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Market Lab Report - Premarket Pulse 1/3/17

Major averages closed lower to end the year on higher but below average holiday volume. As we have written, at no time in history has this QE bubble ever deflated gently. This seems to be the market's biggest headwind for 2017. The US Federal Reserve is now on course to hike potentially three more times this year. After central banks have printed themselves into a monetary corner, the US Fed realizes they better start raising rates or they will have no "fuel" to resuscitate the economy from the next recession which could turn out to be far more serious.

Since 1929, every bubble that burst due to Fed rate hikes came at a time when interest rates were significantly higher. Thus, the Fed was able to lower rates to spark a recovery. This time, rates are still near historically low levels, which makes this time different. Indeed, over the last two years, rates have never been lower in the history of the United States.

China's December Caixin manufacturing PMI came in at 51.9. This was up from 50.9 a month ago, and the strongest level since early 2013. However, Chinese citizens continue to move currency outside of China beyond the maximum annual limit of US$50,000. To get around this maximum, an increasing number of Chinese have been using bitcoin to convert their yuan for quick transfer via cyberspace into accounts outside of China. Indeed, bitcoin broke through $1,000 on the first day of this year as it set new market capitalization highs above $15 billion.

Oil prices moved sharply higher on Tuesday on hopes OPEC’s deal to cut production that set in on Sunday will help stabilize the market in 2017. The jump was fueled in part by expectations members of OPEC and other major producers will abide by an agreement to curb output. The output quotas kicked in on Jan. 1. Market participants are now waiting to see if both OPEC and non-OPEC producers will stick to their part of the deal.

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