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OPINION

Twist and shout!

Twist and shout!
January 6, 2017
Twist and shout!

More importantly, pollsters have been shown to be not only unreliable but perhaps biased. That politicians cannot be trusted to voice the views of their constituencies. That 'experts' are not really very different from lobbyists. That the status quo is more likely to be changed with referendums than with parliamentary elections. That bad losers are not confined to sporting activities, but are to be found in all walks of life. Let's see how quickly the above change their tune to fit new administrations.

Markets feel no need to pander to these people, but soldier on, estimating risk and probabilities as they go - on the whole apolitically. The shock of massive stock index rallies following Brexit and Trump's victory were branded in The Trader's mind, a reminder of how important an impartial look at the charts is. So here we go for what might be the outlook for 2017, where some forecasters even read the runes and laid out their cards in late October (to beat the competition at their game). Really!

As we look through what we feel are the eight most important charts of the coming 12 months, we also review our predictions from this time last year (spoiler alert - we did not get them all right).

 

 

 

FTSE 100

Starting with this year's most difficult: the FTSE 100 (why make life easy and gloss over our faults?). Still struggling around the psychological 7000 area, as it has done since 1999, it has managed the strongest ever annual close, coupled with a bullish type of candle for 2016. In theory last Friday's close at 7142 should mark the beginning of the next leg in a secular bull market. We worry that the annual close at a new record high is not statistically significant. We also warn that as sterling, on a trade weighted basis, slumped to its lowest some say in a century, this index has really not kept pace with currency devaluation (unlike indices in Argentina and others).

 

  

FTSE All-Share

To this we add the FTSE All-Share, which struggled but managed to rally from support at the 3275 area, as predicted. Though inching to a new record high in October, it remains within the broadening top featured last year. Not really bullish yet.

 

  

Dow Jones Industrial Average

The Dow Jones Industrial Average only made significant gains in Q4 2016 and might be considered a bit of a one-trick pony, benefiting from The Donald's expected helpful hand for US banks.

 

  

US 10-year Treasury yield

However, what is probably more important is the outlook for interest rates. Such a song and dance about the US Federal Reserve raising rates again this year. Yeah! From a record measly low 0.25 basis points to 0.50 in December 2015 to 0.75 in December 2016; big deal. And yes, key US Treasury yields backed up but did so by less than during the so-called 'taper tantrum' of 2013, rallying from a new record low. Secular trend line resistance from 1987 is still totally intact. Retracements have been well within normal parameters - 50 per cent from 2010's high and less than a Fibonacci 38 per cent from 2007 and the start of the banking crisis. Look at history - and think. How can anyone, hand on heart, at the moment say that the reversal in rates over the past six months was truly significant and changes the secular trend?

 

  

UK 10-year gilt yield

The effect on UK 10-year gilts was even more muted. Again from a record low yield for 10-year paper these tripled from a paltry half a per cent to one-and-a-half. Still below the then record low of 2012; retracing just 61 per cent of the latest leg down from 2015. We could go on, noting that UK two-year Gilts again last week traded at record low yields (4 basis points). In Europe key two-year German Schatz yields collapsed in 2016's final week to yet another record low at minus 84 basis points - and UK and US fund managers keep banging on about bonds at current prices being a bad investment. Time to think outside the box, methinks.

 

   

Cable

The foreign exchange market has seen some really serious shifts. Would you believe that Brazil, which suffered its worst recession in a century, has seen the real appreciate by 18 per cent against the US dollar and the key Bovespa index rally by another 76 per cent (low to high)? So much for FX reflecting economic reality. Things don't always pan out as per text books. Over the calendar year, of the major currencies worst hit was the pound, followed by the Mexican peso and Turkish lira (all for political reasons). Far better: the Russian rouble, up 16 per cent against the strongest US dollar in 14 years, where central bank head Elvira Nabiullina (who must have the most difficult job of its kind) also managed to get inflation down to target.

Looking at two currency charts in detail: cable first. Our forecast last year was correct, up until October when a sudden slump to $1.1800 took all and sundry by surprise. It has since recovered, but remains under the key secular chart level at $1.3000. Until it can creep, crawl, hoik, itself above here the danger is for yet more sudden, but brief, downside testing. More realistically, expect a protracted and pathetically slow recovery in what is currently, by historical standards, one of the cheapest currencies in town.

 

  

Sterling/euro

Against the euro life is most tricky as these two dogs fight it out to the bottom. Most analysts agree with us on the tricky outlook (if not on their inherent weaknesses). Last year we pointed out the major struggle around €1.4400, saying a sustained break above here was unlikely; so far so good.

 

 

What we had not imagined was a collapse of an order of magnitude similar to that in 2008. What a mess. Looking long term, just like the probe above €1.4400 was probably a false break, the dip below €1.1100 was another one. A painful, slow recovery for sterling has probably started but progress is likely to be halting and riddled with problems.

 

  

Gold

Gold also proved tricky and while last year it bounced a bit more than we expected – from levels we had described as "not even close to cheap" in 2015 – it's still clearly in a secular bear market. One wonders whether bitcoin might be supplanting precious metals' claim as a store of value.

 

  

As always, nothing is obvious because if it were, we'd be there already. We remind that crowded trades are the most likely to go wrong, of which potentially the most obvious for 2017 is the view for continued US dollar strength. It's already very expensive - with all that this implies for commodities priced in the unit - and anything else for that matter.