Market Outlook | February 21, 2017

 “Stubbornness does have its helpful features. You always know what you're going to be thinking tomorrow.” Glen Beaman

 Its Own World

The stubbornly robust US stock market continues to go much higher, given low interest rates and increased global liquidity. It may be even harder to imagine that volatility is very tame, despite political twists and turns, macro concerns, and an unconvincing growth environment. The overly anticipated trend reversal is that stocks have not materialized and the bull market is about to turn eight years old. Since the March 2009 extreme lows, the S&P 500 index has mustered over a 250% return. Basically, a smooth-sailing appreciation in stocks appears quite disconnected from “ground” level sentiment that’s causing daily political uproar and middle class dissatisfaction. At times the financial markets seem like it lives in a world of its own.

To claim this stock rally was fueled by Obama’s policies or Trump’s post-election optimism may not tell the complete story. Markets have not overly cared about theatrical and contentious politics thus far. It’s true, during the Obama post-crisis era, Quantitative Easing policies materialized in an aggressive manner but hardly stimulated the real economy. And yes, the Trump rally was driven by investors who looked ahead to fiscal changes, lower taxes and lower regulation.  Now, with the promised fiscal reforms requiring additional time and clarity, investors are not sure what to digest or how to act, except for sticking with status-quo.

“There is a Republican tax-cut plan, an existing one crafted by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady. But it is splitting Senate and House Republicans, as well as the business community it is designed to help. Nobody is quite sure what the White House position is, or when it will become clear. And the whole process is being slowed down by the struggle over whether and how to repeal the Affordable Care Act, which itself is bogged down in uncertainty.” (Wall Street Journal, February 20, 2017)

Further delays to the execution of fiscal policies appear to continue political civil war, Congressional tactics and challenges to progress in the public sectors. What has shifted is the lack of faith in Central Banks and establishment politicians – those visible points cannot be dismissed.  Clearly, Trump and Brexit trends demonstrated these revolt-like responses. Yet, for investors spats between political parties or gloom and doom statements from high-profile money managers are not going to share their thinking.

Rate Focused

However, when push comes to shove, the financial markets remain overly focused on interest rates and the consequences of low rates, which leads investors to desperately seek yields. This combination promotes higher stock prices and further risk taking. Amazingly, quantifying the ongoing risks is not easy until the damage is done and, of course, timing the chaos requires a mixture of luck and randomness. In other words, the various concerns boil down to global growth. From China to Europe to US, what’s the fundamental driver of growth across industries?  Not to mention, the protectionism wave raises even further questions on global growth. These developments do not exude tons of confidence. If there were notable signs of US growth, then the US 10-year yields would be moving higher and Yellen would not be hesitant to raise rates. Amazingly, the Federal Reserve has been hesitant to hike and lacks solid evidence of a heating economy. Economic strength today is still murky.

Hints of Unease

The constant liquidity provided by central banks floods the market with more cash, which puts pressure on yields, encourages more risk taking and boosts share prices of most stocks. Inherently, this effect is as obvious as it seems; from ECB to BOJ, the low rate policies are in effect. In the US, inflation expectations and economic growth numbers are mixed. Can Yellen raise rates in a justified manner?            

The known concerns in Europe are well-documented, the uncertainties are much discussed, but the outcome of the theatrics remains a constant unknown. This can be seen from Brexit implementation to potential “Grexit” to the rapid demand for Nationalism that’s brewing on the ground level. The political crisis across the Eurozone has not derailed or altered the path of stock markets, for now. The fallout or gains from Brexit are grossly misunderstood and negotiation with Greece is an ongoing matter of deferring the not pretty reality. Either way, major changes aren’t easy to adjust to. Plus, elections in France and Germany can spark further changes that can test the fortitude of an optimist.

Sluggish Macro

Since the post-Trump victory rally, there is some mild pause and ongoing sideways action in interest rates, oil, gold prices and dollar index. Although, US stocks have roared in a dramatic fashion, the commodity and currency trends are lackluster or nearly trendless. From supply-demand dynamics in Crude to some EM currencies attempting a recovery, the participants hint of waiting before overeating. The inverse relationship between US stocks and EM-Commodities is worth tracking. Not all assets are as cheerful as the broad US indexes (S&P 500, Dow Jones and Nasdaq) along with a strong US Dollar. A theme that’s not new, but vividly stands out even more in a less certain world.

 Article Quotes

Europe-China Conflict:

“Brussels is investigating a showcase Chinese rail project that aims to extend Beijing’s ‘One Belt, One Road’ initiative into the heart of Europe, potentially putting the European Commission at loggerheads with China. …Any legal setback to China’s first railway project in Europe would be a diplomatic embarrassment for Beijing, which made the railway its cornerstone offering to win support from central and eastern European nations during a summit attended by the countries in 2013. At issue for the commission are separate agreements signed by the Hungarian and Serbian authorities. But the main focus is on Hungary, an EU member state that is subject to the full rigour of European procurement law. As a prospective member of the bloc, Serbia is subject to looser rules. Failure to comply with EU tender laws may be punished by fines and proceedings to reverse infringements. ‘If push comes to shove and if it turns out that the Hungarians have awarded a public works contract of a particular dimension without tender they will of course have infringed EU legislation,’ said a senior EU official.” (Financial Times, February 20, 2017)

Potential Turn:

“It is not unlikely that interest rate differentials may widen to new extremes before they reverse. This is because political uncertainty surrounding fiscal policy means uncertainty about how monetary policy may respond. Still, there is a limit or floor on how low or high interest rates can go before they become more permanently damaging to the financial system. Markets have taken a view that eventually the Fed will face a “ceiling” on U.S. short-term nominal interest rates, especially in the wake of excessive fiscal policy that may overheat the economy and cause a recession. In Europe, markets have expressed their opinion that negative rates can’t go on forever, and therefore the amount of negative yielding bonds has fallen from more than $10 trillion to less than $5 trillion, according to recent J.P. Morgan research estimates.” (Bloomberg, February 17, 2017)

Key Levels: (Prices as of Close: February 17, 2017)

S&P 500 Index [2,316.10] – From June 27, 2016 lows (1991.68) to February 16 highs (2351.31), the index is up 18%.

Crude (Spot) [$53.40] – Nearly three months of sideways patter. The current $50-54 range remains familiar for both buyers and sellers.  A directional catalyst is needed to tilt the neutral behavior.

Gold [$1,228.30] – After bottoming in mid-December, Gold prices are mildly suggesting the ability to hold around and above $1,200. Yet, confirmation is needed if Gold prices are stabilizing.

DXY – US Dollar Index [100.80] – Nearly four months of DXY staying above 100 suggests that King Dollar is still a major theme, but there has been no major reacceleration since November. The January 3^rd peak of 103.82 is worth tracking if that marked a meaningful top. For now, it remains mostly neutral and reaffirms the existing trend.

US 10 Year Treasury Yields [2.41%] –   For about five years, 10-year yields have hovered under 3% and mostly above 1.50%. The multi-decade downtrend is still intact despite some occasional spurts.  

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | February 13, 2017

“Never become so much of an expert that you stop gaining expertise. View life as a continuous learning experience.” (Denis Waitley)

To grasp the current debate between bulls and bears, it helps to understand the mindset of investors and the power of perception. With the expanding list of unknowns regarding macro events, it's amazing to see that angst is mostly suppressed and anxiety is barely visible despite the murmurs of “bubble-like” traits within the financial service industry. The dominance of the status-quo is remarkable, and speculating the catalyst of a pending correction is suspenseful.

The Bulls Mindset

With stock markets roaring to all-time highs, the confidence of Bulls is hardly shaken given the ongoing resilience witnessed from past worries. Volatility indicators have been knocked down, which only signals that turbulence is not feared by most. Amazingly, VIX (Volatility index) being closer to 10 and near 10-year lows only feels like an exclamation point for those who've ridden the pre- and post-Trump stock rally. Political rifts and Federal Government posturing aside, there is a clear-cut agreement of a bull market. Even the Dow 20,000 mark was not needed to re-confirm the known bullish run, despite mixed real economy data that have puzzled experts and casual observers. 

Hubris or not, the status-quo of ultra-low interest rates ends up boosting the prices of stock and real estate prices. Plus, high-profile money managers have been skeptical for 2-3 years, and that public skepticism did not derail US stocks, either. That said, some participants may be asking: Why listen to "experts"? Not to mention, Hedge Funds, on average, have not thrilled investors and even endowments have struggled to outperform in this bullish environment. Anti-establishment Trump is wrestling with re-writing and redefining the well-established market narrative. Thus, the simplicity of this ongoing stock market run is centered on “stick with what's working” especially when fixed income, commodities or non-US investments have had their own shares of turbulence recently. The perception of risk is muted and the urgency of "not missing out" in the current rally plays into investor behavior and decisions. Also, passive investors who bought a basket of US stocks are quite pleased and even encouraging those who sat out to join the rally. This is how momentum is built and extended.

The Trump-Yellen relationship is in early stages, but participants are not completely convinced that rates will go much higher and the Dollar will get stronger. On both points, there is a lot to be seen from weak dollar policy to the Fed's search for a justifiable rate-hike. Even mysterious elements end up leading folks to choose US stocks as the best relative option. At the end of the day, Trump and Yellen may not mind higher stocks, which serves as a tool to boost both their egos, despite their fundamental policy and political differences. Even the Trump-Yellen politically charged disagreements have remained tamer than anticipated. Perhaps, the power of the bullish run feeds into old habits that are hard to change, and why change them? The burden of proof of a pending shift in sentiment is on the bearish crowd, at least, that’s the message from the markets. This week, Yellen will address and rate hike implications, and, surely, it will be digested and dissected carefully by pundits and investors.

The Bearish Perspective

To start, the bearish argument is made by some pointing to the stretch valuations or the natural need for a breather in share prices. Others have been citing the Central Bank induced low rate environment that has fueled an appreciation in asset prices, leading to more risk-taking and reckless actions.  At the same time, the low rate environment has a mixed impact on the real economy and ultimately highlights the disconnect between financial markets and small businesses.

Equally, there are questions of eroding fundamentals as highlighted in the retail sector and other areas feeling the effects of technology. NASDAQ high flyers such as Google, Facebook and Amazon have greatly benefited in the new economy, but other companies and business models have been tested or left behind. NASDAQ is flirting with all-time highs, but public and prove entities don't share the same joy.  There are questions about collective job and wealth creation:

“Some indicators of labor-market slack also increased, which should push away inflation concerns. The underemployment rate, which includes people stuck in part-time work who want a full-time job, rose to a three-month high of 9.4 percent.” (Bloomberg[BD1] , February 3, 2016 )

Simply, the Sanders and Trump rise reflected some of the struggles in the real economy for a much broader US population. Yet, the political banter and chatter for the greater need of policy driven stimulus is being received with concerns. There are real issues that are worrisome in current economic models, where the mismatch between skills and demand has left a challenging labor market.

The bearish view has been proven dead wrong at various junctions in recent years, as the multi-year price appreciation continues. Perhaps, investors are numb from hearing about too many warnings too often. Plus, the distant memories of 2000, 2008 and 2011 fail to spark a nervous breakdown. In other words, the known concerns aren’t going to sucker punch investors. More or less, it’s been backed in.  Lack of major defaults and crash-like events have been absent to alter the bullish narrative, but merely “we’re due” is what keeps the pessimists less active. Yet, the strange part of this muted turbulence is the Brexit and Trump results. Both historic outcomes have obviously reawakened concerns of globalization via the referendum on the political status-quo. Brexit and Trump results naturally suggest an outright demand for nationalism at all cost.  In a quick gut-check, the majority would say, Nationalism would inversely impact this market that’s been shaped by globalization in recent decades. However, the market isn't digesting these events and quantifying Brexit/Trump is not quite easy, thus worries are deferred for now. 

However, Greek bonds are rising again, the Eurozone crisis is being slowly revisited and prior concerns, such as status of Italian banks, cannot go away. In other words, the many unsolved issues from before leads the bears to worry. In fact, financial times put it best:

“Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration. But it is more than a mere contributing factor…. Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.” (Financial Times, February 12, 2017)

Reconciliation

The bull-bear debate has been one-sided for too long. Yes, the markets are typically biased on the bullish side, so some of this complacency is less surprising. The truth is not clear and bound to have a paradox. Yes, anxiety seems tame for now. One thing is clear, the catalyst of an all-0ut panic is difficult to calculate since the list of worries has mounted.

For now based on macro indicators, investors are very comfortable with the prevailing status-quo of low rates, contained inflation, and ongoing investor search for yield. Maybe there is a bigger message, regardless of Trump and Brexit, interest rate polices are what captures the financial markets. More and more, US stocks aren’t caught up in foreign policies or political clashes, but sensitivity to rates remains a critical reality.  As long as US 10 year yields fail to surpass 3%, inflation fears seem muted. Volatility spikes do not seem visible from the sharp uptick in rates. The last major spike in volatility was on August 28, 2015 when the VIX (Volatility index) reached 53.29 after bottoming at 10.88 on August 7, 2015.  (Worth noting: VIX today is around 10.85).  A three week stock market sell-off period in August 2015 was the last time that the markets truly panicked and rattled the bulls.  Perhaps, lower yields and failure of central banks to stimulate the real economy is what will give more legitimacy for the bearish argument.  In an amazing way, the fewer signs of economy revival, the friendlier environment for stocks.

Article Quotes

Hedge Fund Performance:

“Professional investors are more informed, more highly educated and more competitive than ever before. Yet they are all competing for a shrinking slice of the alpha pie. This is what author Michael Mauboussin calls the paradox of skill. Mauboussin says, ‘It's not that managers have gotten dumber. It's precisely the opposite. The average manager is more skillful than in past years. The paradox of skill says that when the outcome of an activity combines skill and luck, as skill improves, luck becomes more important in shaping results.’How many institutional investors bother to ask themselves if the investment managers they are investing with are lucky or truly exhibit skill?... The increased competition and larger capital base made it nearly impossible for these funds to keep up their outperformance.” (CNBC, February 7, 2017)

Ongoing Doubts:

“Inflation expectations, which surged immediately following the presidential election, have stalled in recent weeks. That suggests investors are questioning the economic growth the new administration hopes to deliver. The strong dollar has also prompted import prices to cool. And investors have recently dialed back expectations that the Federal Reserve will raise interest rates at least three times this year. A slew of economic data this week as well as Fed Chairwoman Janet Yellen’s semiannual testimony before Congress will likely reinforce these modest expectations The so-called Humphrey-Hawkins hearings, beginning Tuesday, will mark Ms. Yellen’s first appearance before lawmakers since Donald Trump was sworn in as president. Mr. Trump criticized her sharply during his campaign and GOP lawmakers have considered taking steps to subject the Fed to greater congressional scrutiny, topics which Ms. Yellen will undoubtedly face.” (The Wall Street Journal, February 12, 2017)

Key Levels: (Prices as of Close: February 10, 2017)

S&P 500 Index [2,316.10] – Record highs again. Since November 4, the index has rallied over 11%. Since breaking above 2,100, the index solidified an explosive bullish run.

Crude (Spot) [$53.86] – Trading between $50-54 in the past 2+ months. This is due to a combination of near-term stability and lack of catalysts at the current junction. The supply-demand dynamics that kept Crude below $50 are changing via OPEC agreement, but soft demand is still mysterious.

Gold [$1,228.30] – Strong case to be made that Gold has bottomed out around $1, 150.00. That said, visualizing a meaningful move requires optimism given the 4 year sideways pattern.

DXY – US Dollar Index [100.80] – Back to the common and familiar 100 range.  After peaking on January 3, 2017 at 103.82, the strong dollar trend has taken a breather. Since mid-2016, the dollar acceleration has been a major theme.

US 10 Year Treasury Yields [2.40%] – Confronting critical level. Interestingly in June 2015, Yields peaked at 2.49% and declined. Now, Yields are approaching similar levels. If the status-quo remains with rate-hike policies, surpassing beyond 2.50% seems challenging. A suspenseful period awaits for those seeking notable directional moves.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | January 17, 2017

“A single event can awaken within us a stranger totally unknown to us. To live is to be slowly born.” (Antoine de Saint-Exupery 1900-1944)

Synchronized Elation

 Higher movements in US stocks, interest rates and oil prices not only materialized in recent months, but the optimism of this trend-continuation remained in place.  The collective expectation of better economic signs, mixed with some tangible data of slight improvement, begs the question: what really is the status of global growth? In the US, is labor data signaling some mild revival? Bank earnings were somewhat healthy, matching the trend of rising interest rates. And fiscal policies are expected to be implemented in a favorable way despite the mind-numbing DC gridlock. Even the Federal Reserve is feeling a bit optimistic about the economy, and relentless buyers continue to accumulate shares. Expectations, like the bullish spirits, remain very uplifted, which sets the bar too high.

The Dow 20,000 obsession is alive and well. Perhaps, that milestone serves more entertainment value for financial pundits than observers of the real economy. Apparently, the rising interest rates have not quite derailed the bullish market; even a mild slowdown in the US Dollar has not stopped the positive momentum. Yet, in grasping the events ahead it helps to identify the “known unknowns” versus the “unknown unknowns”. Turbulence is inevitable, but the critical catalyst is the mysterious element for risk managers.  In most cases, the way the script plays out is driven by surprises and which catalyst will set the tone.

 The KNOWN Unknowns

As Trump looks to enter the White House this Friday, the key US stock indexes are flirting with record highs. Through this headline chatter there are lingering issues that will be highly tracked and discussed.  Here are some of the known concerns that are familiar to participants:

 1. Brexit implementation - Financial markets digested the Brexit decision, but the details of the exit process will shed additional light while triggering more volatility. There is a posturing game between the European Union and UK leadership. The short-term volatility does not mean there won’t be long-term benefits, but predicting the theatrical elements appears genuinely difficult. Of course, the British Pound has felt the pain of Brexit and the turnaround for the currency is unclear. Inevitably,  expect more volatility as the twist and turns continue given pending negotiations. Trading ‎opportunities will present themselves and political agendas will spin the reality, which will create more deception.  In other words, the true impact of Brexit may not be straightforward.    

 2. Trump-GOP relationship - The 2016 election gave republicans the White House and Congress, so new regimes are expected to implement a new path. However, not everyone sees eye to eye on fiscal spending, lower taxes and less regulation. Thus, how the DC political climate shapes up will be essential for investors and business leaders. ‎ As inauguration looms this Friday, now the speculative policy-driven euphoria and financial speculations from supporters and antagonists will be tested a bit. Although, anxiousness can overtake investors and media observers alike, true judgment of policies impact on economic/ financial markets may require patience.

 3. Central Banks influence - In the year ahead, less reliance on the Central Banks (CB) and the continuation of rising rates is highly anticipated. Although Europe seems stuck in a near-zero climate, US rates are rising. Even in China short-term rates are rising, as well.  The link between populism and distaste for CBs might be a bigger theme than currently discussed. In other words, from Emerging Markets to Developed Markets, the doubt is mounting on the success of monetary policies. In fact, CB’s are bound to face collective scrutiny that can force them to be less influential on financial markets. That’s a fundamental shift from the last eight years and noteworthy for all investors.

 If the US economy is perceived to grow and get healthier, then the pace of rate hike and faith in central banks can be more telling. Already, interest rates are rising in the US, as some economic improvements are perceived and mixed optimism is brewing.   Rising rates inversely impacting stocks and real estate remains to be seen. Perhaps, that’s the risk for those that enjoyed the rise of asset prices due to ultra-low rates. If there is a crisis or bursting of a bubble, then a collective rage can point to the CB’s policy failures. Thus, Yellen & Co. must be a bit nervous as their reputation and institutions credibility is on the line.

‎4. China - There are many questions about Chinese growth and the impact of multiple stimulus efforts. But, the China-West relationship is rocky from political, military and trade tensions. ‎ In addition, the Trump-China relationship will be highly watched and publicized, but both sides will need to navigate closely to contain the outbursts. Surely, new trade policies or South China Sea rifts can shake markets a bit. From a fundamental point, how the earnings of global companies are impacted will be more of a direct and immediate interest to investors. So much of the global economy is intertwined into the topics that impact the Chinese market from Commodities to Interest rate policies. The fragility of the Chinese status-quo is surely a mega matter.

5. European Elections - As faith in globalization suffers severe scrutiny, the demand for Nationalism and re-defining sovereign values has grown. That said, Nationalistic parties are in more demand than recent years, which surely can change the completion of the EU as well as business sentiment. Like all topics above, the European election themes are interconnected to Macro factors. Brexit and Trump are reminders of this anti-establishment trend. Some may go that direction; others might go towards a dangerous path. Either way, that’s going to drive the perception of policy risk. No question, 2017 can embark on a new era and shift that might take a while to digest.

Accepting the Unknown

There are many factors that can alter the post-election euphoria and multi-year bull cycle. Surely, sensitivity and suspense have escalated in tandem because the global tension has yet to calm. Despite the posturing from the Federal Reserve, who kept rates and volatility low, there are real economy uncertainties, which will be confronted. The tame volatility that’s been witnessed for a while may provide the earliest hints. But even if volatility inches higher, the question will remain, how will the dust settle after near-term uncertainties? Eventually, noise is bound to resurface, and one or two events can drive the rest of the market narrative. All that said, it seems a bit wise to admit the unknown and not to overly claim it’s quantifiable. Perhaps that’s the healthy approach ahead of an action-packed period.

 Key Levels: (Prices as of Close: January 13, 2017)

S&P 500 Index [2,274.64] –A intra-day high of 2,282.10 was reached on January 6, 2017. This further emphasizes the record-high trading behavior that’s been common in recent years.

Crude (Spot) [$52.37]  –Appears trapped in a range between $50-54.  The commodities ability to stay above $50 appears noteworthy in the weeks ahead. 

Gold [$1,190.35] – Desperately attempts to bottom. The December 15, 2016 low of $1,126.95 is on the radar for both buyers and sellers. The multi-year, sluggish price action lingers especially with a move below $1,200.

DXY – US Dollar Index [101.18] – Strong dollar momentum is waning and slowing a bit. A breather here is be expected after a strong run since May 2016.    

US 10 Year Treasury Yields [2.39%] –   Since July 2016, the turnaround from the low of 1. 31%, has set the tone for a new trend. The re-acceleration from November lows is even more stunning, at least in the near-term.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.

Market Outlook | January 3, 2017

“Status quo, you know, that is Latin for ''the mess we're in.” Ronald Regan (1911-2004)

For 2017, specifically the first quarter, there are three themes that can spark notable movements:  First, the perception of Central Banks and their effectiveness to reignite the real economy. Second, developments in China from economy to foreign policy to commodity consumption. And third, Eurozone changes from Brexit-like events to elections that can shape the political future of the continent and the Euro.  These three global topics are surely on the radar. The nuances serve as a potential catalyst to spark market movements.

Status-quo Wobbling

There is much anticipation and suspense regarding the potential derailing of the current market trend. With so much attention circulating around Trump’s regime and the Brexit fallout, the age-old discussions about interest rates and the power of the Federal Reserve remains a critical topic for risk takers of all kinds. At some point, Yellen will have to confront the truth about the effectiveness of low interest rate policies. The Yellen-Trump relationship, which was reported as hostile pre-election, tamed recently following the December rate hikes.  This relationship requires some clarity, but preserving the status-quo of low interest rates is not easy and seems less welcomed moving ahead.

More than the Yellen-Trump relationship, the limited tools of central banks mixed with the unsustainable, ultra-low rate climate may disrupt the familiar pattern of higher stocks and higher real estate prices. However, with the real economy / global growth not being overly thrilling, predicting sustainable rate hikes is a dangerous game. Not to mention, fiscal spending via infrastructure spending, lower taxes and reduced regulation would provide justified optimism, but a follow-through is desperately awaited. Patience is required before making a huge trend declaration.

Obviously, the low interest rate phenomenon is a global theme that’s beyond Yellen & CO. Central banks have struggled to stimulate economies while raising inflation expectation. To continue would be quite difficult. So far, it has been a big disappointment and desired economic results are still awaited. In fact, this is where the Trump victory, Brexit and more Populism comes in to play since the perception of economic well-being is under severe scrutiny. This expanding populist movement has rattled central banks, who are confronting a reality of anti-establishment sentiment, loss of credibility and lack of creative answers to justify an ultra-low interest rate environment:

“Critics of central bank actions were emboldened by a still sluggish global economy even after years of unprecedented monetary stimulus” (Bloomberg, December 15, 2016).

Near-term Suspense

Investors, recalling last January, are quite nervous going into 2017. Not to mention, a multi-year bullish market mixed with increasing optimism, which logically forces one to think cautiously. “Uncertainty” is discussed from a political level as much as economic, so no surprise. Since mid-year, the remarkable turnaround in US 10 Year Yields tells a critical story. 1.31% to 2.44% may not sound like a big deal, but it is a sharp turn to higher yields. A strong Dollar, higher Treasury yields and weaker Gold prices have defined the last six months. In the first few months of 2017, these macro indicators are worth tracking for clues if last quarter was a prelude of what is to come. However, if last quarter was a bit of an outlier and if the status-quo has not changed, then the suspense is deferred further without clear answers.  

Mysterious China

A concrete trend in China is hard to decipher given government data. Real estate bubbles, overheating economy and slowing growth targets have been well documented. At the same time, the Chinese Stock Market (Based on FXI) is far removed from all-time highs, which tells only part of the story. It’s been over nine years since Chinese stocks hit all-time highs. In this same period, US broad indexes are reaching record highs. In addition, the Trump-China relationship is a wildcard. A few mild spats can trigger concerns, ranging from North Korea to currency manipulation among other antics. The sentiment can shift rapidly.

All that said, the Yuan weakening is a fact that’s visible on many fronts. “The yuan CNY=CFXS, which has reached an 8-1/2 year low, was on course to shed nearly 7 percent against the dollar in 2016” (Reuters, December 30, 2016). Some may be tempted to bet on a recovery, but the fundamental weakness in China is evident.

Also, capital outflow is plaguing the Chinese policymakers. In fact, Bitcoin’s (the digital currency) recent appreciation is attributed to ongoing outflow from China given recent capital controls.  Thus, confidence in China is waning, and policy makers have attempted various stimulus efforts. However, since the perception of “China” is quite vital in the business community as well as commodities, tracking the developments for a potential macro catalyst is vital. In addition, the China vs. US rift is not farfetched, but estimating how and when that plays out is even harder to tell. One thing is certain,  the importance of China in political, economic and military related matters is crucial. This makes the events there much more suspenseful and meaningful in the first quarter.

Eurozone Theatrics

The post-Brexit world has sparked all kinds of emotions, debates and doubt about the future.  The Italian Banks,  the Greek debt crisis and Britain’s negotiation with both are enough for concerns. Yet, since concerns have become the norm, it may have made market participants somewhat numb or unmoved by ongoing shocks. In a strange way, an upside surprise in the Eurozone might materialize since the beaten up themes are known. In other words, the risk-reward may appeal to some daring few seeking a remarkable turnaround.  However, the bureaucratic process for change in the Eurozone will be lengthy and the “breaking up” of the union has too many scenarios to ponder. What’s hard to ignore is the populist trend that’s building (as globalist sentiments continue to crumble from US to UK to France) in Europe with more elections coming up. This is another element that’s brewing to re-shape the European status-quo.

If independence and nationalism are preferred, then the status-quo can get rattled again. Although, the consequence might take time to play out. All that said, the tone, actions and leadership of the European Central Bank (ECB) remains quite intriguing. If the ECB, which has mainly created the non-event status quo move, eventually makes a drastic statement, then a new trend can spark with increased volatility. Like all developed markets, investor’s obsession begins and ends with interest rates.  That surely will reflect in the ongoing weak Euro and contentious attitude between European leaders. Stakes are much higher now and participants are asking shrewder questions, which makes each week and tick critical.

Key Levels: (Prices as of Close: December 23, 2016)

S&P 500 Index [2,238.83] – For 2016, the index was up 9.5% . The last two months were explosive as December 13 marked all-time highs (2,277.53).  Mild pullbacks seem inevitable, at least closer to 2, 200.

Crude (Spot) [$53.72] –  In the last six months, buyers showed confidence around $40 on several occasions. In the near-term, staying above $52 is the critical junction.

Gold [$1145.90] – During the past year, gold fluctuated with July 6 highs of $1,366.25 to December 15 lows of $1, 126.95. In the second half of 2016, gold was down over a 17%.

DXY – US Dollar Index [102.21] – During the last half of 2016, a strong Dollar theme remained in place. Since 2011, when the Dollar bottomed, the trend has been positive. For some perspective, July 2001 highs of 121.02 serve as the milestone to keep in mind.      

US 10 Year Treasury Yields [2.44%] – Along with a stronger dollar in the second half of the year, yields went much higher.  2.50% is a key resistance level to watch as breaking above 3% has been difficult in the last six years.

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