That political risk comes in the form of Trump’s inauguration speech, which promises once again to be one that we simply have to watch, but is likely to stop short of anything that gives more on the fiscal timeline. UK Prime Minister Teresa May’s speech on Tuesday is absolutely shaping up to be the markets highlight though and looking at the moves in GBP this morning we can see that for those who like volatility then the UK is where you want to look.
GBP/USD has traded below $1.2000 this morning, but the bigger moves are seen in GBP/JPY which has fallen 1.6%. GBP/AUD fell 3.5% last week and is trading just above A$1.6000 in early trade and this remains my preference for trading GBP given we saw bulk commodities once again have a strong night on Friday (iron ore, steel and coking coal futures closed up 4.9%, 0.9% and 4.3% respectively). Keep an eye on iron ore futures this week though as we could be staring a break of the December highs of 650 and into blue sky territory, although copper also looks really bullish. This should support AUD/USD, which is threatening to break above $0.7500 and I suspect it will stay above here in the week ahead if we do see a closing break.
It will be interesting to watch the open of the FTSE 100 too as we could be staring at a 15th consecutive gain in the market. This is clearly a reflection of a weaker GBP given some 80% of company’s source revenue from outside of the UK, but I am not sure we have reached a point of maximum euphoria, although the market internals are at concerning levels (91% of stocks above their 50-day moving average).
The market is now positioning for some fairly punchy rhetoric from Teresa May and this idea of “hard Brexit” and a clean break from the single market seems likely, in a bid to gain full control over immigration. Brexit minister David Davis is also adding fuel to fire, with calls for a priority around negotiating ‘third country’ free trade deals, which by all accounts are very hard to achieve unless there is full separation. We also hear from the UK Supreme Court this week and the great unknown is upon us. Forget the run of good UK data, GBP is an out-and-out political currency (it has been for a while) and the prospect of volatility here is now very high.
Aside from the political risk, we also get a number of key economic releases, including China Q4 GDP (expecting 6.7%) on Friday, US core CPI, Aussie employment and policy meeting from the ECB and Bank of Canada. Of course we also start seeing US Q4 earnings ramp up with 9% of the S&P 500 market cap due to report, predominantly in the financials and industrials, although energy also gets a look. We also get a number of Federal Reserve speakers and global leaders speaking at Davos. As I said, the event risk is real.
The lead for Asia though is fairly upbeat for the open, with the S&P 500 closing in the middle of the day’s trading range of 2278 to 2171. Financials had the standout performance, thanks largely to good results from Bank of America and JP Morgan, although the KBE ETF (SPDR S&P Bank ETF), which has been my preferred vehicle for trading the US banks (and reflation), and this ETF failed to close above the top of the recent trading range and was hit with a wave of sellers into $44.50.
There isn’t much to make us feel US futures markets are going to gap to greatly on open at 10am (AEDT), with most of the weekend news focused on Teresa May. Recall US equity markets are shut tonight for Martin Luther King Day, but S&P 500 and commodity futures do open as usual but close early. This suggests our call for the ASX 200 at 5750 (+0.5%) looks fair, with SPI futures closing Friday’s night session up 18 points. We are likely to see good gains in the mining and industrial space, while energy and financials should see fairly flat open.