The ISM manufacturing index for the USA came in at 59.7 for December, construction spending rose by 0.8% in November to a record annual high, whilst new orders recorded a 69.4 reading for December. This positive news extended beyond impacting equity values, the news also caused the U.S. dollar to rise versus its three main peers; yen, euro and sterling. On Wednesday evening The Fed released the minutes from their December FOMC rate setting meeting and the release contained few surprises. The committee voiced their concerns on inflation being below the 2% target, whilst suggesting that the tax cuts, which will cut the corporate tax rate from 35% to 21%, may have a healthy trickle down effect on consumers’ spending ability, thereby increasing inflation.
FX markets burst into life on Tuesday morning, as Tokyo and Sydney opened. Once the London market opened currency movements accelerated dramatically, with several currency pairs whipsawing violently, in a wide range throughout the day. These conditions offered up some excellent trading opportunities for scalpers and day traders, whilst exposing swing and position traders to difficult trading decisions. FX markets appeared to undergo a rebalancing exercise, after the extended and fractured holiday period, a common occurrence on the first full trading day of the year.
Traders began to quietly re-engage with the FX markets, as Tokyo and Sydney opened on Monday evening/Tuesday morning. After a fractured ten day holiday period, over the Xmas and New Year period, London’s open will be closely monitored. Last week’s trading ended the year with gold (XAU/USD) finally breaking the critical 1,300 handle after slumping to 1,236 in early December. U.S. equity markets reached record highs during last week’s trading sessions, but with the Trump tax reduction programme now signed into law, analysts and traders may calculate that the tax breaks are now fully priced in.
Trading in U.S. equities was approximately 40% below the 30 day moving average on Thursday, despite this the major equities markets in the USA experienced rises during the New York session. The medium to high impact economic calendar news generally missed the targets, adding to concerns regarding how much room the equity markets have to grow in 2018 if, (as suspected by many analysts), the recent tax cuts have already been priced in. The advanced goods trade balance for November missed the prediction, by registering a -$69.7b deficit, whilst wholesale inventories in the USA grew by 0.7% during the month.
Trading in U.S. equities was approx 43% below its average 2017 level on Wednesday. The U.S. dollar fell sharply versus the: Aussie, sterling, euro, the Canadian dollar and the Swiss franc. The U.S. dollar index fell by approximately 0.4% on the day. A suggested reason for the drop in value of the USD is related to traders betting on global central banks finally withdrawing stimulus and raising interest rates in early 2018, as global growth figures have sufficiently improved.
As the FX markets reopened on Boxing Day, liquidity and consequently the trading in currencies was significantly reduced, as many institutional traders at major banks and funds remained out of the markets, or on holiday. Many currency pairs experienced whipsawing conditions during the trading sessions, which provided both challenging conditions and opportunities for many retail FX day traders. Certain global stock markets were also closed, therefore the impact of any significant economic calendar news proved to be benign. For example, the news circulating that USA shoppers may have generated their best shopping figures in over a decade, did little to boost U.S. equity markets, despite the underpinning revelation that confidence must be high in the USA, for consumers to take on more debt and spend.
We now know that the tax reduction plan is happening, the fiscal stimulus spend (as much as one trillion dollars promised to rebuild crumbling infrastructure), has curiously disappeared from the Republicans’ and Trump’s narrative over recent months. The potential infrastructure spending plan has had a negative effect on the U.S. dollar throughout 2017, and despite the Fed keeping to its promise to raise rates by three times in 2017 investors failed to bid up the dollar, which has fallen considerably versus two of its main peers; euro and sterling throughout the year. The U.K. BoE and the Eurozone ECB have delivered dovish statements during the year with regards to interest rare rises. In terms of monetary policy actions; the BoE felt forced to raise rates by 0.25% to 0.5% in November, in order to counter inflationary pressures, whilst the only hawkish move the ECB conducted was to taper its APP (asset purchase programme) by €20b a month.