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Equity markets open 2017 in a sea of complacency. The VIX is bobbing near its 52-week lows and stock investors are convinced that it’s the 1980s all over again.
It may very well be Ronald Reagan redux, as deregulation and a strong dollar create fresh investment flows into the U.S. and as both the Dow and the S&P hit fresh record highs. But history rarely repeats itself that neatly. And as the great Wall Street sage Robert Farrell once said: “When all the experts and forecasts agree — something else is going to happen.”
That’s why I enter 2017 far warier than most of the Wall Street pros, because the bullish scenario just seems too pat. Say what you want about Donald Trump but the man is never boring — which is to say that if you are going to bet on the Trump Administration, you should probably bet on volatility. After all, we are now at a time in history when we are just one tweet away from a crisis.
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| Complacent stock traders may get caught off guard as volatility spreads from the bond and forex markets. |
While equity investors have been partying like it’s 1999, fixed-income and currency markets have been far less sanguine as we step into the New Year. In forex and in bonds, volatility is nearly three-times the VIX levels, which should be a note of caution for anyone who thinks stocks will just rise in a nice, neat linear fashion.
Volatility of course is manna from heaven for currency traders who love nothing more than up-and-down price action as they profit from both going long and short. This week, the forex market is chock-full of data with the U.S. ISM and NFP reports taking center stage, but also important releases out of the U.K. will provide some color on the economy there.
In the U.K., the near 20% drop in the pound has suddenly made U.K. Manufacturing highly competitive and the latest PMI reading was the highest value in 30 months. However, U.K. Manufacturing is a minor part of Britain’s economy and traders are far more concerned with the U.K. consumer.
The very same depreciation in the currency that has helped manufacturers since the Brexit vote could spike prices for most U.K. consumers, who import many key goods. On Thursday, the market will be focused on the U.K. PMI Services report, which comprises more than 70% of the economy, with the market looking for a slight pullback. But if the data misses badly, cable could be headed for 1.2000 flash-crash lows as traders continue to worry about the viability of the U.K. economy.
Meanwhile in the U.S., the dollar rally will now have to be backed up by U.S. data. With markets now pricing in three Fed rate hikes in 2017 and a growth of 3%, even the slightest wobble in the U.S. data could send the buck tumbling in a bout of profit-taking. If, however, U.S. news continues to show steady and improving growth, the dollar juggernaut has nothing to stop it. So we could see 1.0300 EUR/USD and 120.00 USD/JPY before the week’s end.
Happy Trading,
Boris Schlossberg
{ 10 comments }
Right bet on volatility.anytime something may happen.
I am a new subscriber and I am not sure what comes next
I’m really surprised by the resilience of the US market after such shocks in the FX market. After all it was not so long ago that everybody was worried about US Corp earnings given the strength of a dollar that was much weaker. And it’s good to take heed to the volatility of the bond and FX because something must give.
I might disagree with you on one point. We are just one tweet away from solving and straightening out a crisis, rather than causing one. You slant says something about you.
You don’t solve anything with a tweet. It is one-sided communication.
“You slant says something about you.”
Yes it does. It means he’s looking at the tweeter in chief from a position of intense sanity.
What kind of wobble in the US data could create a market downturn in the new Trump Administration?
Boris
If you have cash and I mean a lot of it, there aren’t many places to put it where it is secure, earns a decent income and is retrievable at face value. Enter the dollar, a dirty shirt yes, but cleaner than many others. (a fight to safety for some other currencies) Enter Donald Trump, one of the few presidents to take a savage pay cut and who doesn’t need the job. There are many things one could say about DJT, but he looks like a success, walks like a success and smells like a success. He has promised to make our country great again and faces a daunting task. The thing I like most about him is that he walks and talks like the rest of us. You know; the ones who are fed up with being lied to and crapped on from Washington. Volatility yes, asset specific yes, timing yes, uncertainty yes but what a great market to navigate.
My son is flying to America on Jan 14 and considering our Aus$ is 72 cents american and i have been told your $ will drop 30% after Mr Trump is in office
the only one who could have defeated hillary was trump. w bush let the media blame him for the 2008 stock debacle when clinton & Janet Reno created it by forcing the banks to loan money to people with no collateral. if they balked she threatened to say they didn’t care for the downtrodden. so we had no money down & no doc loans. Millions bought houses otherwise unable to. the big builders built millions more homes because supply & demand was falsely created. W Bush went to Congress many times to stop it but the press said he didn’t care for the poor. by this time most of these people were losing their homes & Bush got blamed. this will never happen to Trump! The media will continue to attack him but he tweets the truth & attacks back. Trump is not a politician. He is brilliant & is creating a brilliant cabinate. Obama & Bush handed billions to countries all over the world that hate us. Trump will stop it. The 35% corporate tax sent our corporations running & with it jobs. 15% tax will bring them back. I expect this market to do very well under Donald Trump.