Market analysts are starting to wrap up their year’s work and turning their attention to what will happen in 2017.
Citi’s FX team, looking at the technical trading positions of a range of assets, has a note out with a dozen predictions, with some summary statements that helpfully line up with the tune of seasonal favourite sing-song, “The 12 days of Christmas.”
An edited version of the slide deck from analysts Tom Fitzpatrick, Shyam Devani, Dan Tobon, and Beimnet Abebe is below. It’s republished with kind permission and their key calls include:
- The S&P will continue to rise;
- Oil is heading above $US60;
- US consumer price inflation will head “close to 3%”;
- US 10-year Treasury yields have the potential to bust out beyond 4%;
- The US dollar will continue to strengthen;
- The Euro will hit parity with the US dollar and potentially fall below that level, and,
- The gold price will continue to fall.
It’s a good summary of views on some major issues, delivered with some seasonal spirit and the odd gratuitous reference to technical trading terms such as channel bases. But anyone can read this and follow what they see flowing from the charts.
Here we go:
The pack kicks off with a classic bad Photoshop job encapsulating some of the key themes likely to dominate the year ahead. See if you can spot them all...
Here's a summary of the calls. Some disclaimers are highlighted. Now let's get on with it - everybody sing together...
There is strong likelihood that the S&P 500 posts only the third bullish outside year in the last 81 years, in 2016. The other years being 1935 and 1982 after which we saw up years of 28% and 17% respectively.
In the prior 2 cycles the S&P turned 3-4 months after the consumer confidence peaks. Not only does consumer confidence not look like it has peaked but a move over 120 looks very feasible.
A rally similar to that subsequently seen into July 1987 would see crude close to or above $60 by end Q1,2017 at the latest. An inverted head and shoulders and 55-200 week moving average patterns (completed with a weekly close over $52.14) would suggest as high as $70+ in early 2018.
For nearly 60 years the 2.7%-2.9% area on core CPI has been a 'magnet' in both rises and falls in inflation. With economic growth improving and likely getting more stimulus (Fiscal/infrastructure spending/HIA 2) and oil rallying we would expect that range to be revisited in 2017.
We remain focused on 1999 onwards in terms of dynamics in markets and the economy and the rebound in the oil price core CPI in October 2016 is 2.1% (exactly the same as October 1999- 17 years ago). Despite the collapse of the NASDAQ in 2000; the economic slowdown and ultimately the negative feedback loop from 9-11 in 2001, core CPI rose to 2.6% in 2000 and 2.8% in 2001.
Given our positive equity market/economic/fiscal/HIA2/infrastructure spending outlook we suspect we could hit those levels more quickly this time around.
The fifth chart of Christmas truly says to me –- A fall in the T-Bond to the channel base we can see
Fixed income has been in a 35 year post Volcker bull market. Even only a fall to the support area around 127¾ - 129 would suggest a 30 year yield close to 4% in 2017. A break below there, if seen, would suggest that the 35 year bull market has ended.
30 year yield: An outside year in yields would come if you post a lower low than the prior year (already done) then post a higher high than the prior year (3.255%) and close the year above that high. Such a development would suggest a move to at least the 4% area with the potential for an extension towards 5% and possibly even 5.5% further down the line. This potential also exists on the 10 and 5 year yields.
The only part of the 2’s to 30’s curve that cannot post an outside year is the 2 year yield.
We suspect the “most dovish Fed in the history of mankind” will have to be “dragged kicking and screaming” towards a more “normalised path of rate hikes.
Unless and until that happens the path of least resistance will likely be the longer end of the curve (10’s and 30’s) closely followed by 5 year yield.
The path of the 2 year will be much more tied to that of expected Fed moves. As a consequence, for now , we expect the curves to continue to steepen. The curve we watch the most on a “technical” basis is the 2’s versus 5’s curve. It has broken good resistance around 65-70 basis points with notable levels above now being 84-86 basis points (resistance from Nov 2015 and the 200 week moving average); 104 basis points (2015 highs on a weekly close basis) and 135 basis points (major weekly close highs in 2014).
Above there, if seen, would be new territory (not yet our base case) as it would complete a double bottom suggesting another 100 basis points topside. For that to happen we would likely need to have a market that believes that the Fed has been caught as far behind the curve on the downside as it was on the topside in 2007.
The USD (DXY) Index cycle has been closely tied to major US housing/banking crises and recessions (1973-1975,1989-1991, and 2006-2008) From an FX perspective we are more focused on the period 1989-1999. As in 1998-1999 we believe the recent low around 92 seen in May will provide a platform for a move to 110+ in the next 12-18 months. Given we are more neutral on USDJPY around 115 and bullish the CAD given our oil view, this is essentially a bullish view for the USD against European currencies (77.3% of the index) and in particular the EURO (57.6% of the index).
A move towards .9000 looks a very strong possibility in 2017 while there is an outside chance that, by 2018, it could revisit the all time low at .8230.
The technical picture on USDCAD independently still suggests USDCAD around 1.20. That is consistent with an Oil price of $60+.
In both 1982 and 1999, Gold turned higher with commodities in general. This also happened in 2016 (17 year gaps). However, as the USD strengthened: Equity markets rose: the US economy performed well and yields moved higher- Gold returned to its lows again. We expect a similar dynamic in this cycle.
This suggests a move back towards at least $1,034-$1,046 in 2017 with an outside chance (more likely 2018) that sub $900 could be seen.
The 12th chart of Christmas truly says to me – Some LM currencies will do well…with a “stalker” that we will have to wait and see
The weekly moving average setups on USDRUB, USDZAR, and USDCLP remain compelling and suggest lower levels in all three pairs. USDMXN has the 'potential’ for a similar setup but for now remains 'the stalker' of the group.