As detailed in this morning’s Daily Kickstart, we’re starting the year on a high note, with inflation edging up in Europe, manufacturing activity stabilizing in China, and equity markets striking a largely positive tone in the first full trading day of the year.
Oil’s up, US futs are up, Europe is set to enter a bull market – hell, what’s to complain about? Well, I could give you a number of reasons to worry, not the least of which is political risk which I still contend will be the key driver of markets (and certainly of vol.) in 2017…
SocGen on 2017 outlook: "… a bit more growth, a lot more politics"
— Walter White (@heisenbergrpt) January 2, 2017
But despite my reservations, the bulls are off and running which, according to SocGen, means “grinchs” like me should have “stayed in bed”.
The Grinch and Scrooge had better stay in bed this morning. If they were to venture into market-land they’d find revolting amounts of holiday cheer in evidence. Strong purchasing manager surveys in Europe yesterday (Sweden’s was the standout) are followed by a strong Caixin manufacturing PMI in China this morning (51.9 vs 50.9 last, best since Jan 2013). Oil prices are flirting with mid-December’s highs, copper prices are up too and the RBA’s commodity price index is up almost 40% y/y in December. Bah Humbug!
In FX markets, all this cheerfulness is seen in a strong performance by a bunch of risk, China and commodity-sensitive currencies. The fact that further weakness of the Yuan is one of the most consensus views out there adds to the potential for currencies like AUD, NZD, KRW and TWD to start the year with short-covering as the main theme. The first currency out of the blocks in January however is the Rouble, and as I wrote when I was in Moscow just before Christmas, there’s a real dearth of RUB bulls out there so it’s not just about position-adjustment.
At 10 EST we’ll find out if manufacturing data out of the US can keep the holiday cheer alive. Here’s a preview via Citi:
ISM Manufacturing Citi: 54.1, Median: 53.7, Prior: 53.2
Strength in already released regional manufacturing surveys for December indicates that ISM-manufacturing may print at or above 54 for the first time since 2014.
The employment subcomponent is likely to garner interest ahead of nonfarm payrolls released on Friday. The employment subcomponents of December regional surveys were mixed with Empire, Dallas and Richmond declining but Kansas City and Philadelphia increasing. Our forecast model, which includes this survey data along with lagged labor market and industrial production data implies a modest decline in the employment subcomponent to 51.2.