Fast and Furious – Market Drift

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Markets’ reactions in the four days following Donald Trump’s surprise victory in last week’s US presidential elections has lent support, in some cases somewhat perversely, to my underlying view that:

  • Central banks and markets were at an inflexion point. My central premise was that slowly rising global GDP growth and inflation was starting to alter major central banks’ thinking, with developed central banks increasingly unlikely to cut policy rates and/or boost/expand their QE programs. The market implication was that global yields had probably bottomed out and that greater market volatility would likely accompany the transition to higher yields (see Central bank easing nearing important inflexion point, 16 September 2016).
  • The US Federal Reserve (Fed) would hike its policy rate 25bp at its meeting on 14th December; and
  • The dollar nominal effective exchange rate (NEER), which is now up about 2.8% year-to-date, would strengthen in 2016 for a third consecutive year, albeit more modestly than in 2014 and 2015 when it appreciated 10% and 12% respectively.

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Made in America

President-elect Donald Trump’s stated aim to boost US growth by significantly increasing infrastructural spending and cutting taxes has pushed the S&P 500 to a six-week high and dollar NEER to a multi-year high and fuelled a rally in commodities (bar crude oil and gold) – contrary to analyst forecasts which I had shared. At the same time, his apparent penchant for looser fiscal policies has accentuated the prospect of higher US inflation and budget deficits and pushed US yields higher across the maturity spectrum. Coupled with the threat of protectionist policies, this has been a toxic mix for emerging market currencies which have weakened across the board (see Figure 1).

US and global macro data and worldwide developments have perhaps understandably played second fiddle in the past week. For example markets appear to have glossed over weak UK industrial output and trade data for September, released on 8th and 9th November respectively, with Sterling the only major currency to have appreciated versus the dollar since Trump’s election victory (see Figure 1).

But markets’ interpretation of how Trump’s rainbow of stated goals and senior personnel appointments will translate into actual policies both near and medium-term understandably remains very fluid. Indeed US equities have flat-lined in the past three sessions, US yields and the US dollar have stabilised this week as has a GDP-weighted basket of emerging market currencies and the price of Brent crude oil has jumped $2 per barrels since yesterday. This market volatility is unlikely to die down until it becomes clearer which policies Trump will prioritise and push through via executive order and/or the Republican Congress.

 

Re-focus on macro data and global developments

At the same time, I would expect markets to gradually re-focus their attention on key macro data releases – over which Donald Trump has no control – as we get closer to:

  1. Major central bank policy meetings, including the European Central Bank’s on 8th December and the Fed’s on 14th December.
  1. Key political developments, including the British Supreme Court’s decision expected in early January on whether to overturn the High Court’s ruling that the British parliament, not government, will have to trigger Article 50.

With this in mind, I have compiled a calendar of key data releases and events for the US, eurozone, UK, non-Japan Asian economies, OPEC and global economy, detailing their importance to policy-makers and markets. For ease of use I have broken the calendar into five chronological sections which will be updated if and when appropriate.

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Olivier Desbarres

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

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