Naughty Or Nice?

Well, I suppose that depends on what you believe in …or rather who, and ultimately what you invest in. It looks as if we will close out the year in the same changeable climate that we have got used to in the second half of 2017.
I do hope Father Christmas (or Santa Claus as I kept being reminded last week in NYC) isn’t bringing a long pin to burst some of the global bubbles.

Of course, once we grow up we stop believing in good ‘ol Santa, because we cant see him…its an illusion, rather like bitcoin joining the never-ending appetite for mania and the bubbles it creates, and still with plenty of believers pushing it onwards and upwards.  This has factored in a softer outlook for Gold at least for the shorter term, but until tested by a real sweep of fear, then I am not so convinced.

The week was busy and I think I picked the right time to take a short break. Central banks featured strongly and left us with a trail of 2018 clues which we can pick over while we enjoy the vacation and it’s celebrations.

The Week In Review
There was plenty of data to digest as well as the central bank policies from the major three, the US the UK and the ECB. The FOMC went first on Wednesday and seen as dovish despite the rate hike which had been forecast and factored in, and as growth forecasts were raised but without any further rate upgrades…its still 3 for next year. The USD sold off on the perceived disappointment but has hit a one month high this week before pulling back:

The ECB stood out as the most cautionary with Draghi still calling for stimulus to keep the inflation process alive. The BOE also held rates indicating only modest adjustments are likely.
The Chinese also raised rates as they grapple with their own attempts to deleverage.
Amongst the data, in the UK inflation crept up t 3.1% and PPI to 1.8% RPI did dip to 3.9%. Average earnings stayed at 2.5%. Meanwhile, retail sales also advanced. The claimant count rose significantly as did unemployment.
In the US CPI stayed at a rather unimpressive 0.4% whilst retail advanced to 0.8% This data does underline the weaker side of the USD outlook as inflation still looks subdued. At the week’s end, Empire State manufacturing and industrial production slipped to 0.2%
In the EZ, PMIs again strengthened in Germany and the EZ as a whole.
AUD HPI slipped as jobs data improved. A mixed bag. Chinese industrial production held at 6.1%
In Canada, manufacturing sales fell to -0.4% and industrial production also fell to 0.2%

The Big Picture
Watching the central banks this week ‘playing ‘with policy in what we know is a globally managed game is a necessary part of preparing our own game plan and finding opportunities. What is equally if not more important is reading between the lines and understanding the commentary against a background of data and reality in each individual economy.
What struck me as I caught up with the news is first the problem of wage growth globally and the stubbornness of inflation with a notable exception: the UK.
In these 3 economies, average hourly earnings are stuck. Last week amongst the NFP data a slip in wages:
In the UK this week it was in line with the estimate at 2.5%, but check out the inflation stats, the following charts courtesy of

And the EU, a different concern and their leader, Draghi is not yet convinced about inflation:

Little wonder that the powers that be at the ECB and the BOE are being very careful about when and how to tighten, and how they manage it. The US has also got some less than convincing data:

And that is why we have to watch this: The US10 which gives us the perspective of the bond market to expectations and doubts about fed policy and just how realistic it may be::

I should add to this the yield curve has resumed its flattening course. That alone throws up a major warning sign for the US economy and something we need to monitor constantly.
This, of course, is the time to really take into account the global macro elements as we prepare for a new year of trading, so paying attention to possible clues as the central banks line up to take their turn seems an obvious step. So were their clues we can use amongst the spin?

The FOMC went first raising the rate as expected to keep the projection of 3 rate hikes next year and yet upping the growth outlook. The USDX sold off immediately after, disappointed it seems with the same dot plot.
The ECB were cautionary on inflation whilst acknowledging economic growth and expansion, Mr. Draghi was perhaps the most dovish this week as he referred to the ‘ample degree of stimulus’ still required to support inflationary trends. He is still not convinced and again pulled back from tightening talk.
In the UK, Brexit breakthrough …the first stage at least, has promoted some optimism in the BOE but not reflected by the market players now concerned with the challenges of stage two…negotiating a trade deal.
The bank held rates at 0.5% with a reference to ‘further modest increases’ over a period that can be years. This set a mildly dovish tone but let us lose sight of the inflation statistics which will be kept in focus by the policymakers.
So we seem to be back where we started as 2018 approaches…all central banks are not convinced about recovery, the UK has the inflation but without convincing growth, their task may be very tricky in what could become a stagflationary environment.
Big pictures are all about preparation and for the longer term, it is hard to see how the US can raise 3 times next year let alone more. This is a global market, and there are weak links. China is one of them desperately trying to deleverage it is exposed to US rate hikes and any problems there will be felt absolutely everywhere…including the US who must be very aware of that.
Europe is quietly and slowly firming up, the US over-optimistic for what lies underneath and the UK on the verge of a different problem but with the unenviable task of managing inflation without decent growth or advances in wages.
As for Gold, it seems the bitcoiners have subdued Gold buying as has the recent strength in the US. The risk environment has followed the December history admittedly with a few kinks. If it really does get negative I start with a long bias in Gold whatever the challenges…Bitcoin is likely to be another bubble in waiting for the inevitable bursting. Now wise to guess when ?
Equities continue to party and the structures getting more and more unstable on a technical view. Monetary policy is a big factor. The tax plans are also big with one less seat in the Senate for the Republicans as from January …a majority of 1 and no sure fixes for Mr. President now.
Oil is uncertain and choppiness likely to continue and not where I am personally focused. Whether OPEC can conquer the supply glut in 2018 is highly questionable but unanswerable.

The Week Ahead
One week to Christmas Day so we shall see the thinning liquidity and have to be aware of it if your intention is to trade the week ahead.
Sunday: AUD economic outlook.
Monday: NZD, business confidence, AUD policy minutes,
Tuesday: German Business climate, US building permits, and current account. NZD dairy process, trade balance, and current account.
Wednesday: BOE’s Carney speaks. CAD wholesale sales, crude oil and existing home sales from the US NZD GDP and the BOJ meeting with a focus again on the statement.
Thursday: BOJ press conference. CAD, inflation stats, CPI retail sales and core numbers. US final GDP, one to watch.
Friday: UK current account, final GDP, US core durable goods new home sales personal spending and Core PCE, a Fed favourite. CAD GDP

Opportunities and Trade Ideas
I will be looking for some set-ups on Monday following the massive news week we have just had.The sentiment is always the place to start even if we acknowledge the seasonal tendencies. I will not open new positions from Wednesday.
I start every week with a look at the bond market and keep an eye on the mood there all week. This gives me the clues for the USD direction and that needs some clarification, so we prepare for both.
There is a chunk of NZD news that could give us some direction. A two-pronged preparation here, I like the structure of the NZDUSD for a short on any weakness in the NZD data, but if the USD does not follow through I also like the EURNZD long. Also, I think the EUR took a pounding so a long also possible for EURUSD and the EURAUD. I am avoiding the CAD this week.
Gold I watch and wait: it needs USD weakness and sentiment but remains on the list for longs especially early in 2018.
USDJPY is on hold as the BOJ is too late in the week to trade the effects.
EURGBP, on the short list, AUDJPY, looking for the short but the BOJ meeting again makes this unlikely this week. This one is post-holiday and subject to New Year sentiment!
The AUDNZD is exposed to the NZD data and still a bias long.
If we see upside potential in the USD USDSGD is a good structure for a long.
Equities are a no-no but next year looking for shorts and patiently so!
On the Holiday menu this year, you should include some food for thought. The VIX is heading back towards its lows: chart courtesy of

image courtesy of
The Nikkei will be the one to watch for sentiment:

The Chinese stock markets are looking scary:

This is a composite of the two major Chinese equity indexes, the Shenzen and the Shanghai. Put this on your watchlist.
As we wrap up for the vacation…pun intended… alternative scenarios are still the name of the game. The experts and the analysts can make good cases for the US strength, US weakness, Higher oil prices, lower oil prices, equity collapse or a new year party. They are all convincing and show how vulnerable we are to choppy conditions and missed sentiment.

I will be updating this page over the holidays with some more big picture stuff to consider and to while away any free time you may have. What will be essential as we head into a new year is understanding the background against which sentiment is playing out and against which you are looking for opportunities.
In the meantime, stayed prepared, plan the alternative scenarios, make a list, and just like good old St. Nick, make sure you check it twice!


Judith Waker