Here are the questions being asked at FT markets as a new trading week begins after the pronounced swings in equities, bonds and currencies that followed Donald Trump’s election victory in the US.
Are the dollar bulls running too fast?
When currencies start motoring, forget speed limits. The dollar has accelerated markedly since election day. Pressure on emerging markets is rising, while the euro slid through $1.06 on Friday and the yen has weakened towards ¥111.
It seems the stars are aligning for the dollar. Expectations of a Trump fiscal shot in the arm for the economy in 2017 that boosts growth and inflation are a powerful source of support. The bond market says a Federal Reserve rate rise next month is a done deal. An important risk concerns how fast the Fed tightens policy during 2017 as other central banks remain on the sidelines.
“The risk here is that, after the sharp moves of the past week, investors face an intertemporal gap between yield pricing, for which the future of an inflationary Trump fiscal stimulus is now, and the Fed’s evidence-based (data-dependent) reflationary approach to proceeding with rate hikes,” says Lena Komileva of G+ Economics.
Still, the dollar rally is impressive and goes beyond recent violent asset allocation shifts between bonds and equities. The dollar index ripped through 100 and then 101 last week to a near 14-year high. It has risen more than 3 per cent since polling day, as investors have dumped EM equities at the highest pace for 14 months.
Investors are also calculating how much money comes home to the US thanks to a tax deal for companies that repatriate foreign profits. Such a prospect means the dollar can rise further even as the US runs a larger current account deficit.
After nearly two furious weeks, a little relief?
The dramatic market reaction since November 8 has been dominated by US stocks, which recorded their biggest weekly inflow since December 2014, while bonds have endured their largest outflow since the taper tantrum peaked in June 2013. The great rotation is on, and this time appears to be the real deal.
Some, however, are questioning whether the pace of the rotation can continue, particularly as Thanksgiving looms next week. They also stress that a great deal rides on how the president-elect’s policies are moulded into law as they pass through the sausage-making process of Congress in 2017.
There’s also a gnawing sense among some investors that a further rise in bond yields and a stronger dollar will only tighten financial conditions further and weigh on the economy. One thing stands out: prepare for more volatility.
Will the UK Autumn Statement have a bearing?
Probably not, but it still represents a test of the government’s ability to command investor confidence, because it represents its first statement about the health of the UK economy.
Much of what Philip Hammond, the chancellor, will say has been trailed — a possible £100bn Brexit bill, some minor support for families who are “just about managing”, likely slower growth — but market attention has understandably been elsewhere, so the reaction has been negligible.
Investors will inevitably compare the UK’s plans for fiscal stimulus with those in the US, and will probably be disappointed in what Mr Hammond says, given that he is likely to colour his remarks with the need for fiscal discipline.
Sentiment to the UK is driven more by the legal to and fro on Article 50 (the forthcoming Supreme Court ruling on the government’s plans for triggering Brexit). But the pound has rallied firmly against the euro, which has fallen to above 85p, and there is an argument that the scale of the post-Brexit decline will reduce the current account deficit. Anything and everything Mr Hammond says about Brexit will be pored over intently.
Political risk heats up in Europe
Opinion polls are not to be trusted any more, so one of the big questions for investors this week is the range of political outcomes they face in Europe next year.
Two of these could start to be answered next week. November 20 brings French primaries for Les Republicans, with Alain Juppé leading former president Nicolas Sarkozy in surveys (for what they are worth). Whoever wins this will be the main challenger to Marine Le Pen of the far-right National Front in French elections.
Meanwhile at a meeting of the party of Angela Merkel, German chancellor, we could learn whether she intends to seek another term next year.
Italy, though, remains the most pressing concern, with Matteo Renzi, the reformist prime minister, this week saying he would not lead an administration of technocrats if he loses next month’s constitutional referendum.