Final week of 2016 begins quietly.

* Start of what looks like a slow week.
* Dollar inches higher in light trading.
* Oil steadies, commodity currencies higher.
* Gold ticks higher…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning. Traffic into work this morning tells me that most folks are taking this last week of 2016 off of work. But the markets are back open and as I mentioned last week the final few days can either bring a whole lot of nothing or some real volatility. Things are pretty slow this week as far as economic data, and with most of the markets trading in a fairly tight range last week I expect things to remain quiet. Frank will get our Pfennig started on this Tuesday morning:

Outer Mongolia Bowl – Boxing Day. I’ve always wondered why it didn’t take off here in the United States. The concept of sharing something gained with those less fortunate seems like a theme that would resonate in this season but for whatever reason it just hasn’t happened. Maybe it was an early rebellion against anything English or since a portion of the origin was aimed at serving people the tradition just did not take hold here. We’ll all changed it to be the day we take the cool stuff we received to the store to exchange it for even cooler stuff we pick out ourselves. Me, I went skiing.

As I have experienced and thought about the true revolutions in technology over the past many years I wonder if a historian looking back 500 years from now will say 1950 – 2050 was the golden age of being a human, or if these fantastic things will turn out to really be – fantastic. I’ll admit I am influenced by speculative fiction and sci-fi with dark views of the future. This is typically framed as government or business out of control. Technology turned against the people. There are certainly examples of this occurring in some of the more dictatorial countries and our own debates about privacy and personal freedom generate some serious concern IMHO. But looking back into history, the years I mention above have been ones where health, personal freedom, economic prosperity (for sure in the first world and I’ll argue that even down to the 3rd it’s relatively better) and lack of global war stand out as unique. Here in the US it has been especially good. But we all know that there is dissatisfaction with where this stands now. Is it something that will be resolved, or do we leave this period of relative excellence behind for the world of “Blade Runner” or “Altered Carbon?”

Many commentators argue that the growth trends we’ve experienced since World War II cannot be replicated. Labor in particular follows the steps in prosperous countries from organization, to better wages, to wages and work rules that become uncompetitive, to outsourcing and finally replacement by technology. We have seen much of this in the US. Japan has been through the boom and bust. And of course Europe has this virus too. As investors we need to try and predict how our governments will react to the noise they are hearing, and place our bets accordingly. I would have money down on a roller coaster of a year in 2017. While the news and various elections provided entertainment this year, the markets were relatively flat. I’ll guess on a lot more volatility to come and a geopolitical event to top it off. Fasten your seat belts.

Thanks Frank, and I agree with you that 2017 could be a heck of a roller coaster ride. But this last week of 2016 is taking on a quieter tone as most of the big market makers and speculators seem to be on holiday. Global stock markets are holding on to their annual gains in light European trading as investors return from Christmas break. One of the items which could lead to some increased volatility in 2017 and maybe even in these final few days of 2016 is the President elect. Donald Trump’s surprise election to perhaps the most powerful post in the world was expected by many to send shivers through investors. But instead the equity markets continue to set new records and both consumer and business confidence has increased. But other data we received last week suggest the actual economy may not help the new administration as much of the data suggest the US economy is slowing a bit during the final quarter of 2016. And with the FOMC taking what many view as a more aggressive stance on interest rates the risk is that the US economy stumbles as we enter the new year.

Investors seem to be happy with just locking in their investment gains for this year. The currency markets in particular are pretty quiet this morning with the dollar index just ticking a bit higher on the back of a lower euro and yen. While the euro is down just a bit, I’m actually surprised it has held up as well as it has with all of the Italian banking concerns. As I wrote last week the Italian government had to step in to capitalize what is known as the globes oldest bank, and there are real concerns that this is just the proverbial tip of the iceberg for the Italian banks.

China has been another source of concern for the markets. You will remember that worries over China and a quick devaluation of the Chinese currency is what set off the big pull back in the markets as the year began. Could we be setting ourselves up for a repeat of 2016? Some economists are starting to talk about another drop in Chinese growth, but data released this morning showed strong profit growth across Chinese industries. The weaker renminbi certainly helped Chinese manufacturers. But will this growth in exports run into the wall built by the new administration’s trade policies?

The Japanese yen dropped a bit in overnight trading as a report showed core consumer prices fell in annual terms for the ninth month. Japan continues to be stuck in a deflationary environment in spite of all of their attempts to generate inflation. Household spending in Japan continues to slump no matter what the government does to try and encourage Japanese consumers to spend.

The pound sterling is the biggest mover vs. the US$ as I turn on the screens. Brexit concerns are again being blamed for the pounds weakness, as negotiations for the exit of the UK from the European Union continue. PM May continues to insist she will call for Article 50 as early as March. I would expect the Pound sterling to remain under selling pressure until Article 50 has been invoked and the real negotiations for a UK exit can begin. The UK economy remains surprisingly resilient, but the currency will probably trade more on speculation than on actual economic data – making the pound one of the more risky currencies to hold next year.

The Russian rouble has been one of the best speculations in 2016, increasing over 21% vs. the US$ YTD. But the rally may not be over for the rouble and it continues to firm a bit entering the final trading days of 2016. Oil steading right around $55 per barrel has helped the rouble, along with the election of Donald Trump who is seen as more Russia-friendly than the current administration. Any mention of easing the sanctions put in place after Russia’s invasion of Crimea could propel the rouble to another year of double digit gains. But investigations into Russian hacking could send the rouble the other way. So the rouble continues to be a very speculative gamble for currency investors (perhaps better for traders than investors.).

Gold ticked higher following the holiday weekend as buyers in China pushed prices up over $1,145. Gold demand in India remained somewhat subdued last week following the cash crunch which was brought on by the Indian government. Silver also ticked higher as well with prices moving above $16 in early European trading. Platinum snapped six straight sessions of losses overnight and Palladium is on track for its biggest one day rise in over two weeks. Overall a good start to the final trading week for the precious metals.

Currencies today 12/27/16. American Style: A$ .7192, kiwi .6891, C$ .7388, euro 1.0448, sterling 1.2255, Swiss $.9720 European Style: rand 13.9195, krone 8.7136, SEK 9.2395, forint 295.25, zloty 4.2140, koruna 25.840, RUB 60.64 yen 117.47, sing 1.4484, HKD 7.7583, INR 68.00, China 6.9462, pesos 20.6177, BRL 3.2795, Dollar Index 103.06, Oil $53.52, 10-year 2.5688%, Silver $15.81, Platinum $903.00 Palladium $657.40, and Gold $1,139.92.

That’s it for today. I had a great LONG holiday weekend and spent a lot of quality time with my two kids and wonderful wife. We had family over on Christmas eve and then had a fairly quiet Christmas day together. Last night we were invited over to an old neighbor’s house for dinner and it was really great to catch up with our good friends, some of whom we haven’t seen in over ten years. I hope everyone has a terrific Tuesday and thanks for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets