I did not do much trade this week as I did not have much time to focus on and the market is calm. Everyone is living with Christmas mood. I was reluctant to do take large positions on assets I mentioned. I took positions as mentioned earlier by going long in pound and short in Yen. I did lose in pound and closed my position as I saw trend going down. Yen made a bit of return but I was reluctant to keep my shorts as my gut feelings kept me in an alert so I covered before Yen strengthened again. I am only short in bonds for now with a small amount and probably I will not trade heavily in the next 2 weeks as New year is approaching.
During the week, pound sterling lost its value against the dollar, however, the dollar lost its value a bit against euro. Dow Jones was very close to 20,000 level by 19980. The market I believe is too ahead of itself without a doubt. Trump without doing anything material is pushing markets higher. Dollar and US stocks have risen considerably higher since Nov 8 presidential election and I believe there will be a correction. The market will decide later whether to keep going down or keep its uptrend depending on what Trump will do after Jan 20 inauguration.
Rising dollar is not always good for US stocks. 30% of SP500 companies revenues mostly coming from overseas. A Strong dollar means less revenue in dollar terms. If the dollar keeps rising and there is no serious action on cutting taxes for corporate America then those companies will show fewer profits in 2017. However, how strong magnitude will be is dependent on the dollar, other major currencies against dollar and Trump policies. Of course FED as well. This complicated chain reaction has many moving parts.
1.FED is going to raise rates 3 times over the course of 2017 which will push rates higher hence bond prices lower.
2.I see more animal spirit in the game as people are taking more risks after strong economic reports and Trump administration that he will “make America great again”.
3. Higher rates mean a stronger dollar in 2017 considering the fact EU, Britain and Japan is either doing expansionary monetary policy and not in good shape which both issues result in weaker currencies.
4.EU will keep its QE until the end of 2017, BOJ probably as well till they see inflation going up. By the way, weaker currencies mean better trade balance for both of them. However, too much a strong dollar can hurt US exports which are against TRUMP views. That is the part needs an attention. Too much a stronger dollar can push TRUMP to devalue it. However, I am not certain yet how.
5.On the other hand, if US economy grows faster it might keep yields down but uncertainty in this is too high. There a lot of variables that affect how yields will perform in 2017. One thing is surer that FED rate hike will raise yields, another is the performance of the stock market and how other major economies will perform. For now, I will be short in bonds as I don’t have much conviction to believe otherwise.
6.Oil is following uptrend currently, OPEC will cut production starting from Jan. Oil will respond positively to the news when OPEC starts cutting so, in the long term I am optimistic about oil prices. I think if we get more positive news from China, Japan and US economy that means higher demand for oil and less supply should push prices higher. I will keep a close eye on oil as the situation develops.
7.When it comes to gold I don’t have a higher conviction on how it will move. It will depend on what is going to happen to other asset classes. If they are down. market participants will rush to gold for safe heaven. So keeping an eye on those assets will determine how I might move on gold.