It's a big day for world markets as US traders return from their long weekend to find markets in turmoil as political uncertainty roars back with a vengeance and the trends of late 2016 unravel.
The late 2016 rally had been built on hopes that incoming President Trump would usher in a new golden age of growth with no opposition. This dream has smashed into the wall of reality with opposition and unintended consequences emerging and upsetting the apple cart. Markets that had priced Trump to perfection, like stocks and USD, now find themselves standing on quicksand. Meanwhile with political uncertainty increasing worldwide, defensive markets that had been really hammered, particularly gold and JPY are roaring back to life.
This morning finds US index futures trading down 0.5%. The US dollar is getting hammered after President-Elect Trump indicated he thinks the dollar is too high which he blamed on China keeping its currency too low. Traders have taken this to suggest that he may not be as open to multiple rate hikes and an elevated dollar through the year. The bottom has fallen out from under USD today which has lost over 1% to gold and many of the major currencies including EUR, JPY, CAD, AUD and others.
The biggest move today is the explosive 2.3% rally in GBP against USD and 1.3% against EUR around UK PM May's big Brexit speech. The street has applauded her comments indicating that following a full Brexit. She intends for Britain to become a strong, outward looking, great trading nation, a magnet for international innovators that also provides a fair deal for everyone at home. PM May indicated plans to work toward some kind of customs union trade deal with the EU with a phased transition but no membership, enabling Britain to control its immigration and laws. She also indicated no deal would be better than a bad deal and won’t work with those who want to punish Britain for standing up for itself. She also promised a vote in Parliament on the final Brexit deal.
China is also in focus today with President Xi speaking at Davos (a forum that is also looking past its prime). Mr. Xi indicated Chain's economy continues to struggle but government support is apparently helping. He also promised not to devalue China's currency, blamed the financial crisis on bad regulation rather than globalisation and promoted global trade. This sounds like the country which has benefitted the most in the last 20 years scrambling to maintain its gains in a changing world. China may have other problems too with reports suggesting the country’s oil production is declining with new discoveries no longer keeping pace with declines at tiring older fields.
There have also been economic reports like UK inflation, with US Empire Manufacturing later this morning. The main drivers for market action and opportunities for trading this week appear to be coming mainly from changes in political trends and market sentiment surrounding Brexit and Friday's US inauguration.