Daily Commentary BY THE CURVE TEAM –

Trends Resume as Markets Kick Off 2018

3rd of January, 2018

The wobbles from the holiday period were quickly forgotten as markets resumed the trends that were prevalent leading into the break. If history tells us anything, it is not the first day of trade in the new year that matters.

Markets quickly resumed the trends prevalent prior to the holiday break overnight. Equities kicked off the year in solid fashion, bond markets were under pressure with yields heading higher while the US just can’t catch a break despite some solid data.

It was all about manufacturing indices overnight. Most of the major economies including China, Europe and the US all remained well above 50 indicating that they finished the year with activity expanding.

As for markets though, history has often showed that the performance of equity markets for the year ahead often follows the trend set by the performance of the second trading day of the year. However that historical trend could be at the mercy of bond markets, especially if long term interest rates start to head north in a hurry.

On that topic, ECB council member and President of the Austrian Central Bank made some timely observations overnight. He pointed out that money is flowing into European equities and that US equities looked very heated. This was before he sounded a warning that the end of the ECB’s QE program is “within sight.” 

If the ECB joins the Fed in taking away the punchbowl, the effects that the flood of liquidity that has hit the market over the past decade could unwind. That could gather further pace of the BoJ looks to follow suit further down the track.

It all makes for a very interesting year ahead.

David Flanagan

Director - Interest Rate Markets