Evdokia

Evdokia Pitsillidou, Head of Risk Management at easyMarkets. She specialises in commodities, options and currencies and loves to solve analytical problems and overcome challenges.

The year 2017 seems poised for a running start as there are several top-tier events lined up in January. On the very first day of the year, China will be releasing its official manufacturing and non-manufacturing numbers so this should set the tone for the market open on Monday (1). Stronger than expected readings or improvements could allow risk appetite to come into play for the first week of the year while downbeat results could let risk aversion creep in.

Keep in mind that several markets might still be closed right around the first half of the week so the thin liquidity may provide some potential for volatile action. The main event for the week is the December US non-farm payrolls release, which may also provide market watchers some clues about the pace of Fed rate hikes for the year. Recall that the Fed hinted that there are three more tightening moves lined up for 2017, on top of the 0.25% rate hike they announced in December 2016.

Other factors that may impact overall market sentiment are the UK Supreme Court ruling on Brexit negotiations and Trump’s inauguration ceremony. The former is set to be announced anytime during the month, which suggest that pound traders might be on their toes for the entire January, while the latter is scheduled for January 20.

Now the UK Supreme Court ruling is a pretty huge deal since this may determine whether the Brexit process would be a long and arduous one. If it upholds the High Court ruling requiring parliamentary approval before Article 50 is invoked, the Brexit strategy may be held up in months or even years of political back-and-forth that might wind up postponing the move indefinitely. This may set the tone for some cautious trading for the pound, although the UK currency may find some relief in staying within the bloc and enjoying its benefits for much longer.

As for Trump’s inauguration, this event may be mired in a lot of controversy since the FBI and CIA recently confirmed Russia’s interference in the elections. This has even led some members of the electoral college to say that they won’t be giving their votes to Trump, even though the president-elect still has a sizeable lead to go by. Further questions on the legitimacy of the outcome and Trump’s remarks during his speech may carry a lot of weight in determining what’s in store for the rest of the year when it comes to US politics and perhaps trade relations.

Still, if Trump’s acceptance speech immediately after the election results were announced in November is any indication, the incoming US president is capable of toning down his rhetoric and sounding diplomatic, early morning Twitter rants aside. If he exhibits this kind of demeanor during the inauguration, markets may get a sense of calm and focus on the fiscal policy plans of the new administration, possibly even yielding a repeat of the stellar post-elections rally.

US traders are on the lookout for the administration’s plans for infrastructure spending, tax reform, trade negotiations, and the healthcare overhaul – all of which are may to have long-lasting impacts on businesses in the country. In turn, the US business outlook may have a major influence on global demand and growth. Besides, any major increase in fiscal stimulus could remind Fed officials of the need to counterbalance this with some form of monetary policy tightening, reinforcing their projections of three interest rate hikes for the year.

In terms of events on the economic calendar, the Bank of Canada’s interest rate decision and the European Central Bank statement are also top contenders for spurring a lot of action in the charts. Preliminary GDP readings from the US, UK, and euro zone nations due later in the month may also indicate if major economies are off to a strong or weak start for the year. Aside from that, earnings reports from top US companies could have a major impact on risk sentiment.

In any case, there’s still a lot of uncertainty looming over the markets at the very beginning of the year so equities and commodities might be off to a slow start, likely waiting for the main event risks to pass before pushing through with their climb. It’s also may worth noting that January marks the official start of the OPEC’s output deal so market watchers may be eager to find out if the member nations stuck to the agreement or not. To top it all off, updates on the French and German elections set to take place later in the year may also bring some tension to the table.

In a nutshell, January’s events could provide a preview of how the rest of the year might turn out, although the odds seem tilted to a risk-on month. After all, traders are may already used to expecting the worst but have shown possibly capable of piling money into riskier holdings even on mild upside surprises. The US dollar may be the strongest performer of the month, coming off a very hawkish Fed statement in December 2016 and likely to benefit from either risk-off or pro-US updates. Besides, dovish biases from the ECB and BOJ may to keep US yields more appealing against most of its counterparts.

The outlook for US equities hinges on Trump’s inauguration and quarterly earnings reports but the odds may also seem to favor more rallies. In Europe, may there is a greater deal of uncertainty looming with the Brexit Supreme Court ruling and the upcoming elections in the top economies. As for commodities, early reports on OPEC production may determine how crude oil might fare while risk sentiment may set the tone for precious metals such as gold and silver. Either way, be on the lookout for any sharp moves as headlines may carry a lot of weight in pushing prices around, given all the political events on deck.

 

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