global demand growth for 2017 and 2018. Then the American Petroleum Institute (API) reported an extraordinarily large build in US crude inventories which was confirmed by the EIA data release on Wednesday. However, traders covered their shorts as the EIA also reported a drawdown in gasoline stocks. This fresh upside momentum was given another boost after the Iranian and Qatari oil ministers suggested that the November production cut agreement should extend beyond the June deadline, despite an impressive compliance rate. OPEC estimates that daily production in January was 32.89 million barrels, versus a target of 32.5 million barrels. This suggests a compliance rate of 91% - well above both the 60% generally expected, and the 80% reported a fortnight ago. The International Energy Agency (IEA) said OPEC had achieved record initial compliance of 90% while demand grew faster than expected. In addition, it appears that Saudi Arabia - the leading OPEC member and the world’s largest producer - set a fine example by cutting output by more than it had committed to at the Vienna meeting in November. On the flip side, the IEA reported that US producers are taking advantage of higher prices to boost daily output to the highest level since April. Consequently, all eyes are focused on what crude does now as it once again tests resistance.

    After a strong showing at the beginning of last week, gold and silver appeared to lose upside momentum as the weekend approached. There was a feeling that both precious metals were overdue a correction after a solid rally which began at the end of last year. However, it appears that investors are quite content to use any pull-back as an opportunity to increase their exposure to the two precious metals. This was the case despite the dollar putting in a strong performance with the Dollar Index posting its first positive week since mid-December. Typically, gold and silver (along with other dollar-denominated commodities) find themselves out of favour with investors when the dollar is rallying. Both metals found buyers even as a number of major stock indices hit record highs. This suggests perhaps that although investors have plenty of risk appetite as they consider the prospect of Trump’s promised tax cuts, they are also hedging their bets to some extent and increasing their exposure to precious metals as a hedge. Investors are also convinced that the Fed will hold off from hiking rates at next month’s FOMC meeting. However, they should probably not get too carried away until they hear Janet Yellen’s testimony in Washington tomorrow afternoon.

    Forex Update

    - USD rallies into weekend

    - Trump builds bridge with China

    The dollar crept higher on Friday to round off an impressive week which saw the Dollar Index post its first positive week since mid-December. The greenback had fallen sharply since the beginning of the year when it briefly hit a fourteen year high against the euro. The rally comes despite investors toning down their expectations for a Federal Reserve rate hike next month. Instead, the dollar has bounced as investors viewed it as oversold to some extent, especially considering the political uncertainty across the euro zone. Next month brings a general election in Holland, followed by the presidential election in France which will probably be decided over two rounds in April and May. There are concerns that in both cases Eurosceptic candidates could do well enough to threaten the future of the Euro zone.

    But the dollar also found support after President Trump said his administration would be announcing “something over the next two or three weeks that will be phenomenal in terms of tax.” This has helped to take the focus off Trump’s protectionist rhetoric and his apparent difficulties in imposing a travel ban. On top of this it appears that Mr Trump spoke to Chinese premier Xi Jinping and promised to honour the “one China” policy. This should diffuse some of the tension that has existed between the two leaders following Trump’s call with Taiwan’s president back in December and his criticism of China concerning supposed currency manipulation. But traders will be wary in case the Trump administration attempts to talk down the dollar again.

    Upcoming events

    Today’s significant economic data releases and events include German WPI and the Bundesbank Monthly Report.

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