The last full trading week of 2016.

* Investors start to square up positions.
* US housing starts tumble.
* China surprises with a stronger fixing.
* Gold rises for a second day…

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

Good morning. The weekend brought the bitter cold temps which the weather folks had promised with the thermometer plunging to single digits for the HIGH here in St. Louis. We also had two separate bouts of freezing rain which made the roads pretty treacherous but that didn’t stop me from getting out with the family to finish up our Christmas shopping. Frank headed back to Colorado where the temps were actually warmer than here, and as usual he found some time to share some thoughts to start the week off; so take it away Frank:

Edwards, Colorado – Occurrences and alternatives. I spent Saturday morning shoveling snow. On Friday around 2pm here it was cloudy and about 40 degrees. I was hiking well up in the foothills nearby and participating in conference calls (modern mobile phone technology is liberating). When we returned, the driveway was wet but clear after some earlier snows. Later after a local company’s holiday event there were about 5 inches on the surface. Heading out about one-hour later the tracks we made coming home were invisible. At our primary residence in Saint Louis shoveling feels like a chore – push enough off to move in and out of the garage and expose the black asphalt until thermonuclear radiation takes care of melting it entirely. Then, well nothing special to do. Here of course there’s a different excitement – powder. Shoveling is just a warm-up for the enjoyment to come. Reports from the mountains suggested 14 inches up high. Context, point of view, and choices may provide a different perspective on the world, and on investing.

It’s funny that Chuck and I have completely different views of the places to be. Chuck has often said here and in person that if he ever sees snow again it will be too soon. For me, sitting on a beach for an extended period of time – or even a pretty short stint – would result in a meltdown. Making a stretch of a connection here it remains amusing to read in all the major press about the extreme strength of the US dollar. It feels like it’s everywhere from political rhetoric to otherwise savvy markets commentary. Maybe it’s just wishful thinking. Running my eyes down year-to-date change tables reveals that in fact it really hasn’t changed all that much year-on-year. The euro is down around 4% against the dollar, while a pretty long list of currencies hold on to gains: Brazil, South Africa, Canada, Norway, New Zealand, and so on. As we have become accustomed to through the election cycle facts and statements in the press couldn’t be more divergent.

After the Fed move last week we did see dollar strength and high yields in most fixed income categories. Perusal of the daily news shows stock prices at sporty high levels. It appears that sight unseen the markets have graded the new administration with an “A”. I will be covering the track record of market predictions in an upcoming article for www.EverBank.com/Insights/ at the first of the year but suffice to say that the grade would be an “F”. This year of course it has been especially unclear since there have been literally no formal definitions of intentions. I’ll be waiting for bills to be introduced and executive orders to be made before trying to make much sense of 2017.

Frank may enjoy shoveling snow, but as I pointed out earlier the precipitation here in St. Louis this weekend took the form of ice with dramatically lower temps. The dollar rally cooled off a bit on Friday also and we start the week off with a ‘mixed bag’ in the currency markets. I mentioned on Friday that we may see investors start to adjust their portfolios for the year end, taking gains where they can be found and staying somewhat neutral going into the New Year.

We received data regarding US housing starts on Friday and the news was not too good. Housing starts were down 18.7% MoM after an adjusted 25.4% increase in October. Economists had predicted the November housing starts to show a 12.8% increase for November, so the miss was pretty dramatic. Building permits also fell MoM with a 4.7% decrease following an increase of 2.9% last month. Housing is probably one of the most important segments of the US economy, and these numbers confirmed the growth here in the US actually slowed a bit in the fourth quarter. This report follows others last week which showed a widening of the trade deficit in October along with weak retail sales and industrial production in November. GDP here in the US is predicted to have slowed a bit from the brisk 3.2% increase in the 3rd quarter, with most expecting Thursday’s report to show 4th quarter GDP at 3.3%.

But the poor US data doesn’t seem to be impacting global investor confidence as the equity markets continued to hit record highs. Bond yields also continued to move higher on Friday, but seem to be taking a breather this morning. The US dollar is drifting lower along with bond yields as investors seem to be cashing in on some of their recent bets that the new Trump administration will be boosting inflation pressures. The Japanese yen was last week’s largest mover, and is reversing some of these big moves this morning strengthening almost 1% vs. the US$. The BOJ is widely expected to keep their negative interest rate policy in place at the end of their two day policy meeting, so any strength in the Japanese yen may prove temporary as other central banks start considering tighter monetary policies.

The pound sterling is the largest mover vs. the US dollar this morning, falling nearly 1% as investors worry about what the details of BREXIT will bring. UK officials have started to talk about a transitional agreement with the EU during negotiations, but the FT reported on Sunday that EU Brexit negotiators are insisting Britian agree to the terms of their exit prior to any transitional deal. All of this uncertainty on BREXIT has weighed on the pound sterling which is now below $1.24.

The Australian and New Zealand dollars are both lower this morning continuing the loses they both sustained over last week. These are two of the worst preforming currencies over the past 5 days as investors feared Australia may be on the verge of losing their AAA rating. The Australian government forecast a smaller than feared budget deficit for 2016, but this relatively positive news was unable to offset the worries about a possible downgrade by S&P.

The New Zealand dollar was also lower this morning but may get some support from data released by ANZ which showed business confidence grew in December. Another report released by Westpac showed consumer confidence gained the most since 2013; rising to 113.1 from 108 in the third quarter. The report stated that households ‘have become much more upbeat about where the economy is headed’ and more upbeat about their own financial situation.

Higher oil prices and a pause in the dollar rally combined to help push the Russian rouble higher. The rouble is the best performing currency vs. the US$ over the past month, increasing over 4.5% vs. dollar in the past 30 days. The OPEC deal to cut oil production along with Donald Trump’s election win have encouraged speculators to get back into this currency which is one of the more volatile currencies which we offer. Some analysts have begun to think western sanctions imposed on Russia following the Ukraine conflict could start to be eased after the Trump election, believing that a Trump administration will be much friendlier than the current leadership here in the US.

China surprised the markets with a stronger fixing price for the renminbi, bucking the recent trend. The PBOC continues to ‘control’ the Chinese currency by setting a fixing price each day and government researchers in Beijing forecast more yuan depreciation ahead. The renminbi is predicted to depreciate against the dollar by 3 – 5% during 2017 according to the Ministry of Commerce. The renminbi has fallen over 6 percent against the dollar this year.

Gold rose is rising for a second day with a $4.81 increase this morning. The pause in the dollar rally along with a slight safe haven bid helped push gold higher on Friday. China’s taking of a US underwater drone on Friday caused a very brief ‘risk off’ rally for precious metals, but tensions eased quickly and gold prices continue to be held in check by higher US interest rates and record equity markets. Richmond Fed President Jeffery Lacker said on Friday that the Fed will likely need to raise interest rates more than three times next year. Janet Yellen will be speaking this week and investors will probably be looking for any further signs that the FOMC will be more aggressive with their 2017 rate hikes. While higher rates don’t always mean lower precious metal prices (Chuck has made this point repeatedly) these higher rate expectations seem to have set a lid on precious metals prices.

Currencies today 12/19/16. American Style: A$ .7255, kiwi .6940, C$ .7472, euro 1.0424, sterling 1.2379, Swiss $.9740 European Style: rand 14.033, krone 8.6895, SEK 9.3805, forint 298.49, zloty 4.2243, koruna 25.883, RUB 61.80 yen 117.20, sing 1.4488, HKD 7.7662, INR 67.832, China 6.9312, pesos 20.407 BRL 3.3702, Dollar Index 103.2, Oil $51.71, 10-year 2.55%, Silver $16.06, Platinum $927.80 Palladium $680.50, and Gold $1,139.88.

That’s it for today. It was certainly an adventurous weekend with two separate rounds of ice storms here in the Midwest. Brendan and I braved the storm to go hunting on Friday night, but didn’t have much success as the ducks just weren’t flying. We did make it home to enjoy a nice dinner with the family and then spent some time with my mom last night to exchange our gifts. I have a very busy week with the big Mizzou-Illini bragging rights basketball game sandwiched between two separate holiday parties. Should be a fun week! Thanks for reading the Pfennig and I hope you have a Marvelous Monday.

Chris Gaffney, CFA
President
EverBank World Markets
1-800-926-4922
https://www.everbank.com