Weekly Wrap Nov 25: OPEC meeting Wednesday. Italian Referendum Sunday.

A lot of noise and very little signal. On the political front, there appear to be some disarray in the Trump transition team as they cannot agree on whether Romney should be invited to the party. The Green Party has asked for a recount in Wisconsin, Michigan and Pennsylvania. Trump has denounced this as a scam. In France, Francois Fillon has won the second round of the primaries in a landslide. His reward is a match up against Le Pen.

For this week, look out for the OPEC meeting in Vienna where expectations run high for a deal to cut output. On Sunday, Italy goes to the polls to vote on a referendum to reform the upper house. There is no clear opinion among analysts whether a Yes or a No is preferable but the Prime Minister has staked his office on the outcome. Quitaly, is the term we are at risk of hearing about more in the media if things don’t go to Renzi’s plan.

Macro:

Donald Trump’s views on trade are quite clear, but he’s not the president yet. The decline in world trade, however, is over 5 years old and continues with poor number from Japan and HK.

European PMI’s continued their robust trend with relatively weaker manufacturing numbers more than compensated for by stronger service numbers.

In Japan, inflation isn’t deteriorating but neither is it recovering.

Equities:

US equities continued their climb, ostensibly on increased growth expectations and a tax cut directly boosting the bottom line, Japan is up, driven by banks and exporters, China is up. We know why Brazil underperformed, and Mexico, and India. But Europe is flat and there is no major impeachment, no great wall, or demonetization going on. The European market is likely feeling the angst of the Italian referendum and the French primaries, and further down the road, a number of key elections.

Bonds:

Duration continued to sell off across USD, JPY. European sovereigns were volatile but ended the week flat. Bunds and Italian bonds underperformed. UK gilts were surprising stable given the Autumn (Re)statement which indicated an increase in borrowing of 122 billion GBP over the next 5 years.

Credit spreads continues to tighten in sympathy with rising equities. Credit is looking quite expensive in the context of the last 2 years, but less so in the context of the last 10 years.

FX:

Yet another week of USD strength. The USD is fundamentally supported and is likely to rise further. That said, nothing goes up or down in a straight line. We wouldn’t be shorting but we wouldn’t be rushing to buy either.

Commodities:

Before the US elections, if anyone expected sub 1200 USD gold on a Trump victory they might be deemed insane. And inflation, it is believed, is good for gold. It can’t just be USD strength since gold is falling even faster the MYR (Malaysian Ringgit). Could it be a risk on environment causing a rebalancing out of gold? Whatever is driving the price of gold, we cannot see it. Trump isn’t President yet and he is only just filling his cabinet. It could be that investors are unwinding various positions which were established to weather the US elections. Base metals have been strong, obviously driven by the promise of infrastructure spending in the US and to some extent in the UK.

Oil was very volatile last week. The November 30, OPEC meeting draws near and we will soon know how determined the Saudi’s are to maintain price stability and provide support. The Saudi’s pulling out of a non-OPEC side bar just 2 days before the Vienna meeting didn’t help. Saudi claims that the oil market could balance even without production cuts only made things worse. Oil prices were up 7% at the beginning of the week before falling 7% at the end of the week.

Week ahead:

Nov 28