New Year same old themes

This is my first note of 2017, and after 2.5 weeks off, forgive me if I am a little rusty. I’m hoping a fresh blast of Alpine air during the past week has cleared away the cobwebs, giving me fresh focus for the months ahead. Looking at the key charts, the first week of the year could set the tone for what is to come. The volatility in Treasuries is the most interesting thing to note, and the decline in the pound suggests that there are further GBP bears out there.

To ease myself gently back into work, here is a list of the key things that I am watching this week.

• Trump press conference: this takes place on Wednesday, and each word is likely to be scrutinised almost as much as Janet Yellen’s press conferences. Watch out for any comments about trade tariffs and his feelings towards China. Treasuries may rally and the dollar could fall if Trump says anything controversial, but we expect him to stick to saccharine stuff during this speech, including family thank–you’s etc. Thus, we wouldn’t be surprised if we see yields fall and risk rally on the back of Trump’s speech, as long as he doesn’t digress from the script.
• UK economic data: manufacturing is expected to have ended the year on a high note, up some 0.5% for November, according to Bloomberg economist estimates. But, the trade balance is expected to look fairly grim, suggesting that the large decline in sterling is not having an impact on the UK’s large trade deficit. GBP was one of the weaker performers in the G10 last week, we shall have to see if strong economic data can trigger a pullback to the 50-day sma at 1.2438, or if headlines from the Sunday papers about an indecisive PM and muddled Brexit plans lead to another leg lower in GBP/USD, potentially below 1.20.
• Supermarkets: The UK’s supermarket giants could release some much-needed good news this week. Some IB’s are expecting “strong” (read better than previous years’) Christmas trading figures for Morrison’s and Tesco, released on 10^th and 12^th Jan respectively. Investors will be on the look out for signs that our indigenous supermarkets are catching up with the likes of Aldi and Lidl. Expectations are for fairly modest increases in sales compared to last year, however, anything stronger than expected could see some belated festive cheer for Morrison’s and Tesco’s share prices.
• Treasury market gets tested: The first major sale of US Treasuries takes place this week. $56bn will be auctioned. The key question for bond and dollar traders is whether prospects of a bear market for Treasuries will make US debt harder to sell, especially to deep-pocketed foreign investors. Any signs that it is indeed getting harder may see bond yields surging after last week’s wobble. This could be good news for the dollar in the short term, even though consistent struggles to sell Treasuries this year is likely to erode support for the dollar over the longer-term.
• Oil: crude closed last week close to its highest level since 2015. This uptrend shows no sign of slowing down, although $60 is a major resistance zone for Brent, and is less than $3 away. We expect the market to test this level, and if it can slice through it, then we could see extended gains for the commodity currencies like the NOK, AUD and CAD, which were the best performers in the G10 FX space last week.
• US stocks: Retail sales data, the Trump press conference, and a speech from Janet Yellen are all important for stocks this week, but could the major US indices be running on borrowed time? The Dow was so close to 20,000 on Friday and we expect it to breach this level this week. But what then? Declines in the Russell 2000 (US small cap index) and the Dow Jones transport index, both typically leading stock market indicators, make us a little nervous that a breach of 20,000 will fail to herald a new, more energised rally for stocks, and instead we could see a pullback if 20,000 is breached.

For now, that is about all I can think about. I will be back in touch this week once I have reacquainted myself with my desk!