The inauguration of Donald Trump as President of the United States dominated the news at the end of the week. President Trump’s inauguration speech was surprisingly hard-lined despite his earlier signals where he sought to unite the nation. Eschewing discussions about policy, Trump later focused on the media’s reporting of the turnout at his inauguration, claiming that they had misrepresented and under-reported the turnout.

Across the pond, Antonio Tajani was elected president of the European Parliament marking a shift from the centre to the right. The European Parliament has a say in matters regarding trade and on any trade agreement with the UK.

Meanwhile in Davos, the Chinese President Xi JinPing launched a robust defence of globalization and open markets saying “no one will emerge as a winner form a trade war” and pledged that China would not engage in a currency war nor manipulate the RMB. China is apparently busy building bridges as America prepares to build great walls.

Macro:

  • China reported stable economic growth at 6.7% for 2016, hardly a surprising number.
  • Manufacturing data was strong in Japan and the US, further evidence that global manufacturing has found its footing after a period of recession.
  • Fed Chair Janet Yellen gave a guarded speech which was fairly neutral amid markets expecting a hawkish statement. Yellen was sufficiently vague to give comfort to hawks and doves alike.
  • And finally, Theresa May said that Britain would leave the EU come hell or high water warning that “no deal” would be preferable to a “bad deal.”  The UK is threatening to make itself a tax haven for companies across the world if it does not get a deal.

Equities:

  • Luxury stocks are coming to life. The slump in luxury stocks triggered by a slowdown in demand in Asia, in part due to market saturation and in part due to the anti corruption drive in China had prompted companies to re-examine their strategies and operations. Burberry and Ralph Lauren appointed professional CEOs to take the reins from their creative directors, most companies which previously eschewed on-line channels have embraced it in the last year or so. (After testing the market via the Yoox Net A Porter channel YNAP. YNAP may face competition and channel conflict as this trend continues.) The latest development has been an agreement between Richemont and Swatch to supply it movements. Almost 20 years ago, watch companies began a trend of making movements in house, a particularly expensive exercise designed to justify meteoric price hikes. Depending on the scale of consolidation in capacity, the rationalization of movement manufacture could result in substantial cost savings and efficiencies. Apparel and accessories had turned the corner last summer. Horology could be the next to turn. Watch this space.

Bonds:

  • Inflation and reflation made the headlines and drove bond yields higher across USD, EUR and to a smaller extent JPY.
  • The JPY curve is steepening in the 10 – 40 year sector. This is on cue as the BoJ needs a steep curve at the long end to balance its negative short rates. The term structure is profitable for banks and insurers.
  • The US10 year has been volatile, pushed and pulled by comments from the Fed and data. Our thesis is that rates should feel upward pressure from the economy, but at some point will become intolerable for the US treasury. What those levels are are another matter. There is a risk that the Trump trade may have pushed yields past this point already. We maintain a flexible approach to our duration hedging currently holding a partial hedge.
  • European data are showing a firm recovery in inflation and growth. The ECB raised its forecasts for growth and inflation but warned that risks remained to the downside from global factors. It said that it would allow itself to buy bonds below the deposit rate (currently -0.4%), the usefulness of which is questionable given yields have risen in sympathy with USD bonds and the only central bank likely to have to use this concession being the Bundesbank.

A quick scan of credit markets shows there has indeed been a stalling of liquid IG and HY markets in US and Europe. There are various excuses including rally exhaustion, political noise and upcoming supply. Meanwhile, there has been remarkably strong performance since the start of the year from US and European CLO markets (BBB to B), peripheral ABS, Euro AT1s and leveraged loans. If we compare asset class spread levels to the tight levels of 2015 or even of the last three years, two areas continue to stand out as good value – Euro CLO BB/B and Euro AT1s.

FX:

The USD is at an inflexion point. Whether the rally continues or reverses will depend on the rhetoric and policy progress of President Trump in the coming weeks and on the actions of the major central banks, the Fed included.

Commodities:

With all the uncertainty and the rise in inflation expectations, it is no surprise that gold has risen 5% this year, and looks set to continue.

Week ahead:

Jan 23

  • Singapore inflation

Jan 24

  • European Composite PMI
  • France, German Mfg and Svc PMI
  • Swiss trade balance
  • US existing home sales
  • Dijssselbloem speaks

Jan 25

  • Taiwan GDP
  • German IFO report
  • Japan customs cleared trade
  • France INSEE Mfg confidence

Jan 26

  • UK GDP
  • Singapore industrial production
  • HK exports and imports
  • US advance goods trade balance, initial claims, new home sales
  • Japan inflation

Jan 27

  • UK debt rating by Moody’s
  • German retail sales
  • France INSEE consumer confidence
  • Italy ISAE business sentiment and consumer confidence
  • Eurozone money supply M3
  • US Core PCE Price Index, durable goods, Michigan Sentiment.