US markets surged to new records last week as all major US indices made new all-time highs with the prospect that we could well see further gains in the days ahead, despite the continued strength of the US dollar, ahead of this week’s Federal Reserve rate meeting. Rising inflation expectations along with the prospect of a significant US fiscal stimulus is driving risk assets across the board, while placing downward pressure on government bond markets.
We also saw some significant breakouts for European equity markets. The German DAX broke out through the 10,800 level which had capped every rally seen since the beginning of the year, and in the process pulled the index into positive territory for the first time this year, dragging the EuroStoxx 50 along with it.
Building on from last week’s gains we look set to start this week on the front foot after non-OPEC members concluded a deal with OPEC to cut production as part of the recent deal to try and keep a floor under oil prices, sending Brent prices to their highest levels since July 2015, and up over 4% on the day. With US prices also following suit the big question now is whether the shale producers start to bring dormant production capability back on line.
Even the FTSEMib managed to post its best week of gains since 2011, despite a Friday sell-off caused by the decision of the European Central Bank to reject Italy’s demand for more time to secure private funding for a recapitalisation of Monte dei Paschi. Some have criticised the ECB for being inflexible with respect to extending the end of month deadline, but it remains highly unlikely that any extra time that could have been granted would have made investors any more likely to invest in a bank that to all intents and purposes appears un-investable.
While it could be argued that the political situation is more stable with the potential appointment of foreign minister Paolo Gentilone to replace Matteo Renzi as Prime Minister, it doesn’t change the fact that he faces the same problems that brought down his predecessor, which means he could well struggle to get anything done, in the weeks and months ahead, which suggests that elections may follow in the coming months.
His first problem remains the fate of Monte dei Paschi and the prospect that the bank could well need bailing out, with the only questions surrounding how the process is handled, with the potential for a politically toxic bail-in of retail bondholders.
Until this particular matter is resolved markets are likely to remain apprehensive at the prospect of how the new Italian government might look to restore confidence in the country’s banking sector.
As we look ahead to a busy week for Italian politics, we also look set to see the first US Federal Reserve rate hike this year, almost 12 months to the day since we saw the last one. There should be no surprises around this meeting, though the press conference will take on an even greater significance in the context of the signalling of Fed intentions in 2017, as regards further rate rises.
This time last year expectations were high that last year’s decision to hike rates would be the first one of many. This belief proved somewhat optimistic given we haven’t even seen one yet, so not only will Fed Chair Janet Yellen’s tone be important, in the context of the Fed’s views about the fiscal stimulus promised by President elect Trump, but so will the steepness of the dot plots, in terms of members expectations, of the future rate path.
It’s also set to be a busy week for UK data with the latest November inflation numbers, unemployment and wages data for October, culminating with the final Bank of England rate decision for 2016.
EURUSD – continues to drift lower after last week’s failure at 1.0870, which keeps the prospect of further losses on a break below area the 1.0500 level a distinct possibility. We need to see a move back above 1.0650 to stabilise, otherwise a move through 1.0460 opens up the risk of a move towards parity.
GBPUSD – continues to look a little soft having failed to push through 1.2800 last week. As long as we hold above 1.2430 trend line support from the October lows the uptrend towards 1.2880 should remain intact. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – the euro continues to find upside progress a tricky prospect, with the potential for a retest of the recent lows and 200 day MA at 0.8290 a realistic prospect. We need to see a recovery back through 0.8480 to stabilise.
USDJPY –has finally gained a foothold back above the 115.00 level bringing closer the prospect of a move towards 115.60 and the 61.8% retracement of the 125.85/98.95 down move. Below 112.40 argues for a retest of the 111.20 area.
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