Linear Talk – Macro Roundup – December 2017

By Colin Lloyd

Globally stock markets were mixed last month but the US made new all-time highs despite the imminent arrival of quantitative tightening. Bond markets were range bound, the US$, which looked like it might rebound last month, faded whilst oil hit its highest level since July 2015.


The Nasdaq made a new high at 6426 on 28th, the S&P testing 2658, in its wake, on 30th. The party appears to be in full swing and, even though we know, the Federal Reserve are destined to take away the punch bowl, hopes of a triumphant Trump tax cut remain supportive. The old adage ‘buy the rumour, sell the fact’ springs to mind.

The German DAX Index made a new high for the year at the beginning of November but, along with other European markets, stalled, amid uncertainty about the political situation in Germany and a couple of earnings misses, in particular from Electricity de France. A small technical intraday trading gap still remains between this month’s low of 12,848 and 12,828.

The Nikkei 225 also continued to rise, testing 23,382 on 9th – the highest for 26 years. The steady QQE policy of the Bank of Japan, which makes investment in JGBs unattractive, may be a partial factor but the relative health of Japan’s banking system and range of first class corporations is also supportive.


Currency markets remained quiet last month. The US$ Index reversed October’s gains, testing 92.43 on 27th. Even the mere discussion of the Trump tax cut appears to be weighing on the UD$ in a manner similar to the Reagan tax cuts of the 1980’s.

EURUSD followed suit, testing 1.1933 on 27th. Political concerns in Germany and Spain were swept aside.

USDJPY was range-bound, although 110.83, the low of the month, was also seen on 27th in the wake of the Thanksgiving holidays.


US 10yr bonds remained in a tight 14bp range, opening at 2.38% and closing at 2.42%. The 2yr/10yr yield curve continued to flatten, however, prompting further suggestions of a US recession next year.

German bunds were similarly constrained, ranging between 31 and 43 bp. They closed the month 1bp higher at 0.37%.

Chinese Government bonds yields increased sharply towards the end of the month. 10yr bonds reaching 4.03%, a level not seen since October 2014. The recent move has gathered momentum since the September 30th PBoC announcement of a targeted lending plan. The new scheme is aimed at providing credit to SMEs and farmers. This will be at the expense of the shadow banks and stock speculators. The PBoC has not increased MTF and SLF rates since March and the base rate remains at an historic low, however, stock operators should proceed with care.


WTI reached $59.05/bbl on 24th, a level last seen in July 2015. The next target is $62.58/bbl which marked the brief rebound after the fall from much higher levels earlier in the decade. Supply, however, is likely to respond quite rapidly to the increase in prices.

Copper, which has been driven by expectations of higher demand from China, took a breather last month. From an open of $3.14/lb it closed the month just off its low at $3.037/lb. Chinese GDP may be backward looking and monetary conditions, which were tightened back in February and March, may be beginning to take their toll.

Cocoa still seems to be dogged by excess supply. Even political tensions in the Cote D’Ivoire have been largely ignored. The recent strength proved transitory with prices closing the month at $1444/ton, near the low of the year.

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