Trump-driven markets

Overnight markets seem to be reverting back to the mean following a few days of uncertainty around Theresa May’s hard Brexit speech.

Source: Bloomberg

The UK is putting a time window around fixing trade negotiations with the world, but considering a history of drawn-out trade negotiations in the past, this could be unlikely. You may remember it took ten years to agree on the Pacific trade deal - the one Donald Trump indicated he would undo on his first day in office. UK negotiators may find themselves on the receiving end of negotiations rather than being the price makers as Theresa May is indicating.

Evidence of this is now showing up in the FTSE 100, down another 1.1% overnight, with the FSTE 250 also coming sharply off the highs of last week.

The markets and the world are now weighing up the US republicans' ability to match the President-elect’s campaign statements with real world outcomes. Set your alarm clocks for 2am Saturday morning if you want to watch the ceremony.

Commentary around Trump’s success or failure is coming from some of the more experienced, with George Soros speaking at Davos and suggesting Trump will fail based on his ideas being contradictory.

With US ten-year bond yields at 2.46 %, putting in a new high for 2017, it would seem the market is looking forward to controlled inflation and a renewed economy.

It should be noted that the US volatility indicator (VIX) rose 5% overnight. The VIX is still at complacent levels and any further moves higher would see some risk off taking place. With US indices failing to take out recent highs, namely the DOW a full 350 points away after failing to take out the 20,000 point level, further consolidation seems likely.

For Australia today, we are expecting a follow through from the weakness in global markets overnight, with the BHP ADR pricing in at $26.40. The Australian 200 is expected to find further weakness in the real estate sector, which is currently the worst performing sector both here and in the US. Strong falls in real estate provided the drag on US indices overnight. The CBA ADR down $1.60 at $81.00 suggests the financials will do it tough today.

Our markets really have a tug-of-war going on. Commodities are regaining the bid and louder noises are coming from real estate investors who are not seeing further value in a market that made extraordinary gains over the past four years, putting a cloud over the financials mortgage risk in a potential rising rate environment.

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