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Market Talk – January 16th, 2017

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A heavy day for Asian shares with 1% declines for many core markets. The fear was created as the British Prime Minister Theresa May is expected to claim that Britain will make a “clean and hard” exit from the European Union when she makes her speech on Tuesday. Sterling was trading around the 1.2200 for the majority of Friday’s trading but fell to below 1.20 (-1%) in early Asian trading. The uncertainty around the UK and Europe unnerved many markets as exporters question not just markets but their current and future agreements. The Nikkei followed sentiment by declining 1% with Takata (leading airbag maker) having reached a settlement with the US DOJ and saw their shares down around 10%. The JPY again saw renewed flight to safety with a rush below 114 (113.70 hi +0.6%) but is seen drifting back in late trading. The Hang Seng lost around 1% in early trading, tried to recover but was hit again mid-afternoon but did manage a slight climb just into the close. We are seeing a small recovery in Asian futures late which bodes well for the cash open in a few hours. All markets will be watching Chinese President Mr Xi when he address an audience at Davos on Tuesday.
The markets negativity also rolled into European trading ahead of what will be an extremely interesting week. We will hear from BOE governor Mark Carney at a dinner later this evening, Mr Xi amongst others, from Davos, Theresa May’s speech from London Tuesday and also the inauguration of Donald Trump on Friday. Plenty to keep markets on their toes and probably a little of everything for each market. Insurance, banking, auto-makers and key exporters were leading European indices lower on Monday. The UK’s FTSE held in reasonably well but only because of the decline in the currency.
The DXY has benefited from all this confusion as has gold (+0.5%), US stocks (futures as US Holidays Martin Luther King Day) and US treasuries. Interestingly, although US debt have rallied we have not seen the same reaction in Bunds; could this be the start! We have been following the spread between US and German fixed-income for a while with the view that valuations are stretched at best. Late in the European day the IMF announced the UK will grow an additional+0.4% in 2017 pushing expectations up to 1.5%; a huge contrast to the warnings given ahead of the BREXIT vote.
US 10’s trading around 2.39%, Germany 0.33% (spread last seen +206bp), Italy 1.91%, Greece 6.83%, Portugal 3.83% and UK Gilts 1.32%.
US Markets have a public holiday