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It may not surprise to see some heat coming out of the USD in early interbank FX trade, with USD/JPY currently down 39 points (or 0.3%). Global political leaders (and celebrities) have united in condemning Trump’s policies. We have even seen Theresa May performing a fairly strong 180-degree turn from her initial response – she now does not agree with the policy. It's also interesting to see both French and German politicians moving closer to the centre on immigration in response, against the trend of populism in these countries. The ever-more likeable Canadian Prime Minister Justin Trudeau is taking a fairly defiant stand as well on social media.
Whether the markets start to price in a stronger Trump risk premium is yet to be seen, but the S&P 500 rallying 1% last week in the face of various protectionist measures suggests this premium is not yet in the market. The US volatility index (or the ‘VIX’) closed at a meagre 10.58%, traders are simply saying they have limited lasting concerns and that portfolio hedging (through the use of ‘put’ optionality) is just not in demand. There is also a view that traders do not see any real range expansion (in price) in the S&P 500 over the coming 30 days. There is a record short position held in VIX futures and if the market does get a little flustered could the VIX be headed high, predominantly on a position adjustment? This is one market for the radar, with a number of Trump’s non-economic/anti-globalisation policies looking like they may start to become more of an issue for financial markets.
Aside from US politics, traders have largely been talking about Friday's US Q4 GDP numbers. Granted we have seen a strong slide in annualised growth from 3.5% in Q4 to 1.9% in Q4, bizarrely one partially attributes that to soybeans! Soybeans account for 1% of US exports, but when net exports subtract 1.7ppt from the Q4 print and soybeans exports fell close to 100%, this huge volatility largely contributed to the 4.3% drop in Q4 exports. Perhaps the fact that USD stayed firm and the US ten-year treasury only lost a couple of basis points on Friday's session is due to business, residential investment and personal consumption having stayed firm. Durable goods orders were largely better-than-forecast too.
Aside from political headlines this week, keep an eye on Thursday's US manufacturing ISM and the Federal Open Market Committee meeting and, of course, Friday’s non-farm payrolls (consensus 175,000 jobs). US earnings continue to roll in with 25% of the S&P 500 market cap due to report. So far, of the 35% of companies who have reported, 73.5% have beaten on the earnings line and 51% on sales, with an aggregate 4.4% EPS growth.
There is much to focus on in Asia this week too, with China releasing its manufacturing and services data and the Bank of Japan (BoJ) meeting tomorrow afternoon (no set time). We could see some tweaks to the BoJ’s economic outlook, but by and large, this is not the time to be altering the run-rate of ETF buying or its yield targeting stance. In Australia, the focus becomes one more of stock picking and while the investment theme of higher commodities and increased global inflation forces (ie buy banks) is still very much at the epicentre of market moves, earnings from Aussie corporates will start to trickle in.
The ASX 200 trades on a forward price-to-earnings multiple of 16.1x, which is hardly cheap, but this multiple has moved lower of late despite strength in the market. Positively, consensus earnings estimates have been lifting, which of course is wholly centred on the materials sector, although the consensus is that we do see a healthy 7% increase in bank earnings in 2017 too. Will the outlook statements justify this modest re-rating?
We start the day eyeing an open around the 5700 level, so modest weakness, and while we have seen some selling of USDs in early FX trade, the open of the futures markets at 10am AEDT will be of interest given the weekend news flow. Moves in S&P 500 and US crude futures could dictate sentiment, especially with much of Asia closed today for the Lunar New Year.