The positive global sentiment from 2017 has continued into the early parts of 2018. Last year we became accustomed to new daily highs in either the US, Asia or Europe. This morning we open to fresh record highs in Asian stocks with the Nikkei up 0.33%, while the Hang Seng was also in the green jumping 0.74%. Market risk indices would also allude to markets in good spirts with the VIX (market’s measure of volatility), which registered 9 of its 10 lowest levels last year, this morning back below the 10 mark. Another valuation index applied to the S&P 500 to gauge whether stocks are under or over-valued, is the cyclically adjusted price-to-earnings ratio (CAPE). This ratio is based on average inflation-adjusted earnings of the S&P 500 companies from the previous 10 years. The models average reading since inception is 16.8 and has only breached the 30 mark on three occasions. The first was in 1929, second in 1999 and the other is today, sitting at 33.78.
On the currency front, the yen continues to gain ground as markets continue to interpret last week’s reduction in long term government bonds as a shift towards normalisation. The yuan is also in the green since the start of the year, touching a 2 year high after the PBoC raised the currency’s fixing to the highest since May 2016. Oil prices also continued their upward trend into the New Year, with both Brent and Crude reaching levels not seen since 2014. This is on the back of ongoing output cuts by OPEC and Russia.
Over in Europe and it was a good week for the euro, with hawkish minutes from the ECB coupled with Germany’s two main parties ‘likely’ to reach a preliminary agreement for a grand coalition. This helped push the euro higher against its major peers trading at three year highs against the greenback at 1.2233 while against the pound it’s up 0.35% already this morning with highs of 0.8902. We have spoken previously around these inflated levels for the euro, EURUSD up over 15% the past year, while EURGBP also up close to 3%. Given the ECB’s previous rhetoric around their unwillingness to undo their work to date, it would not be too big a surprised to see the ECB kill the mood a little for euro traders.
In the UK and markets will be closely watching tomorrow’s inflation data, which is forecasted to ease to 3.0%. The rapid rise in inflation has largely been driven by the depreciation of the pound in 2016. Many analysts are now predicating that we have reached a peak here with the pound reversing its fortunes against the majority of the G10 currencies in 2017 with GBPUSD now trading at its highest level since the early hours of June 24th 2016. A lower inflation figure should no doubt ease the MPC’s stance on any future rate increases.
The US market is closed for Martin Luther King Day. The big event of the week stateside will no doubt be Friday as the US heads towards another potential shutdown crisis. Congress avoided a shutdown just before Christmas by extending it a couple of weeks. However this Friday markets are expecting a more grueling test here.