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Weekly Outlook

By David Morrison  |  16/12/2017 14:26
”Bull

Markets look set to wind down next week as we approach Christmas/New Year holidays. We can expect trading volumes to decline although that can often go hand-in-hand with a pick-up in volatility.

Stock Indices

As this week drew to a close, the US majors were trading just a tad shy of their respective all-time highs. The Dow, S&P500 and NASDAQ 100 continue to trend higher with upside momentum intact. This comes despite a brief wobble on Thursday after two Republican senators expressed last-minute doubts over the Trump administration’s proposals for tax reform. Earlier in the week the Republican Senate majority was reduced after Democrat Doug Jones won in Alabama. This means that Republicans now have 52 of the 100 Senate seats which could make passing tax reform more problematic for Trump.
It’s also worth noting that the Russell 2000 (a broad-based index of US-centric mid-caps) has failed to follow the major US indices higher of late. The Russell has lost around 2% since closing out at an all-time record high at the end of last month.

FX

This week we had monetary policy meetings from the US Federal Reserve, European Central Bank (ECB) and Bank of England (BoE). Wednesday’s Fed meeting triggered a sharp sell-off in the US dollar on what can best be described as a “dovish rate hike”.  The US central bank raised its fed funds rate by 25 basis points, as expected. However, the accompanying Federal Open Market Committee’s (FOMC) Summary of Economic Projections forecast three 25 basis point rate hikes in 2018. This was unchanged from September’s summary despite the FOMC upgrading its growth forecast to 2.5% from 2.1% and predicting that the unemployment rate would drop below 4% next year. Some analysts had expected the FOMC to forecast 100 basis points worth of rate hikes in 2018.

The ECB concluded its own monetary policy meeting on Thursday afternoon. This saw the EURUSD reverse a fair-sized chunk of the previous day’s gains after the ECB maintained its dovish stance. Traders reduced their long positions in the euro after the ECB’s Governing Council forecast that inflation is set to come in well below target for the next three years. This raises the likelihood that the central bank will extend its Asset Purchase Programme (APP) beyond the current September 2018 end-date.
On Thursday data showed that US Retail Sales rose strongly in November and came in well above expectations. Core Retail Sales (excluding automobiles) were up 1.0% on the month compared to forecasts of a 0.6% rise. Headline Retail Sales rose 0.8% on expectations of a 0.3% increase.

Technically, it looks as if the dollar could go in either direction between now and the year’s end. Support for the EURUSD comes in around 1.1730 and then 1.1680 below that. The first area of resistance comes in between 1.1860/1.1880, followed by 1.1950 and then the September high just below 1.2100.

Crude oil

Crude looks on track to end lower for the third week in succession. Both WTI and Brent enjoyed a strong run-up ahead of the OPEC meeting at the end of November. This came on expectations that OPEC and a number of non-OPEC producers would once again agree to extend the output cuts first agreed this time last year. As expected, the 1.8 million barrel-per-day (bpd) reduction was extended from March 2018 to the end of next year. However, supporting the old cliché that it is better to travel than arrive, crude has drifted lower since then. This week’s sell-off came despite the shutdown of the North Sea Forties pipeline following the discovery of leaks. In addition, there were hefty drawdowns in US crude inventories which is typically price supportive. But this was offset by a pick-up in gasoline stockpiles and news that US production hit a fresh record high. On top of this the International Energy Agency (IEA) said it expects US crude output to continue to rise next year which should offset efforts from other producers to cut production.
 
 Precious metals

Gold rallied after Wednesday’s US Federal Reserve FOMC meeting. The Fed increased rates by 25 basis points as expected. However, members of the FOMC continue to forecast a further 75 basis points-worth of tightening next year, despite raising their predictions for US economic growth. There had been speculation that the FOMC would prove more hawkish in this quarter’s “dot plot” than they were in September. There were suggestions that they could be looking for four 25 basis point rate hikes next year. But this was not the case and the dollar lost ground on the news while precious metals pushed higher. If gold and silver can consolidate above $1,250 and $16 respectively for the rest of this year, then both could be set to recover recent lost ground once we get into 2018.


Events and data releases

Despite coming into the last week ahead of the Christmas/New Year holidays, there are still a few important data releases to be aware of including:
 
Tuesday:               Reserve Bank of Australia Monetary Policy Meeting Minutes
                             German Ifo Business Climate survey
                             US Building Permits
                             US Housing Starts
Wednesday:         US Existing Home Sales
                             US Crude Oil inventories on Wednesday
Thursday:             Bank of Japan Monetary Policy Meeting
                             Canadian CPI
                             Canadian Retail Sales
                             US Final GDP
                             US Weekly Jobless Claims
                             US Philly Fed Manufacturing Index
Friday:                  UK Current Account
                             UK Final GDP
                             US Durable Goods
                             US Core PCE - the Fed’s preferred inflation measure 
 

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