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The Krips Report: Reflation Trade Frenzy

By November 13, 2016 No Comments

US and European stocks gave back of their post-election gains, the dollar continued to rally following a remarkable week for global markets.

The shock news of the election of Donald Trump as the US president caused markets to plunge however, this was quickly reversed as ‘reflation trade frenzy’ swept across global markets.  Driving equities and base metals higher and bond prices sharply lower.   The powerful rebound took the Dow Jones to a record on Thursday and up a hefty 4.9% over the week.

The FTSE 100 closed Friday’s session in the red as the pound strengthened against the dollar on reports some MPs are prepared to vote against triggering the formal Brexit process.

London’s top tier index fell 1.43% to 6,730.43 points, while the pound rose 0.21% versus the dollar and was changing hands at $1.2581.

Sterling received a boost after Liberal Democrat, Labour and SDLP MPs told the BBC they are willing to vote against invoking Article 50 in Parliament. Lib Dem leader Tim Farron said his party would oppose Brexit unless promised a second referendum on the UK’s deal with the European Union.

“The pound was expected to rise on last week’s realisation that Article 50 is now in the hands of Brexit-sceptic MPs, and with the US election now out of the way, we are seeing that pound rebound take shape,” said IG’s Johsua Mahony.

Much like a weakening euro was perceived to be good for UK stocks, today’s pound rally is doing little to help the FTSE, which has suffered more than most.

So-called “hard Brexit”, in which Britain loses its access to the single market, is the most likely outcome of negotiations. S&P’s chief sovereign credit officer Mortiz Kraemer said it is hard see how a hard Brexit can be avoided unless both sides become more flexible.

“Nothing today suggests that a common quest for compromise will overcome the gulf that now looks as wide as the English Channel,” Kraemer said.

In economic data, UK construction output hit its lowest level in four years in July to September. The Office for National Statistics said construction volumes fell by 1.1% in the third quarter compared to the April to June period, marking the weakest performance since the third quarter of 2012. Still, this was less steep than the 1.4% drop expected.

Data from Destatis confirmed German inflation was at a two-year high in October. Consumer prices last month rose 0.2% from September and 0.8% from October last year, which is its highest level since October 2014. Meanwhile, the annual rate of inflation came in at 0.7%. This was in line with consensus and the original estimate.

In the European Union, consumer prices were up 0.2% on the month and 0.7% compared to October 2015.

Stateside, consumer sentiment improved more than expected in November, hitting its highest level since mid-2016, according to data released on Friday. The University of Michigan’s preliminary US consumer sentiment index rose to 91.6 in November from 87.2 the month before and 91.3 in the same month last year, beating expectations for a reading of 87.5.

Meanwhile, oil prices plunged after OPEC said its production increased by 240,000 barrels a day in October, reaching an average of 33.64 million barrels per day. Brent crude dropped 3.2% to $44.39 per barrel.  Gold had an even worse time, sinking $26 to $1,233 a troy ounce for a weekly slide of 5.4%.