There are some key moves seen on financial markets in the past couple of weeks as the general outlook on market sentiment has undergone a seismic shift. We look at the impact that has been seen across forex markets, equities, commodities and bonds. The big question is thoguh, will the moves continue higher or is there some room for profit-taking this week?
A fundamental shift in market sentiment was brought about following the victory of Donald Trump in the US Presidential Election. On the potential for growth and inflation driven by fiscal spending of perhaps $1 trillion (can he really deliver on such huge levels of spending?) Treasury yields and the US dollar have soared. The dollar has soared to its highest level since 2003 as the market has re-priced for a sharper set of rate hikes by the Federal Reserve. Fed officials are talking about asset bubbles and even the historically dovish Janet Yellen is concerned over the delay to rate hikes leading to the economy potentially overshooting. There is a significant re-pricing underway and it could continue to the end of the year. There will inevitably be bumps along the road, nothing ever goes in a straight line. The technical charts suggest that whilst momentum is strong for the dollar, it is stretched and this could give rise to a near term technical correction this week. Looking away from the dollar though there are a couple of big volatility events for the Eurozone on the horizon, with the Italian referendum (4th Dec) and the December ECB meeting (8th Dec). Will Italy be the next location for the populist movement to strike? If so, would markets begin to seriously question the stability of the Eurozone once more, ahead of further crucial elections in The Netherlands, France and Germany in 2017. This could perpetuate recent euro underperformance.