Tuesday January 3 2017 Daily Market Primer

Happy New Year.  The US stock market finished the last trading day and the last week of the year down, with the S&P down .5% on New Years Eve, but had a strong finish to the year, with the S&P up 12%, the Dow up 13%, and the NASDAQ up 7.5%.  This rally extends the bull market to 8 years, which is the second longest running bull market in history.  The dollar had a strong rally, and yields were basically flat for the year, in spite of a big rally in the first half and a big selloff in the second half.   This week, we have the December jobs number to look forward to on Friday.  Oil is rallying strongly on positive supply news, with WTI hitting almost $55 this morning and the European benchmark, Brent crude, at $58.  Asian and European stocks were up in the first trading day of the year, and the US looks all set to follow suit, with the S&P futures up .6%, and the market did open up 140 points on the Dow.

	LAST	CHANGE	% CHANGE
DJIA	19,762.60	-57.18	-0.29%
Nasdaq	5,383.12	-48.97	-0.90%
S&P 500	2,238.83	-10.43	-0.46%
Russell 2000	1,357.13	-6.05	-0.44%
Global Dow	2,530.22	-4.71	-0.19%
Stoxx Europe 600	366.04	2.86	0.79%
Nikkei 225	19,114.37	-30.77	-0.16%
UK: FTSE 100	7,178.89	36.06	0.50%
CBOE Volatility	13.87	-0.17	-1.21%
Australia: S&P/ASX 200	5,733.20	67.40	1.19%
China: Shanghai Composite	3,135.92	32.28	1.04%
Hong Kong: Hang Seng	22,150.40	149.84	0.68%
Europe Dow	1,568.31	-10.07	0.18%
India: S&P BSE Sensex	26,643.24	47.79	-0.64%
France: CAC 40	4,904.04	21.66	0.44%
Germany: DAX	11,598.25	-0.08	0.00%
Italy: FTSE MIB	19,719.53	153.00	0.78%
Spain: IBEX 35	9,467.10	48.40	0.51%
U.S. 3 Month	0.518	0/32
U.S. 2 Year	1.238	-2/32
U.S. 5 Year	1.995	-10/32
U.S. 10 Year	2.511	-18/32
U.S. 30 Year	3.125	-1 2/32
Germany 2 Year	-0.782	-1/32
Germany 10 Year	0.254	-21/32
Crude Oil	54.92	1.2	2.23%
Brent Crude	58.04	1.22	2.15%
Natural Gas	3.45	-0.234	-6.35%
S&P GSCI	402.21	4.01	1.01%
E-mini S&P 500	2250.5	14.25	0.64%

Our two favorite factors, value and size, came roaring back last year, shown in this style returns table.

Barron’s magazine is “Saving America” again, this time finding a way to cut $8.6 trillion in US expenditures over the next 10 years http://bit.ly/BarronsUSGrowth.   Let’s hope the incoming administration is reading.  President-elect Trump made several key appointments to his cabinet over the last few days, including former Regan administration trade rep Robert Lighthizer, a known China critic, to lead the US Trade Representative office.   Two positive data points in Europe are starting the year, as UK manufacturing growth for December surprised on the upside, with German unemployment fell.   Indonesia is punishing JP Morgan for publishing negative research on the country, by dropping them from some government service deals.  Mr. Trump is busy Tweeting about GM this morning, threatening them with tariffs for offshore manufacturing, and about Obamacare.  Here are the last three:

Here’s the news:

Crude rally

A barrel of West Texas Intermediate traded above $55 this morning, the highest level for the contract since July 2015. The rise comes after local media in Kuwait reported that the country has cut output by 130,000 barrels a day, a sign that the OPEC deal to reduce production may be implemented successfully. In the U.S., drillers added rigs for the ninth week, boosting the number to the highest in about a year.

China attempts to control capital

Chinese citizens converting yuan into foreign currencies face new requirements as of Jan. 1, including having to pledge that the money will not be used to purchase overseas properties. While there are doubts over whether the new policies will do much to stem flows from the yuan, the effects could be seen in the share prices of Macau casino operators, which slumped in overnight trading. Authorities in China added 11 currencies to the yuan reference basket last week, reducing the weight of the dollar to 22.4 percent, a move that has analysts in disagreement over whether this will increase or decrease the currency's volatility.

U.K. manufacturing rises, German unemployment falls

Manufacturing in the U.K. grew at the fastest pace in 2 1/2 years in December, with the IHS Markit Purchasing Managers Index coming in at 56.1 for the month. In Germany, unemployment dropped by a seasonally adjusted 17,000 — more than the 5,000 expected by analysts — while inflation jumped by 1.4 percent, putting pressure in bond yields across the euro area this morning. Manufacturing and services data from China showed the economy there continues to be robust, while Markit manufacturing data for the U.S. is due at 9:45 a.m. ET.

Markets rise

Global equity markets are starting the new year on the front foot. Overnight, the MSCI Asia Pacific Index excluding Japan Index gained 0.4 percent, boosted by positive China data. In Europe, the Stoxx 600 Index was 0.6 percent higher at 5:20 a.m. ET. The index is set to enter a bull market should the level hold into the close, with gains of more than 20 percent since February's low. S&P 500 futures added 0.6 percent.

Trump's trade representative

President-elect Donald Trump has picked China-critic Robert Lighthizer to head the U.S. Trade Representative office, according to a person with knowledge of the matter. If confirmed, the appointment, coupled with that of Peter Navarro last month, would show the PEOTUS intends on following through on his campaign promise to take a hard line on China. Stock markets all over the world are opening 2017 with a bang. China's Shanghai Composite (+1%) paced the gains in Asia, and Italy's MIB (+1.7%) leads the advance in Europe. Here in the US, the Dow is on track to open higher by 0.9% near 19,932. The dollar is flying. The US dollar index is higher by 0.6% at 103.39, and it is on track to close at its best level since the end of 2002. The greenback is higher against all of its major peers, with its biggest gains coming against the euro (+0.8%). Bonds are getting crushed. Heavy selling has yields across the Treasury curve up about 6 basis points apiece, with the 10-year reaching 2.51%. Selling isn't limited to just the US, as yields are also screaming higher across Europe, where the UK 10-year is up 9 bps at 1.33%. Crude oil soars to an 18-month high. West Texas Intermediate crude oil trades up 2.3% at $54.93 a barrel following confirmation that both Kuwait and Oman have lived up to their promises to cut production, Bloomberg reports. Brent crude oil, the international benchmark, is higher by 2.2% at $58.08 a barrel. Bitcoin is above $1,000.The cryptocurrency trades up 0.8% at $1,020 per coin after crossing the $1,000 mark for the first time since 2013 on Monday. China is tightening control of capital. Beijing announced new rules aimed at slowing the flow of capital out of China. The measures include requiring citizens who take money out of the country to pledge it won't be used to buy property overseas and calling on banks to report any overseas transactions valued at $10,000 or more, Reuters says. The state-run media organization Xinhua has denied the measures are capital controls. UK manufacturing is booming. Markit UK Manufacturing PMI hit 56.1 in December, making for the best print in 30 months. "The UK manufacturing sector starts 2017 on a strong footing. The headline PMI hit a two-and-a-half year high in December, with rates of expansion in output and new orders among the fastest seen during the survey's 25-year history," wrote Rob Dobson, the senior economist at IHS Markit, which compiles the survey. The British pound is little changed near 1.2275 versus the dollar. 2017 could be a busy year for tech IPOs. Blue Apron, Dropbox, Snap, and Spotify are among the tech startups that are candidates to go public this year. Cantor Fitzgerald hires Anshu Jain. Cantor has named Jain president about 1 1/2 years after he resigned as co-CEO of Deutsche Bank following a series of regulatory troubles. Twitter's China boss is out. Kathy Chen has quit after eight months on the job, Reuters reports. In a tweet announcing her departure, Chen wrote, "Now that the Twitter APAC team is working directly with Chinese advertisers, this is the right time for me to leave the company." US economic data flows. Markit manufacturing PMI will be released at 9:45 a.m. ET before both ISM Manufacturing and construction spending cross the wires at 10 a.m. ET. Welcome to Washington The nation’s new, all-Republican leadership begins to take power Tuesday with an ambitious agenda of tax cuts, regulation rollbacks and repeal of President Obama’s health law, but they face a complicated legislative path. House Republicans on Monday night took steps to eliminate the independence of the Office of Congressional Ethics, the chamber’s nonpartisan ethics board, a move that triggered pushback from Democrats and government watchdog groups. The measure is now part of the package of new House rules set to come up for a vote on the House floor Tuesday. The Senate’s opening move in dismantling the Affordable Care Act, also coming as soon as Tuesday, will be to initiate a controversial process to repeal parts of the law. Meanwhile, tensions within the GOP over how to handle Russia are becoming increasingly public as the Senate prepares for confirmation hearings on President-elect Trump’s nominee for secretary of state, Rex Tillerson, and presses ahead with a review of alleged Russian cyberattacks during the 2016 election. Rental Woes Landlords of upscale properties across the U.S. are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions as a glut of supply brings a seven-year luxury-apartment boom to an end. Developers in New York are already offering up to three months of free rent on some projects. In Los Angeles, some landlords are offering six months of free parking, and some in Houston are waiving security deposits. The slowdown is being driven not by a pullback in demand but rather a flood of new apartments, with most recent new construction on the high end. Rising rents in the past few years have helped buoy the housing market, but the flattening of rents in 2017 could shift the financial equation back toward renting, posing potential challenges to the housing market Tax-Deferred Misgivings The champions of the 401(k) now lament the revolution they started. More than three decades since its advent, the tax-deferred savings tool has fallen short of its early backers’ rosy expectations, while 52% of U.S. households are at risk of running low on money during retirement. What proponents of the now dominant vehicle for retirement savings didn’t anticipate was that it would largely replace pensions as big employers looked for ways to cut expenses. Some early backers acknowledge they used forecasts that were too optimistic to sell the 401(k) in its early days. Others say its proliferation has exposed workers to big drops in the stock market and high fees from Wall Street money managers. We look at the several attempts that have been made to make the 401(k) more effective by changing the behavior of savers and companies.

The dollar rally is adding to uncertainty as Fed weighs 2017 rate hikes.

The biggest economies face a $7.7 trillion bond tab as bull run ends.

House GOP votes to strip ethics office of independent status.

Deutsche Bank's former rainmaker is joining Cantor as President.

These are the most popular investor picks for emerging markets in 2017.

Solar could beat coal to become the cheapest power on Earth.

Grab your ear muffs, the new year's arriving with a frigid bang. The Method in Donald Trump’s Maddening Communications Habits Russia Blocking Afghan Peace Deal SpaceX Launches Set To Resume In January Businesses Ramp Up Investment Despite Rising Rates For Financials, Expectations Are Already High Central Banks Loosening Their Grip on Markets

There's an old saying: "As goes Baden-Württemberg, so goes the world." Okay, that's not actually an old saying, but you still might want to pay attention to the southwestern German state today. Its inflation data came out this morning, and at 1.6 percent year-over-year, the number is double what economists expected. In fact, the pace of price gains in Baden-Württemberg is the highest since July 2013. The state isn't alone as inflation data published this morning from several regions in Germany all showed price increases coming in hotter than expected. This data is a perfect way to start the new year as rising inflation is certainly one of the top themes for 2017 all around the world. Some, of course, see this as welcome news after years of dormant prices. Others see this as more bad news for the bond market and they fear that it will mean an aggressive pace of Federal Reserve tightening. Either way, one of 2017's big stories has started the year with a bang.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, Barron’s, Goldman Sachs