Global Market Outlook:
January was a positive month for trading in US stocks which saw the Dow blast though 20,000 and the S&P and NASDAQ rally to new all-time highs. There was some trepidation in the markets ahead of Donald Trump’ Inauguration but the markets cheered his initial moves toward strengthening the US economy.
The big question now is whether this momentum can continue into February. Seasonally the winter is one of the stronger times of the year for stocks, but the question remains whether indices have moved up too far too quickly. It’s easy to sign an executive order to accelerate infrastructure project approvals but getting projects funded by Congress and flowing through into sales and earnings may take longer, particularly if Congress prefers to focus on other areas like tax cuts and replacing Obamacare. The tug of war among parties over priorities, plus the end of earnings season could impact action in stock markets.
In particular, the retailing sector could be active later in the month during its reporting season. A number of profit warnings have suggested the Christmas season was weak for many companies. Retailers could face uncertainty in 2017 as the potential for new tariffs or other measures against China and Mexico could hit their selling prices and profit margins.
The potential for changes in trade relationships may also impact trading in currency markets. So far, Trump has been warmer to the UK, Canada and perhaps Japan and more belligerent toward Mexico and China. Brexit is also likely to be in focus with the debate around legislation, the publishing of a white paper likely in February and initial overtures toward potential trader partners likely ahead of the triggering of Article 50 in March.
February may also be an active month for the US Dollar. The February 1st Fed meeting is unlikely to see any changes but as the month progresses, we could see a lot of speculation on whether we could see a rate hike in March. If the Fed is planning 4 or more rate hikes this year (the street has priced 4-5 into USD), the central bank would need to raise rates in March. If they only plan to raise rates 2 or 3 times, the next hike would be more likely in June. We also could see a battle between rising headline inflation and falling core inflation over which the Fed is more likely to listen to in the coming year.
Three interesting markets for February 2017
1) Index FTSE
MIB (Italy) Average Current Price 19,336 1 month forecast 18,570
Italy’s market staged a big bounce in December led by its banks but became really overbought and ran out of gas in January completing a double top. The country remains volatile politically with the potential for elections this year and it wouldn’t take much to send Italian stocks tumbling again.
2) Commodity Robusta Coffee Current Price 2,243 1 month forecast 2,000
I’m going against the grain a bit here as February is historically a strong month for Robusta Coffee but momentum indicators suggest that seasonal rally came early this year and upward momentum has already peaked. Arabica Coffee already peaked and has been trending lower for a while making Robusta look vulnerable.
3) Currency GBPUSD
Current Price $1.2640 1 month forecast $1.3000
Back in January, Cable completed a big double bottom near $1.2000 and staged a big bounce up toward $1.2685. This seemed to have been too much too quick but following a quick correction back to the 50-day average its uptrend has resumed. Historically, February has been one of the worst months of the year and GBPUSD has been the worst performing major currency in the month of February on average but this year could be different. Following the Brexit vote last summer GBP was crushed on uncertainty but as the path toward Brexit clarifies it has been recovering. With the target date for the triggering of Article 50 creeping up to early March from end of March and approaching quickly, GBP could be an active trader in both directions this month.
Historically, February has been a transition month for commodities, a month where seasonal trends shift from positive to negative depending on the market as traders start to look past the winter months toward the spring. For example, February ends the seasonally favourable period for gold but starts a favourable seasonal period for crude oil.
Of the 20 commodity markets I track over time, 15 have a positive average return for the month while 5 have a negative average return. More importantly, 17 of the 20 have an average move of over 1%, and 2 (Gasoline and Robusta Coffee) have an average move of over 5% meaning that February can be a month of big swings
Weather can play a big role in trading energy and agricultural commodities if winter looks like it’s extending or spring arriving early.
Best Commodity Corn Current price 3.56 one-month forecast 3.72
Corn is still in the middle of what has historically been a seasonally favourable period which runs through April. It recently broke out of a base over 3.50 and could trend toward a test of 3.72 where a measured move from the triangle and a 50% retracement from its previous downtrend converge. We also potentially could see a golden cross of the 50-day average over the 200-day this month.
Worst Commodity Sugar Current Price 20.22 one-month forecast 18.25
Winter has historically been the worst time of the year for Sugar with average monthly declines running through April. The price recently failed to breakout over 21.00 setting a lower high and confirming distribution. Momentum appears to be turning downward. A break of 20.00 would confirm another downturn is underway. .