Donald Trump held a press conference on Jan 11 and spent the time campaigning aggressively for an election he had already won, at least at the ballot box. On current form. Mr Trump behaved more like a beleaguered candidate with slipping ratings than a President Elect, with slipping ratings.

Also in the news is the Trump Dossier, a report which alleges Kremlin officials colluded with Trump, offered him bribes, and accumulated compromising evidence of Trump’s indiscretions in Russia. Mr Trump denounced it as fake.

Navigating the markets without distractions is sufficiently difficult but with Trump at the helm of the US, things get even more complicated. He may not have the power to steer the ship where he wants but he can certainly rock the boat when he wants.

China sailed an aircraft carrier into the Straits of Taiwan. Donald Trump said he would rethink the One China policy, and China quickly reminded him that this was non-negotiable.

Over in Europe, US troops are in Poland as a routine troop rotation, part of NATO’s Operation Atlantic Resolve, which was launched in 2014. Russia, naturally, called it a potential threat. Hopefully, the Trump executive will have the gravitas, diplomacy and grace to defuse the situation.


  1. European industrial production data are corroborating the strength implied by PMIs. The European economy appears to be in a stable growth phase. This could be more than a European phenomenon as manufacturing appears to have stabilized and exited recession. The reason for this is probably that manufacturing has successfully reorganized itself globally to a more insular, de-globalized reality.
  2. Inflation data is also firming up, probably re-affirming the less globalized reality. Less trade means less efficient production and higher inflation at each level of output growth. Adding fuel to the fire is the newfound strength in energy markets as the OPEC production cuts take effect. Recent production growth in the US may dent the short term outlook but rising rig counts are probably only commensurate with replacement supply for obsolescence.
  3.  Trade data may have improved recently but we see this as currency effects and maintain our view that global trade is in decline, and has been since 2011/2012.


The Trump bull market in equities lost momentum somewhat. A reversal in the USD rally also impacted international equities. For now, the equity bull market appears intact but valuations are high and growth expectations may have run ahead of reality. In the meantime, financial conditions have already tightened in the US and in China.


HSBC have a UST 10 year forecast that is at the low end of the street range (1.35%) and compares to a consensus of 2.3-5%-ish area, similar to forwards of 2.4% and a bear extreme of 4%.

  1. What we do. Followers of our strategy will be aware that we are managing duration carefully and intend to run a duration hedged credit book until further clarity is available. We do not have sufficient clarity of data and of analysis to take a determined net long or net short duration position. We would therefore lean towards a duration hedge with dynamic management as data arrive.
  2. What we think. We think that interest rates bottomed in 2013 and that the bond rally of 2014/15 was a local counter-trend within a new secular trend of rising rates. What this demonstrates is the danger of being wedded to fundamentals.
    1. In the long term we see rates drifting higher. The gradual acceptance of fiscal policy not just in the US but elsewhere will be progressively priced into markets and more fiscal stimulus means rising rates.
    2. In the medium term we see rates possibly moving lower. The reaction to the US Presidential election result and Trumponomics suggests higher inflation and thus higher rates.
    3. But, rates have risen on expectations and ahead of actual policy. The risk of rates tracking lower over the course of the year cannot be ignored and they may do so just on the uncertainty surrounding policy and because current pricing may have overshot.
  3. In short, we are not very sure where rates will go in the short run and we apologize that we have so much to say about an area where we have decided to take so little risk, but we need to explain ourselves.

In credit there is more conviction and less to say. We remain optimistic about the prospects in corporate credit, in the US mortgage market from agency credit risk transfers and legacy non agencies, in loans, in structured credit and in financial’s subordinated securities.


The USD rally ignited by the US elections continued to lose steam, probably on profit taking, The USD remains supported by  four pillars, a growth differential, an interest rate differential, monetary policy divergence and potential protectionist trade policy, most of which are stable factors. The current weakness is probably profit taking and a short term correction. For the USD to maintain a decline would require at least 2 of the 4 factors to fail.

GBP was weak again as the UK Prime Minister reiterated her vision of a Hard Brexit. Her Chancellor has been working hard to find viable alternatives even tabling left-field ideas such as making the UK a tax haven.


After 10 weeks of increasing rig counts, the US rig count fell slightly  last week.  The backlog of drilled but uncompleted wells has decreased since a year ago. The IEA expects the oil market to rebalance within 1H 2017, earlier than previously expected, and since the OPEC production cut agreement. The US EIA published data indicating increased US production but said that crude prices should stay above 50 USD during 2017 citing strong demand and the OPEC cut. Oil prices corrected on the news release.

And YTD, even if it is just mid January, is gold. And why not? Political uncertainties remain, markets have lost some of their swagger and inflation has picked up.

Week ahead:

Jan 16

  • UK RIghtmove house prices
  • BoE’s Carney speaks

Jan 17

  • UK CPI,
  • Eurozone ZEW Sentiment Index
  • Singapore NODX
  • China retail sales and IP
  • US Empire State
  • Fed’s Dudley speaks
  • Japan IP

Jan 18

  • HKMA interest rate decision
  • Eurozone, German inflation
  • US CPI, capacity utilization, IP
  • Fed’s Beige Book
  • UK unemployment, average earnings and claimant count
  • Fed’s Yellen speaks

Jan 19

  • ECB rate decision and press conference
  • US building permits, housing starts, initial claims, Philly Fed

Jan 20

  • US Presidential Inauguration
  • China GDP
  • UK retail sales
  • BoJ’s Nakaso speaks
  • Fed’s Harker speaks