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After an ideal opening week for equities in 2018, traders will be testing the waters early on Monday for signs of a reality-check. US fourth quarter earnings, inflation data as well as the durability of the commodity rally are all top of the Watchlist this week.
The Dow has not looked back since it broke 25k. A goldilocks unemployment report on Friday helped the last leg higher. There are jobs being created but without the kind of runaway wage growth that would create enough inflation to tempt the Fed into a fast pace of rate hikes. With the macro backdrop looking supportive, focus is turning to earnings. Banks Wells Fargo and JP Morgan unofficially kick off earnings season on Friday. Markets have been pricing in a short-term jolt to bank earnings from tax reform. A reduction in the value of deferred tax assets, essentially credits for old losses will hurt bank earnings in Q4.
Shares in Europe look set for a strong open on Monday. The FTSE 100 could buck the trend by opening lower after a record-breaking first week of trading in 2018. Optimism stemming from strength of European and global economy should help the German DAX index open at 7-week highs. The opening strength tracks small gain in Asia, where markets were unperturbed by reports from China that the PBOC think “there is room for an increase in interest rates in the short term”.
The US dollar edged up slightly in Asian trading on Monday, recovering a small portion of the losses following the soft jobs report. In the greater scheme of things, US job gains have averaged over 200k for last 3 months and wages are tracking above the rate of inflation at 2.5% y/y. This week we will be looking for Fed speakers to get some more colour on last week’s Fed minutes. The effect of the minutes has been to boost expectations of March rate hike but it wasn’t enough to stop the dollar closing last week lower. For now, markets are placing more emphasis on global growth and demand for global currencies than they are the gradual pace of tightening rates from the Fed. San Francisco Head John Williams is first up on Monday evening.
The euro is edging back on Monday having not quite achieved a new 3-year high. Germany factory orders and Eurozone business and consumer confidence as well as Eurozone retail sales are all scheduled for release on Monday.
There are some tentative signs the strong commodity rally last week is starting to fade. Gold hit a 4-month high on Thursday but has eased back since to the detriment of gold mining shares. Crude oil is finding some resistance from its May 2015 peak (near $68 per barrel in Brent).