Markets have been almost one-dimensional since Donald Trump’s election on Nov. 8. It has been reported that $1 trillion in value has been added to stocks since the election.
U.S. interest rates have raced higher as the markets have priced in almost all of the positive news to date regarding expected infrastructure spending, tax cuts and deregulation.
Interest rate differentials between the U.S. and other G7 countries have widened sharply, causing the dollar to appreciate to multi-year highs.
But obviously things can’t go on like this forever. While U.S. equities continue to march higher, U.S. interest rates and the dollar seem to have paused for now. Positioning regarding interest rate and currency positions now appears overstretched.
The Italian election result last Sunday night spooked the euro into lower territory but that appears to have been temporary. The other big event this week was the European Central Bank meeting, whose decision was seen as generally dovish as it extended its asset purchases, while lowering the amount of assets it purchases each month.
As we approach year end, there is only one piece of potential market-moving news coming up: The Federal Open Market Committee meeting on Dec. 14.
This meeting could yield a surprise, but we feel markets have entered a broad consolidative pattern that will last between now and Jan. 20. During these next few weeks, we anticipate increased volatility in the market but no new directional trends.
After the Fed meeting, markets – like school kids around this time of year – will be itching to take a break.
This has been quite a year, with traders and investors alike humbled about their understanding of politics and the raw emotion of populist sentiment. Markets are emotionally ready to close the book on 2016.
My View: As we head into year’s end, we expect currencies in particular to trade in a narrow range. Over the next couple of weeks we will be talking about our expectations for 2017. Until then we wish you a happy holiday season.
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