Trump’s address in focus
(Arnaud Masset, market analyst)
Donald Trump’s election as 45th US President has triggered an impressive rally in most asset classes. US treasury yields exploded as inflation expectations picked up. The equity market rallied sharply with the Dow Jones Industrial Average flirting with the famous 20,000 threshold. Finally, the US dollar appreciated on a broad basis with the dollar index testing levels last seen in 2003. On the other hand, the Mexican peso has been through hell over the last few weeks sliding more than 20% since November 9th, with a fall of almost 5% since January 1st.
The question that everyone is asking is obviously: was the Trump rally justified or are we ahead of a massive correction? As a matter of fact, investors have already started to take profit - at least partially in the dollar trade - as the greenback takes a breather and even loses ground against high-quality commodity currencies such as the Aussie and the Kiwi. Similarly, US treasury yields have also started to ease somewhat with the 10-year yields edging down 26bps to 2.38% after hitting 2.64% on December 15th. On the short-end of the curve, 2-year yields fell 12bps, down to 1.1825% from 1.30%. In the equity market, the rally is also running out of steam with the S&P 500 stuck below 2,300 points level, while the Dow Jones is unable to break the 20,000 points threshold to the upside.
For now, investors are waiting for Trump to give them some inkling on whether he will hold on to his promises - or rather which promises he will hold on to and which ones he will drop. Indeed, there is no doubt that some of his campaign promise will never materialise. The key is finding out which ones. The President-elect is expected to give a news conference this afternoon at GMT 16:00. Be ready for a choppy afternoon.
MXN
(Peter Rosenstreich, head of market strategy)
Political uncertainty continues to drive MXN lower. Despite Banxico's FX intervention, selling $2bn worth of USD on 5th and 6th ($165bn in FX reserves) with the goal of “providing liquidity and reducing volatility”, USDMXN has broken recent highs, touching 21.84. Yesterday’s move was triggered by the mere anticipation of President-elect Trump’s press conference, which is generating massive outflows from MXN into USD. Trump’s nomination of anti-trade personalities such as Wilder Ross and Peter Navarro has only hardened expectations for a protectionist shift. While the Mexican economic outlook has deteriorated and the risk of a trade war with the US has increased, domestic economic data remains decent. Today’s expected release of industrial production should indicate a recovery of 0.5% from -1.5% fall in the prior read. Yet, ironically the fate of the MXN is at the mercy of Trump’s Twitter feed. Banxico will remain vigilant but there is little prospect of action, redirecting the market’s bias. With the exception of MXN, CNY and TRY, EM currencies are enjoying decent demand with volatility broadly dropping, indicating that should Trump change his language on MXN we could get a significant recovery kick in MXN.
UK economic data sharply improves
(Yann Quelenn, market analyst)
Economic fundamentals continue to be closely scrutinised as the post-Brexit nightmare has yet to materialise. Industrial and manufacturing production are on their way up. This morning, both data came in at 2% and 1.2% y/y respectively, making it seem as though Brexit has actually provided some relief to the UK.
For the time being, the weak GBP is driving exports and while we believe that there are still uncertainties concerning the triggering of Article 50, financial markets are still assuming this will go ahead, which is why we are seeing such a weak pound. Over the past year, the pound has depreciated roughly 17% against the greenback and just short of 15% against the single currency, which is providing a competitive edge to the manufacturing and industrial sectors.
We believe that the consequences of Brexit are overestimated. Markets are pricing in the pound’s difficulties to be a result of its proposed exit from the EU. We remain cautious as later this month, the UK’s Supreme Court decision on whether Parliament will need to vote on Brexit could majorly complicate the country’s departure. In any case, reloading GBP position may indeed be the trade of 2017!