European markets continue to make further gains, with the sheer scale of the global rally demonstrating how investors are embracing all things equity and risk related, basking in the euphoria of synchronous global growth.
Equity markets, which were already strengthening well in advance of Trump’s $1.5 trillion tax cut, or indeed a prospective US infrastructure bill that could form the centrepiece of 2018 legislation, show no sign of any stress, with new record highs an almost daily occurrence.
With the party in full swing and implied volatility at such low levels, markets are seemingly immune to any possible downside, but the key risk that might ultimately bring markets down is inflation.
A material increase in inflationary pressures would potentially force central banks to tighten rates faster than the market is expecting.
For markets which have become accustomed to the idea that the Federal Reserve, Bank of Japan, European Central Bank and others will do whatever it takes to keep markets buoyant, a shift to a genuinely hawkish bias could come as something of a rude awakening.
Today’s non-farm payrolls therefore takes on even more significance, with the possibility that average hourly earnings could prove just as important as the headline payrolls figure as an indication of whether the US economy, which is already operating at close to capacity, will finally start to show signs of the inflationary pressure that has been elusive to-date.
Although we saw a slight pull back in prices this morning, oil remains at close to three-year highs, benefiting from political tensions in Iran as well as the exceptional cold snap currently affecting north America, forcing power companies to burn heating oil as well as natural gas to meet elevated household demand.
Ultimately, these elevated prices should encourage additional US shale supply, but in a global market rebalanced by OPEC cuts over the past year, near-term shortages caused by the spike in demand are sustaining higher crude prices.
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