The Great Stock Party

Today's Highlights

What a Crazy Party!

The BoE's Last Trip Wire

Please Note: All data, figures & graphs below are valid as of January 26th. All trading carries risk. Only risk capital you can afford to lose.

 

The Great Stock Party

There's a massive party going on right now, not just in New York, but around the world as stock traders are taking the Dow 20k as a positive omen and are currently buying everything they can. 

Not only did we see record high levels for the three American indices, but stocks had a huge pre-party in Europe and are currently attending the afterparty in Asia. It's a good time to be a stock.

The Ger30 led the gains in Europe yesterday climbing a total of 1.82%. The price actually rose above my chart and off the screen so I can't even see where it's going now.

The Jpn225 is completely drunk by this point with a gain of more than 2%. I think I saw Toshiba over there somewhere barfing behind a bush.

In order to fund the party, it seems that other assets were sold. Gold fell like a stone dropping right through the $1200 support. 

The US Dollar had a few wild swings as well yesterday. At the moment the USDOLLAR index is flirting with the 100 points level.

Unfortunately, the tech nerds were not invited to the party and Bitcoin has moved a single inch.

The weirdest thing about all this though, is that as the stocks are at all-time highs volatility is at all-time lows. The VIX index closed yesterday at 10.81, its lowest point since January 1st, 2007.

 

BoE's Last Trip Wire

Alright, let's get serious for a moment.

Today sees an important data announcement from the UK. This is the last big number coming out before the BoEs big meeting on February 2nd.

The Pound has been flying since the beginning of last week for two reasons. One on the surface and one below.

On the surface: Theresa May's "clean brexit" speech gave hope that the uncertainties of brexit have subsided and investors are ready for a complete recovery of the British Pound.

There's no doubt that the Pound Sterling is weak at the moment, but what our clients in the UK want to know is, when will the GBP make a full recovery? When will we see the GBPUSD again at 1.7? 

Below the Surface: The economy has been doing great, but the weak pound is causing inflation. In order to keep the inflation in check, the Bank of England may need to start raising interest rates relatively soon.

Market expectations of a rate hike this year are rising. When we spoke about this 10 days ago the market expectations of a BoE hike in 2017 were just 28.4%, that number has now moved up to 48.7%.

In this chart, we can see the markets expected probability of a hike on December 14th, 2017.

The numbers coming out today are the last possible trip wire for the Bank of England. If the numbers come out good, they can feel very comfortable to start signalling a rate rise and send the green line above, along with the Pound shooting to the sky.

If the numbers turn out sour, it will complicate things for them. It's much more difficult to signal a rate hike when the economy is performing below par.