Europe amp US diverging outlooks

European equity markets have failed to make much progress one way or the other this week, kicking the week off and ending it at more or less the same level. The post-election Trump rally is seen to be wearing thin this side of the Atlantic, as investors digest the growing divergence between European and US economies and the outlook for monetary policy.

The dollar has continued its ascent in the wake of Yellen’s hawkish testimony before Congress, where her positive comments regarding the US economy have spurred the currency to break through 101.00 and hit fresh 13 year highs.

Yet while Yellen was more or less confirming a rate hike in December and several rate hikes for next year, European Central Bank President, Draghi was clearly on the other side of the fence. Draghi stated that the Eurozone recovery was reliant on ECB stimulus possibly hinting that ECB monetary stimulus will continue beyond its planned conclusion next March. As a result, the Euro has continued to sell off against the dollar and is currently at $1.0609 setting its sights on $1.04 against the dollar going forward.

Precious metal miners sink to the bottom of the FTSE

Miners have dominated the lower reaches of the FTSE as a strong dollar has weighed on metal prices. Precious metal miners have fallen particularly hard – both Randgold Resources and Fresnillio are trading over 5% lower, mainly due to the continued decline of gold.

Gold, like bonds, has been one of the more noticeable losers of a Trump president elect, with the precious metal falling over 10% since he clinched the Whitehouse. With plans for reflationary policies such as a $1trillion spending spree on infrastructure and control of both houses meaning political gridlock is less likely, inflation expectations have risen sharply, along with debt yields and interest rate hike expectations. Hawkish comments from Yellen in her testimony to Congress renewed selling pressure on gold and given that the US dollar index is trading at fresh 13 year highs, we could see expect to see a more significant correction yet, the trend remains bearish precious metal miners could be set for more pain to come.

Looking ahead to the Autumn Statement

As we look towards next week the US is expected to stay very much in focus, as Trump continues to build his team around him and the debate rolls on as to whether this is a strong dollar trend or a one-off election move.

We will also have the welcomed distraction of Chancellor Hammond’s Autumn Statement – after the past 10 days have been so US centric, the Chancellor’s Autumn Statement will be a refreshing return to domestic affairs. This will be the first look into the Treasury’s plans for the economy in the post Brexit climate and we can also expect some forward looking comments on the UK’s economic health. A weighty chunk of the statement is expected to be devoted to Brexit and setting out the support that the economy needs to navigate through the start of the divorce proceedings with the European Union. Sterling, which has had a relatively quiet week, trading within last week’s range, could be set for more volatility as we head towards Wednesday and investors start to weigh up what Hammond has in store.