Mixed start to New Year

By David Morrison  |  02/01/2018 16:56

Stock indices

The first trading day of 2018 brought a mixed session as far as global stock indices were concerned. There were hefty gains across Chinese-related markets while European indices struggled. Hong Kong’s Hang Seng hit a 10-year high overnight and ended the session up close to 2%. The Shanghai Composite finished 1.2% higher. Both indices got a boost after China’s Caixin Manufacturing PMI came in at 51.5 in December, a comfortable improvement on the prior month’s reading of 50.8. Hong Kong equities also got a lift from last week’s announcement from Chinese regulators who will allow Hong Kong-listed, mainland-incorporated firms to convert non-tradable equity into tradeable shares.

European stock indices largely ignored the positive moves from China. The majors spent most of the session in negative territory, even though US stock index futures were sharply higher in pre-market trade. US investors appear determined to keep up the buying pressure with the majority looking for further stock market gains as we head into 2018. Early in the session the US majors were all close to recapturing their respective all-time highs hit last month. However, soon after the European close the Dow had drifted back into the red. Last year finished on a broadly positive note after Trump’s tax reforms passed through Congress. Also, the technical picture looks broadly positive for US stock indices. However, it’s difficult to see what could help drive prices much higher from here. At the same time there are some traders who are worried that a market correction is overdue.
 
FX

The US dollar was weaker again today. The Dollar Index looks on course to retest the low around 91.00 hit last September. A break below 90.80 would see the Index at its lowest level in three years. Meanwhile, the EURUSD is also closing in on its September high which is just a few ticks short of 1.2100. Investors are once again dumping the greenback as they look forward to accelerating economic growth and a sustainable pick-up in Euro zone inflation. This has seen the European Central Bank (ECB) decrease its monthly Asset Purchase Programme to €30 billion from €60 billion even as the ECB’s Governing Council extended the duration of the programme by nine months. In addition, ECB President Mario Draghi insisted that the bank wouldn’t hesitate to extend the APP in size or duration if warranted by a deterioration in financial conditions. Meanwhile, the US Federal Reserve raised rates again in December and made its first steps in reducing its €4.5 trillion balance sheet. Despite this tightening, the US dollar continues to trend downwards although it’s now approaching some key technical levels. Meanwhile the GBPUSD remains in an uptrend which has been building since just after the October 2016 “flash crash”. But the pair is now approaching a hefty area of resistance around 1.3600.
 
Precious metals

Gold and silver have both kicked off the New Year with solid gains, building on positive price action over the last three weeks. Gold continues to pull away from $1,300 and there’s a good chance that this level could act as support over the coming weeks and serve as a launch pad for an assault on last year’s high of $1,350. It’s a similar story for silver which has also shot higher since early December. If silver can now bed in above $17 then it could go on to retest resistance around $17.40. But it’s worth noting that both metals are overdue some consolidation given the length of the current rally. This could be triggered by a recovery in the US dollar, particularly if the EURUSD fails to break above 1.2100 – the multi-year high hit back in September.
 
Crude oil

Brent and WTI crude have put in solid performances since the summer with both ending 2017 at 18-month highs. Brent continues to trade at a hefty premium to WTI, currently over $6, despite the North Sea's Forties Pipeline System now being fully operational after last month’s shut-down. Crude prices have been on a roll since June and WTI is now testing a band of resistance around $60/62. There has been some speculation that oil is overdue a pull-back now, particularly should investors seen evidence of a pick-up in US shale production given process in the $60 per barrel region. However, last week the Energy Information Administration (EIA) reported an unexpected decline in US production together with a larger-than-expected drawdown in US inventories. Oil prices have also been supported by the political unrest across Iran with demonstrations taking place against the government and a clerical elite. Iran is the third-largest producer in OPEC and is currently exempt from the output cut agreement. 


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