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How the land lies on the first trading day of the year

So we head into the new calendar year, hopefully all refreshed with ideas and strategies to outperform and drive P&L.

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Source: Bloomberg

It was a good year for equity bulls. The ASX gained 7%, materials stocks put on a lazy 39.1%, and utilities, energy and consumer names followed in their wake. Whether the ASX 200 sub-sectors close 2017 in a similar manner will be interesting; the key debate revolves around the potential for global reflationary forces.

One suspects we will be using the term “uncertain” just as much as we did in 2016, if not more, but if investors are prepared to pay around 16.5 times forward earnings for the ASX 200, then we could be targeting the 5900 area this year given where consensus EPS forecasts sit. Of course, for the index to really break through 6000, we are going to need to see financials catch an unexpected bid and, while I am constructive on banks, my preference is US large cap banks as opposed to Aussie banks. With that in mind, 2017 has to be the year of global opportunity, so look outside of the local market to Europe, Japan and US markets to drive outperformance in one’s portfolio.

The bulk of money managers are either still on vacation or will use today to liaise with clients to find out how they see the world in 2017. Importantly, the financial world is still questioning whether Trump will be able to live up to the lofty expectations set and priced into markets. In the next two weeks or so we should hear much more on tax and Trump’s administration, so keep an eye firmly on US bond yields. Especially with buyers starting to creep into the longer end of the curve as the US 10-year treasury has fallen from 2.63% (on 15 December) to currently sit at 2.44%.

European equity markets saw sizeable outflows in 2016 and sentiment towards European equities is still pessimistic given the various political risks we have to navigate through – with political risk another key debate for 2017. This consensus view that politics is once again the big known unknown. Where the various European markets end 2017 is anyone’s call, but I take a cautious but positive stance on these markets over the coming 12 months. My political calls were not brilliant in 2016 though, so I am happy with the view that the easy money is made going into the various elections. If 2016 has taught us anything, it has reinforced the view that trading in the 24 hours around a major political event is for only the bravest of souls.

On the FX front, the CAD (Canadian dollar) was the star of the show and locally we saw AUD/CAD the weakest of all the Aussie majors. Short AUD/CAD was my “trade of the year” in 2016 and, although it had some rocky times, it wasn’t until November that US crude started moving higher and AUD/CAD bears came out. Of course, longer-term FX calls are just that…. a view… and acting on a “trade of the year” is seldom a positive experience. Trading is a whole different ball game and if something is not working, one simply has to cut the position. I suspect short AUD/CAD will continue working in 2017 though, although GBP/CAD shorts through CAD1.65 look more compelling, especially as we head into the March period and see a renewed focus on the triggering of Article 50.

Looking far more short term, while having one eye on the market news I can see focus on China’s outflows, with new regulation on cash transactions and overseas transfers. We have also seen hard-hitting rhetoric about individuals moving more than $50,000 out of China as part of their annual limit, but it seems unlikely this will solve the issue – just look at the price of Bitcoin traded in China! There has been some focus on agency reports that President Xi Jinping is open to China’s economic growth falling below the 6.5% target, with one advisor to the PBoC saying he has proposed a 6% to 7% target.

There has also been a great deal of focus on the Trump administration and how he may take a strongly different view on relations with Israel and Russia from President Obama. However, the more immediate issue for markets is whether the S&P 500 continues to head lower after breaking below the consolidation we saw through December, with the potential to mirror the moves seen in 2016 as the S&P 500 fell 12% in 12 days.

Key support this week sits between 2216 and 2180, so watch price action on moves into this area.

Calling the ASX 200 is really anyone’s guess today, with SPI futures closed since 30 December. However, I would not be surprised to see an open around 5680, modestly higher than where we rounded out the year. Judging by the fact volumes through the Eurostoxx 50 market were 61% below the 30-day average suggests trading will be light today, so we could see some unpredictable moves.

Keep an eye on the USD as we are seeing good buying this morning, with EUR/USD eyeing a move towards $1.0400. This is one to watch given the strong bids in the pair on moves below the 1.04 handle between 15 to 28 December. A close below $1.0400 would be telling.

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