Below trend growth to continue
In a defiant and brief speech, President Trump made it clear that from now on “It's going to be only America first” and in what has now become a great economic debate he reiterated his view that “Protection will lead to great prosperity and strength”. Against this view, history and economic theory tells us that protectionism usually involves an increase in tariffs and a decline in trade.
Whether Trump achieves prosperity for America it remains to be seen, but from a global perspective while his policies could result in America getting a bigger share of the pie, the pie is unlikely to become bigger if global trade declines.
As a sign of where Trump’s policy priorities lie, after the inaugural parade the new administration announced a loosening of rules linked to Obamacare and it ordered a freeze on new regulation in order to reduce the ‘burden’ of government red tape. The new administration also revealed that it will pull out of the Trans-Pacific Partnership and on Monday it will notify Canada and Mexico that it plans to renegotiate NAFTA. The FT also reports that some analysts predict Mr Trump will use his executive powers next week to boost oil and gas industry by approving pipeline applications. If so oil prices could come under pressure early in the week, but broadly speaking it appears that protectionist policies will come ahead of any fiscal stimulus measures.
Equity market reaction to Donald Trump’s inauguration was a positive one with the S&P 500 closing +0.34%, DJ +0.48% and the NASDAQ +0.28%. That said intraday charts reveal equity gains were pared during Trump’s speech, probably reflecting concerns over the emphasis on protectionism.
For the first time since January 3 and before Trump climbed onto the stage, 10y US Treasury yields briefly traded above 2.50%, but then rallied 5bps to end the week at 2.466%. 2y UST traded in a similar pattern down 3.2bps on the day and closing the week at 1.191%. The 2y10y UST curve ended the day 2.5bps steeper at 128bps and the 5y30y curve steepened 3bps closing at 111bps.
In FX, BBDXY ( USD index) gained just over half a per cent before Trump’s speech, but ended the day 0.4% lower. The USD traded softer against all European currencies with SEK leading the way, up 0.79%. The EUR was +0.37% and GBP was +0.27%. Meanwhile G10 commodity linked currencies ended the day little changed but softer against the USD (CAD -0.08%, AUD -0.08% and NZD -0.28%). The AUD traded to a high of 0.7588 ahead of Trump, a level that was last seen in November 12 last year, but pair some gains ending the week at 0.755. Our FV model suggest the AUD is no longer significantly undervalued with model estimate suggesting fair value is currently at 0.766.
In EM currencies, MXN (+1.70) and TRY (+1.57%) ended at the top of the leader board amid rumours of CB intervention, but gains are likely to be short lived, especially for MXN given Trump’s NAFTA renegotiation announcement.
As for commodities, gold closed the week above the $1200 pivot (+0.28%), iron ore was -0.72%, but remains above $80. Oil rallied (WTI +2.04% and Brent 2.46%) on news that OPEC and other nations are on their way to achieving promised output cuts.
CFTC data from the week ending January 17 shows USD speculative longs against G10 currencies were paired slightly with the net long position trimmed by 14k to 237k. AUD positioning was the highlight, after three weeks being short, speculators are now long AUD at +4.8k and up 8k on the week. In rates, US Treasury shorts were reduced in all tenors with shorts in 2y flipping to net long (5k from a 14.5k short position.
In central bank news, Fed Williams said he isn’t worried about letting the Fed’s balance sheet shrink in a healthy economy. Fed Harker repeated his support for 3 rate hikes in 2017 and added that the Fed should consider stopping balance sheet reinvestment after Funds rate hits 1%. ECB Draghi says that persistent inflation differentials may become a source of vulnerability” and also noted that any country leaving the euro zone must settle bills first
Cautiousness is likely to be the theme for the start of the week as the market waits for the new US administration policy announcements. The general uncertainty as well as push back on trade friendly policies suggests the AUD and NZD may struggle to make new highs this week.
ECB president speaks tonight in Turin and there are no major data releases on the roster today. That being said, there are a few data releases later in the week which should garner some market attention. Global PMIs come out Tuesday, AU CPI is released Wednesday and NZ CPI on Thursday. The UK gets Q4 GDP data on Thursday and the US gets its own on Friday.
On global stock markets, the S&P 500 was +0.34%. Bond markets saw US 10-years -0.71bp to 2.47%. In commodities, Brent crude oil +2.46% to $55.49, gold+0.3% to $1,205, iron ore -0.7% to $80.41, steam coal +0.4% to $83.80, met.coal +0.0% to $190.00. AUD is at 0.756 and the range since Friday 5pm Sydney time is 0.7517 to 0.7588..
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