Talking Points:
- Risk trends have broadly advanced on the opening week of 2018 with the S&P 500 posting its best week since December 2016
- It is difficult to ascertain whether the opening move of the year is genuine speculation, reinvestment or complacency
- From the Dollar a speculative recovery looks less and less likely while Euro and Yen crosses offer path-of-least resistance appeal
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We have closed out the first week of trade for 2018, and it has proved a remarkable period for risk-leaning assets. While there was a wide bid across various asset types and regions, the US indices yearned for the greatest attention. Most of the country's major benchmarks extended their charge to record highs. They would also notch consecutive series gains at these untested heights. And, just to make sure everyone was paying attention, the pacing through the close of the week proved to be uniquely momentous. The S&P 500's climb was the strongest for a week - even though accounting for only four trading days - since December 2016. Even more impressive was the Nasdaq 100 which closed out its best week in over two years at nearly 4 percent gains. And, while other barometers of sentiment were not as overwhelming in their statistics, they were nevertheless falling in line to the theme. European and Asian equities, high yield assets, emerging markets and even carry trade all posted risk-favorable gains.
Arguably, the best measure of sentiment gaining genuine traction in the financial system is the breadth and intensity of correlation across these otherwise unrelated markets. Therefore, I would consider this a true speculative theme. Yet, its engagement is not certainty of its persistence. One of the most likely sources of this renewed enthusiasm for 'any and all return' is the natural reinvestment that occurs at the start of a new trading year and/or quarter. If that is indeed the source of this swell, its momentum is likely to soon flag as there was little withdrawal in the latter weeks of December and complacency is still an overwhelming sentiment which acts as a natural anesthetic to true enthusiasm. Complacency may sustain the general drift we've over the past months, but it also means that critical breaks necessary to progress and those assets recently untethered to the sentiment theme will start to struggle more readily. As it stands, there are few high profile event risks on the coming week's docket that look capable of single-handedly picking up the sentiment theme. Instead, we should monitor the intangible and difficult-to-quantify developments that can still necessitate repricing like political risks, tensions with North Korea and rumors related to the proposed infrastructure bill among others.
Meanwhile, the FX market which seemed more responsive to its transparent fundamental drivers seems to be coming unmoored. The Dollar had opportunity to respond to interest rate speculation this past week with the update of the December NFPs and related labor statistics; and yet the currency held its exceptionally tight range near the floor of a three-year, bearish leaning congestion pattern. The payrolls figure did miss, but that didn't seem to put off risk appetite in US assets. From a more than decade low jobless rate and steady 2.5 percent wage growth, we have certainly enough fundamental support to back the Fed's forecast for three hikes in 2018 - indeed the market's own outlook is closing in on that more hawkish view - yet the Dollar has not budged. Similarly, the Euro and Yen have little connection to any specific fundamental points, yet their technical appeal is still warming. It is better in these conditions to treat FX, risk assets and even cryptocurrencies the same: approach with a shorter duration traders' mentality with caution and dynamism as the key principals. We discuss how markets are trading and how we can take advantage in this weekend Trading Video.
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