Almost there, last full week of the year

Tom Stevenson, writing in Sunday’s Telegraph, headlines” The only safe bet may be the one you least expect”, as he looks forward to the year ahead. Basing this hypothesis on the outcomes of events in 2016. Looking forward to 2017, we don’t quite have such possibly divisive events as we did have this year, however we do have elections in France, Germany, Netherlands and Norway. The French elections take place in May, all eyes will be on performance of Front National leader Marie Le Pen. The German elections in the Autumn, the success of the right wing anti Europe AfD party are likely to make the most headlines.

It is doubtful whether any of these events will have the same impact on the outlook for the European economy as the election of Donald Trump has had on the US economy, whatever the outcome. The reflation trade that has been taking place in the past weeks, continues to drive on. This week saw the 9th ever largest weekly inflow in equity funds ($21bn), along with the 7th consecutive month of bond outflows. The weekly AAII investor sentiment survey recorded another week of above average bullish sentiment. The Vix index continues to trade close to historic lows, as always, suggesting complacency or confidence in capital markets.

In the past week, the Federal Reserve raised rates as expected, the market took the news in its stride. It appeared to take the mixed picture Janet Yellen painted for 2017, with an optimistic eye.  At the start of 2016 the Federal Reserve forecast four rates rises, market expectations were for a maximum of two. In the end, we got 1, just. As we enter 2017, the Fed forecast 3 rises in the coming year, we remain sceptical, however in contrast to 2016, the market puts a near 50% chance of the forecasts being correct.

Looking forward to the last full trading week of the year,  on Monday Janet Yellen speaks at the University of Baltimore on the state of the jobs market. The Federal Reserve may believe the economy is close to full employment, however there are still 9 million jobs fewer in 2017 as there were in 2007. Also on Monday Theresa May reports back to parliament on last week’s EU summit.

On Thursday, we get the final estimate for third quarter US GDP, expectations are for growth of 3.3%. The other piece of economic data that the markets will focus on Thursday will be the latest durable goods report. On Friday, we also get the final reading for the third GDP for the UK economy. Forecasts are for a small revision higher from 2.1% to 2.3%.

In the days before the year end, fund managers now keep their fingers crossed the years gains can be hung on to. 

Posted on December 18, 2016 .