Markets outlook: a slight hangover likely despite a bullish start to 2014

This month should provide good opportunities in the short term, but the outlook is mixed for the first quarter.

Throughout last year, uncertainty surrounding the US Federal Reserve action and the timing of the taper, coupled with the bipartisan political rift that held Washington hostage, kept risk sentiment in check.

However, with developments in December, perhaps the two largest drivers of market risk of the past year were essentially put on hold.

In his last meeting as Fed chairman, Ben Bernanke pulled the plug on his record US$85 billion a month quantitative easing programme.

Following the embarrassing US government shutdown in October, Democrats and Republicans finally managed to reach across the aisle to agree a new budget deal that will see $63bn in spending cuts reinstated; thereby circumnavigating another US government shutdown.

Although we approach another debt-ceiling debate in mid-February, much of the uncertainty stemming from these events are now on the back-burner, with markets likely to focus on the fundamentals this month.

With the focus turning back to the recovery and the global growth story, the recent run of US data would indicate a bright start to the 2014 macroeconomic picture.

The US jobs market continues to build on its impressive gains over the past quarter.

We expect to see another 200,000 plus gain in December’s report following the gain of 203,000 in November.

With the most recent US GDP for third quarter printing at 4.1 per cent (smashing expectations of 3.6 per cent), these data points should vindicate the Fed in any debate of whether the taper was introduced too early.

The start of the US corporate earnings season this month and the expected run of stronger data from the US, equity markets should continue to march to new highs with the US dollar likely to remain on the back foot in the initial weeks of this year.

However, in the context of a historically bullish December, we will no doubt see a hangover effect bringing a slight correction to markets – but this should open the door for fresh, long entry opportunities.

With the picture for January looking bright, the outlook for the quarter remains cautious at best. February will see the renewal of the debt-ceiling debate take centre stage.

Assuming the success of the amicable bipartisan negotiation from December, we expect to see the event pass without a breach, but any delays as a result of political posturing will see volatility return to markets.

Also, the first Federal Open Market Committee meeting of 2014 is due at the end of the first quarter.

With the introduction of the taper, the Fed has embarked on a historic unwinding of massive proportions.

Mr Bernanke left the door open to future announcements without further tapering, and once again markets will scrutinise upcoming data to gauge if further reductions to the now $75bn a month programme is on the cards.

With inflation stubbornly low and with our expectations of a continuing improving US data docket, the Fed will be on target for a further reduction in March, which markets will pass off as a non-event.

Looking ahead, along with the gains in US equities, January should see the euro test the 1.40 channel against the dollar, with gold expected to maintain its bearish sentiment with support at $1,180 an ounce.

The dollar has put in a solid performance against the Japanese yen over the past quarter, and with risk sentiment on a high, further upsides are expected.

Keeping this in mind, this month should provide good opportunities in the short term; however with the mixed outlook for the first quarter, any exaggerated gains remain in check.

Gaurav Kashyap is the head of futures at Alpari Middle East