New Year round-up

By David Morrison  |  29/12/2017 15:22

US stock indices

The S&P 500, Dow Jones Industrial, NASDAQ 100 and Russell 2000 are all trading at, or near, all-time record highs. Chart-wise, these four continue to show clear upward trends and this is particularly evident in the S&P and Dow. The NASDAQ has pulled back a touch from highs hit earlier this month while the Russell has recovered its poise after a brief wobble between October and November. But overall the upside momentum appears intact while volatility continues to be extraordinarily low.
Tax reform passed through Congress this month and this is viewed as positive for US corporations. So far this has “trumped” any concerns investors may have had over higher US interest rates and a general move towards tighter monetary policy from developed-world central banks. Despite this, it’s worth exercising some caution as we go into 2018 as we’ve gone a long time without a significant pull-back, let alone a proper correction. Yet it’s difficult to pinpoint anything on the horizon which could faze investors. Heightened levels of geopolitical risk, high levels of indebtedness and the first stages of quantitative tightening have all been brushed aside. Even President Trump’s tweet this week, "Caught RED HANDED - very disappointed that China is allowing oil to go into North Korea," followed by his threat to take trade measures against Beijing, were completely ignored by investors desperate to push money into US equities.

European indices

Although the fundamentals are similar, the technical situation is less clear-cut across Europe. The FTSE spent most of this year trading between 7200 and 7600. This week it finally broke above this range setting the stage for another push higher. Again, it’s worth exercising some caution as this breakout may end up being a false dawn, particularly if sterling were to continue its uptrend. There has been a fairly tight inverse correlation between the main UK index and the British pound. Around 75% of the FTSE 100’s earnings come from overseas and these get a boost when sterling is weak.
Over the channel, the German DAX and French CAC look somewhat tired and sluggish with both testing support around their respective 100-day Exponential Moving Averages. Meanwhile, the Italian FTSE/MIB and the Spanish IBEX hit their best levels back in the summer and are struggling as we go into 2018. We should expect a pick-up in volatility across European indices as we get closer to the Italian general election in March.

FX

The US dollar is on course to register its biggest annual decline in over a decade. Yet the greenback began 2017 trading at its highest level against the euro in fourteen years. Investors piled into the dollar following Donald Trump’s surprise victory in the November 2016 Presidential Election. His promises of infrastructure spending, tax reform and cuts to regulations were all viewed as positive for the dollar. Then just one month after his victory the Federal Reserve hiked interest rates for only the second time since 2004. But January marked the dollar’s peak for this year, despite the Fed raising its key interest rate by an additional 75 basis points. Doubts grew over Trump’s ability to push through key pieces of legislation, even though tax reform has just passed through Congress. As good as the outlook appeared for the US, investors considered that the prospects for the Euro zone were even better. This saw the euro soar even as the ECB extended its Asset Purchase Programme by €270 billion. The dollar hit its lowest point in September and rallied for the next couple of months. But it subsequently turned lower again and this week the Dollar Index broke below support around 92.40. Its next big test comes in around 91.00, equal to EURUSD resistance around 1.2100. A break of either of these levels suggests further dollar weakness ahead.
The GBPUSD remains in an uptrend which has been building since just after the October 2016 “flash crash”. Sterling continues to get a lift from some general positivity around Brexit negotiations but there’s a hefty area of resistance around 1.3600.

Gold

Gold has staged an impressive come-back over the last two weeks. After a strong start to the year, the precious metal suffered a number of sharp pull-backs. The last saw gold lose over 8% in the three months from early September. However, it steadied around $1,240 and then saw buyers rush back in when it broke above $1,260 ten days ago. If it can manage to consolidate above $1,300 over the first few weeks of 2018 then technically a retest of the 2017 high around $1,350 looks possible. Of course, much will depend on where the dollar goes from here. Gold should get support if we see the greenback continue to sell off. But if the dollar recovers from current levels, we can expect to see some profit-taking from recent gold buyers. If so, then $1,260 should prove to be significant in terms of support.

Crude oil

This week WTI and Brent crude hit their highest levels since June 2015. WTI is now retesting a band of resistance which capped gains for 6 weeks between May and June of that year. If it can break and hold above $60/62 over the next few weeks, then from a technical standpoint further gains are possible. The latest push higher has come on the back of an extension of the output cut agreement between OPEC and a number of non-OPEC producers. The 1.8 million barrel-per-day (bpd) reduction is now expected to run until the end of 2018. This should lead to a pull-back in global inventories, particularly if demand growth picks up next year. However, there has been some speculation that Russia will agitate to ditch the deal once inventories drop back towards the long-term average. This could put pressure on crude prices as we approach the next OPEC meeting in June.
There’s also been plenty of speculation that US shale production could increase sharply, particularly as WTI pops its head above $60 per barrel. The Energy Information Administration (EIA) has forecast that US production will average over 10 million bpd in 2018, beating the previous record of 9.6 million bpd set in 1970. However, earlier this week the EIA reported an unexpected weekly decline in US production. This, along with a larger-than-expected drawdown in US inventories helped to boost crude prices as we ended 2017. 

Thanks for reading and I wish you all a very Happy New Year and every success with your trading in 2018

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