It was an upbeat start to the new year with global stocks ending the week at record levels as investors’ risk appetite remained buoyed by optimism over the prospects for growth in 2018. News flow was relatively light, with oil prices nearing a three-year high, as rising political tension in Iran prompted concerns over a supply disruption. Mining companies were particularly upbeat as metals prices continued their bullish run, while there was mixed news on Christmas trading from the UK high street.
Underwhelming reports on the US labour market and service sector activity did little to undermine the bullish mood. Non-farm payrolls were some way short of expectations, while the jobless rate held steady at a 17-year low of 4.1 per cent for the third successive month.
Minutes from the US Federal Reserve’s December meeting indicated that officials continue to back gradual increases in interest rate hikes, alleviating fears that the new tax legislation might raise inflation and require the Fed to raise interest rates more aggressively in 2018.
Looking ahead to 2018, many of the macro drivers for 2017 seem set to continue. The enactment of the US tax reform, coupled with a continued stream of decent data releases across regions, has made for a revival of the reflation hype that similarly grabbed markets at the start of 2017. Geo-political risk has also reduced somewhat, particularly after the North Korean leader announced that he was open to dialogue with South Korea.
Volatility remains low and markets are shrugging off the reduction in stimulus that we have started to witness, perhaps due to its gradual and steady decrease. The biggest uncertainty remains attached to bond markets as liquidity is gradually squeezed.
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