Markets Rally Ahead Of U.S. Holidays

Market Brief

Markets rally ahead of US holidays

Equity markets are still supported by U.S equities reaching a record closing high for the second straight session. Investor appetite for risk is been supported by expectations of the president-elect’s massive $1trn fiscal spend and amid expectations that OPEC will agree to a production cut. In addition, markets were encouraged by the New York Times interview where Trumps appears to have tempered portions of his more controversial views. A more pragmatic Trump significantly decreases the uncertainty risks which have kept the USD trade well bid. Interestingly, VIX has fallen to its lowest levels since August as US real yield surges have stalled, suggesting that USD demand could be limited moving forward. Asian regional equity indices were mostly in the green with the Hang Seng up 0.4% yet the Shanghai Composite fell 0.22% (Tokyo holiday kept trading volumes light). The USD remains supported as US bond yields firmed. Only the AUD was able to meaningfully gain against the greenback. In subdued trading, AUD/USD continued its bounce off the 0.7311 low rallying to 0.7445. In recent sessions the AUD has been able to benefit from surges in Dalian iron ore prices and aspects of yield seeking behavior. AUD/USD traders should watch for further recovery to 0.7486. Oil prices slid but remained firm on growing expectations of an OPEC deal. We remain skeptical of any meaningful production cut and would sell oil on rallies.

Markets Rally Ahead Of U.S. Holidays

G10 Advancers and Decliners vs USD

We caution traders not to get too stuck into the current growth and inflation speculation of a President Trump, as policy are far from detailed or finalized. The current rally is making substantial assumptions on the size of the US fiscal stimulus package (supporting monetary policy) and effects on economic data. What is known for certain is that Trump is a volatile character who’s policy platform can shift suddenly. In addition there is growing push back in congress of proving trump with a blank check for budget expansion.

In the UK, the Autumn Statement should see the Chancellor of the Exchequer Hammond diverging from the current fiscal framework towards a policy with additional flexibility. The move is seen as a response to Brexit and the effect of dynamic economic conditions. The Treasury should acknowledge the greater deficit following the EU referendum but will not propose fiscal spending just yet. However, there is a limited probability of an announcement of prolonging fiscal austerity. For the GBP the adaptive policy should be viewed as a positive since it will provide policy makers with the fiscal stimulus response needed to handle any shock, while the reliance on fiscal support limits the need for further BoE monetary policy measures. GBP/USD is trading sideways and heading into the US holidays, traders should watch for a test of 1.2400 (21d MA) for an opportunity to buy the bounce to 1.2599 (55d MA).

Finally the Fed minutes will be released with expectations for the report to signal further comfort with a December 25bp rate hike. The incoming US data including the strong rebound in October durable goods orders should provide members additional support. Yet with the December rate hike fully priced in we do not see the minutes proving much of a boost for the USD. Michigan sentiment data will provide a view on how the consumer is holding up post Trump’s election.

Markets Rally Ahead Of U.S. Holidays

Today’s Calendar

Currency Tech
EUR/USD
R 2: 1.1259
R 1: 1.0954
CURRENT: 1.0616
S 1: 1.0521
S 2: 1.0458

GBP/USD
R 2: 1.2857
R 1: 1.2674
CURRENT: 1.2467
S 1: 1.2302
S 2: 1.2083

USD/JPY
R 2: 113.80
R 1: 111.45
CURRENT: 110.85
S 1: 106.14
S 2: 104.97

USD/CHF
R 2: 1.0328
R 1: 1.0257
CURRENT: 1.0107
S 1: 0.9632
S 2: 0.9537