by Eli Wright
As markets re-open to begin 2017 trading, Bitcoin tops the early headlines, as the digital currency rockets past $1,000 on its way toward its all-time high of $1,216. Activity on most other markets is more tempered.
US equities closed 2016 to the upside, as did the dollar, but uncertainty about Trump’s policies abound, and the ripple effects of changing US policy and higher oil prices among other things, could have knock-on effects for the global markets. Nevertheless, equities in Asia and Europe began the year by heading higher.
Overnight, the Shanghai Composite gained 1.02%, to close at 3,135.30 while the Hang Seng rose 0.51%, to 22,112.00. Japan's Nikkei Index was closed for the New Year holiday.
In Europe this morning, the FTSE rose 0.35% to 7,167.70, smashing through its previous all-time high of 7,123 reached intraday during April 2015; the DAX is 0.2% higher, to 11,621; and the Stoxx 50 is up 0.45%, to 3,319.00.
In pre-market US trading, the Dow is up 0.57%; the S&P 500 is up 0.69%; and the NASDAQ is up 0.7%.
US bond yields are higher this morning as well: The 2-year note yield is 1.214%; the 10-year yield is 2.476%; and the 30-year yield is 3.082%.
Forex
Since October, the US dollar has moved strongly higher, largely due to the increasingly obvious fact that the Fed would be raising rates at least once before the end of 2016. Market conditions— including rising US equities, increasing bond yields, and ultimately the FOMC’s rate hike in December along with plans for an additional three increases in 2017—have also contributed to the greenback's powerful uptrend.
Nevertheless, over the past two weeks, the Dollar Index has consolidated. It dropped nearly one percent as 2016 came to a close. Could this be the start of a larger pullback, at least in the short-term? If so, there is downside potential for a correction to the next most recent consolidation range, between 101.50-101.
Thus far today, however, the US Dollar Index is slightly higher, up 0.68%, to 102.90. There is a slew of critical economic data set to be released this week, which could help signal how the euro, cable, and USD will perform.
Of importance for the euro, German unemployment figures were released this morning, coming in better than expected (-17K compared to the -5K forcast). For the pound, British Manufacturing PMI is already out, followed later this week by Services, and Construction PMI.
In the US, ISM Manufacturing PMI comes out at 10 AM ET this morning; FOMC Meeting Minutes will be released tomorrow; ADP Nonfarm Employment figures will be published on Thursday; and to end the week, perhaps the most significant monthly announcement of all, US Nonfarm Payrolls and Unemployment data will be released on Friday.
Over the longer-term, Goldman Sachs foresees the euro, pound, and Japanese yen all falling versus the USD in 2017. At the same time, they expect some emerging market currencies including the Russian ruble, Brazilian real, and Mexican peso to post slight increases, while anticipating others, including the Chinese yuan and Indian rupee will suffer declines.
In marked contrast, Credit Suisse expects the USD/JPY pair to fall to ¥96, which would be a decline of 19%.
As mentioned earlier, Bitcoin had a great finish in 2016 and has moved aggressively higher to start 2017, rising more than 6% in the first two days of trading during the new year. It out-performed all central bank-issued currencies with a 125% climb during 2016.
Commodities
Oil prices have stabilized above $50 over the past three weeks, jumping to its highest level this morning since July 2015, on the strength of the agreement forged by the 11 non-OPEC nations who joined OPEC’s deal to limit production for the first half of this year. Many insiders now see oil surpassing $60 in 2017, less than one year removed from below-$30 prices.
As Adam Ritchie, a director of consulting firm Petro-Logistics SA said:
“The mood has definitely turned more bullish, people are more confident that OPEC will do enough to rebalance the market in the first half of 2017.”
Crude is currently trading at $54.97; Brent is at $58.08.
Gold gained 8.5% in 2016, marking the first annual gain in three years. However, it was a tale of two half-years ; the precious metal rose almost 25% between January-July 2016, before falling approximately 17% to close out the year. At this point, the prospects for gold in 2017 aren't promising, as the higher dollar and hawkish Fed weigh on prices, and soaring equity markets boost risk-on sentiment.
Gold is currently trading at $1,148.85.
Stocks
US indices ended last week slightly down, but they wrapped up 2016 on an up note. All the major indices saw gains: the Dow rose 13.42%, the S&P rose 9.5%, and the NASDAQ finished 7.5% higher on the year. The small-cap Russell 2000 jumped nearly 20%.
There seems to be plenty of room for cautious optimism as we start 2017, at least in the short-run. For the third straight year, there appear to be no bears when it comes to the S&P: every analyst surveyed by Bloomberg was bullish on the S&P 500, and the difference between the highest and lowest predictions is only 200 points, the tightest spread ever. However, the average forecast only calls for a 4% increase, about 6% less than the bump up experienced in 2016.
Merril Lynch has given most global exchanges the green light as well.
However, a great deal depends on how Washington’s new majority-Republican government tackles issues, most notably fiscal stimulus and global protectionist trade policies.
As Candace Browning, head of BofA Merrill Lynch Global Research said:
“If investors choose asset classes, sectors and stocks carefully, they can meaningfully outperform the market. 2017 could be the year of the active investor.”
Trumpian fiscal policies and tax breaks could help small-caps, as well as Industrial and Consumer Discretionary stocks.
The S&P's Energy sector increased more than 23% last year, and it could achieve additional gains on the back of rising oil prices.
Financial stocks, which were up 20% overall in 2016, could be aided still more by fewer banking regulations and higher interest rates.
Those same higher interest rates, however, might put a damper on Real Estate stocks. And Materials could be hurt by the higher dollar.
An increase in military spending would help defense stocks.
Information Technology companies could suffer on the heels of international trade reforms.
Perhaps the biggest unknowns pertain to Health Care stocks, as it remains to be seen if and when Obamacare will be overhauled, and how Congress addresses the issue of skyrocketing drug prices and Big Pharma price-fixing.