CTA Investment Signals – January 2018

The markets took to the new year holding the same views seen in the previous one. Continued investor confidence pushed markets higher, supported by strong corporate holdings and favourable economic policies. Combined with steady productivity growth levels and advancing oil prices then market trend continued. Consequently, the CTA investment signals produced positive returns by capitalising on the clear market trending views. World economies stayed on their path towards continued growth. On a macro economic or political level few obstacles could be seen to have the momentum to disrupt this trend. The market sentiment for January was a clear ‘risk-on’ trading strategy across the board.

Growing confidence in the strength behind the financial markets does as signal caution though. As a result the central banks seek to safe-guard against the potential inflation risk. During January the Canadian central bank raised their overnight lending rate to 1.25% on their global outlook views. Therefore the growth in this underlying economic expansion caused most government bonds to weaken. Most notably in the US treasury markets. This combination of increasing inflationary pressures and rising global bond yields places a limit on soaring equity markets. As investors guard against a potential equity sells-off, shifting market sentiment adds volatility to CTA investment signals.

The Declining US Dollar

One of the standout market moves so far this year was the decline on the dollar against other G-10 currencies. Over the course of 2017 the US dollar broadly weakened. This was a consequence of the economic global growth outpacing the US economy. This economic imbalance had been pressuring the greenback lower during the course of the year. In 2018 the decline was accelerated on the comments from the US administration. The message was clear in that a weaker dollar would be good for the US economy. Therefore as the first month of the year closes, the dollar is at a three year low against the euro.

The weaker dollar exchange can also be attributed to the strengthen Eurozone economies. Consumer confidence along with key business output indices are at high levels. These indicators are signs of a Eurozone set on a path of economic recovery. This is despite earlier periods of political tensions for many EU-members. Consequently, investors are observing the views from the ECB on their monetary policy language. Markets will seek to react when the ECB hints on the possibility to reduce this stimulus stance. Looking forward as the European earnings season takes center stage, expectations point towards modest growth. The CTA investment signals will seek to capitalise on the positive economic backdrop.

Bond Price Pressured Lower

The US economy has displayed a broad picture of strength over the past 12 months. However, this does not mean that there have not been pockets of weaknesses dragging the economy lower. The economy expanded during periods of manageable unemployment, without displaying the expected wage growth. As a consequence inflation numbers remain fairly low, but the need remains for central banks to reduce their monetary stimulus. This gradual unwinding will place downward pressure on government bond prices.

As the Fed expanded its balance sheet via quantitative easing, the interest rates on long-term bonds broadly declined. Therefore following the recent run-up in US Treasury yields there is a sense of a rally which has run its course. The fixed income market traded ranges last year, and even though treasury yields have not reached year highs a pull-back is anticipated. As opposed to last year, China is reportedly reducing its US bond purchases. Trade tensions have emerged between the two nations and US government debt can be losing its investment appeal.