Originally published by AxiTrader
Market Summary (7.42 am)
The pause that refreshes, or something more?
The US dollar stabilised last night making some good moves in forexland while US stocks reversed off their record highs just a little. Key to both moves could be further signs of US consumer strength overnight and the continued upward pressure on US and global interest rates. The US 10-year bond is now at 2.7% while German 5-year rates are above zero for the first time in years.
So as I write the S&P 500 is off 0.5% to 2,858 with the Dow off a similar amount to 26,530. The Nasdaq is a little more circumspect with a loss of 0.4% at 6,994. These aren’t big falls in the grand scheme of things. But like me you’ll probably have noticed the amount of coverage saying the pace is too fast so far in 2018 – that can add some psychological weight if the move lower lasts a few days.
We’ll see.
Europe was mostly lower – though only mildly so with the DAX and CAC off 0.12% and 0.14% respectively. The FTSE managed a tiny gain of 0.08% but SPI traders are currently having none of that and have marked prices down 27 points (they were down just 10 points and hour ago) with the SPI now at 5,983. It’s a bit of an ominous reversal.
Back to forex markets now and the US Dollar Index is up 0.3% to 89.237 a gain that maps the euro's loss and dip to 1.2385. The pound is worst performer amid Brexit uncertainty and sits at 1.4069 off 0.7%. The yen is up 0.2% at 108.95. Of the commodity bloc the kiwi is doing worst down 0.5% to 0.7317 and the fist of the large traded currencies to look like it is at risk of a reversal. The Aussie and Canadian dollar on the other hand are still hanging relatively tough having only lost around 0.15% against the US dollar at 0.8098 and 1.2323 respectively.
To commodities now and oil prices are off 1% or more as thee US dollar recovery and a clear sense that speculators are extended hurt prices. WTI is at $65.48 while Brent sits at $69.35. It really does feel like everyone I son one side of the boat right now. Gold has lost half a percent to $1342 while copper reversed yesterday’s strength in Asia and is off a quarter of a percent to $3.19 a pound.
On the day today we get my favourite monthly release in the NAB’s business survey. Japanese retail sales and unemployment are also out as is NZ trade for December. Tonight its French and EU wide Q4 GDP along with German inflation data which will garner plenty of interest in the European session. The US is a little quieter with the Redbook and Case Shiller home prices the highlights. Two speeches, from BoE governor Carney and ECB member Mersch, will be of interest as well.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Bonds folks, bonds! They are on the rise again with German 5-year rates above zero for the first time in years this morning while the US 10 year Treasury is sitting at 2.7%. If it closes the month at this level it will represent a clear break of the 30 year bull market in bonds. That, as I wrote in my 2018 outlook, is a game changer for markets and asset prices across the globe.
- There is some chance of month end rotation from stocks to bonds if active managers need to rebalance their portfolios to stay within mandated limits. So there is no guarantee the break will happen. Bonds could rally into month end on this. But structurally thee recognition that growth is picking up across the globe is putting upward pressure on rates.
- So, with that in mind I thought I’d share my medium/long term target for US 10’s. It’s a purely technical one. But it is one based on my oldest and favorite system – the Fibonacci extension. So folks, my target for the US 10 year Treasury rate based on a simple 138.2% projection of the move since the 2016 low is 3.14%. That would really shake up credit and other markets if the charts are right.
- Bonds are the market wild card for 2018 as I have written often. But I wanted to highlight what Greg Valliere from Horizon Investment had to say on the outlook overnight because I think it puts the key risks folks are focussed on in context. Greg wrote, “THE GREAT MARKET WILD CARD may not be impeachment (unlikely), or a geopolitical crisis, or trade wars (a concern), or deficits (that's an issue for 2020), or an anti-GOP election tidal wave. The great wild card is the possibility of significantly higher interest rates a year from now because the economy is booming; history shows that an economic growth surge like this one is self-reinforcing. POWELL'S TASK: He needs to dampen frothiness; if cryptocurrencies are a metaphor for a new era, that would be troubling. Powell obviously needs to raise the federal funds rate but he has one very important asset that could keep the 10-year bond yield from blasting off: even now, with a roaring economy and stock market, the demand for safe-haven U.S. Treasuries is remarkably robust”. So, in other words, watch out for bonds. But if everything goes to heck they’ll find plenty of buyers anyway.
- And why are bonds rising? Because as Greg says the US economy is strong. After consumption drove Q4 growth (net exports subtracted 1.1% in Q4) we saw last night that personal income and spending was robust. Spending in December was up 0.4% on top of an upwardly revised 0.8% for November while income rose 0.4% in the month. The core PCE price index was steady at 1.5% yoy.
- On the other side of the Atlantic Reuters reported the German government has increased its growth forecast for 2018 materially from 1.9% to 2.4%. But the key here is that it doesn’t necessarily have the implications for ECB policy that you might think. I say that for two reasons. First the ECB is truly independent. And second, it is a single mandate inflation fighting central bank. Both were forced on Europe by the Germans who wanted a Bundesbank replica. Both now mean that the Germans, and hawks on the ECB governing council, are frustrated that they can’t now force Mario Draghi to do their bidding. So it is worth also noting comments overnight from ECB chief economist Peter Praet that the bank will only stop pumping cash via QE when it is confident inflation is heading toward its target in a self-sustaining manner. Also there was a Bloomberg story citing sources who said when QE ends it won’t end abruptly.
- And while I’m in Germany, IG Metall is getting workers across the nation to stage rolling 24 hour strikes from today. 260 companies will be effected.
Australia
- Mmmm. A great day yesterday on the local market. Not as strong as I would have like to see to prove the bulls were back in control but a good day nonetheless with the ASX closing at 6,075. I was looking for a test and hold above 6,100 to prove the bulls case. So the fact that didn’t happen and that SPI traders knocked another 11 points off prices overnight suggests it might be a bridge too far for now. Indeed looking at the SPI chart yesterday in my morning video I was struck by how I saw the set up as pointing lower. We’ll see of course. But I was surprised as I was talking to camera. It’s an unscripted video so what I say is usually coming straight off the top of my head which means its also what I usually believe. So we need to keep an eye on the SPI.
- Looking at the chart then, it’s clear the SPI failed yesterday and has reversed sharply. It’s off its lows for the past 24 hours at 6,000 right now. I’m watching 5,980 as the key level for the SPI. If that breaks it will be a sign for a deeper retracement lower. EDIT: prices have fallen another 17 points since I wrote this around 6.20am and prices are at 5,9080 – close to a break.
- The Aussie dollar has done relatively well overnight and just below 81 cents is still strong. It’s outperforming the Kiwi which is struggling a little and the Aussie remains firmly in its uptrend. But it is very toppy right now and could easily fall to 80 cents and still be viewed as being in an uptrend. That’s my base case now, the Aussie is due a pullback. The question is how far. I’m watching the Kiwi for clues. But if the Aussie holds below Friday’s highs for a few days then the set up for a decent pullback will have begun. A break of the high and the Aussie would be on its way toward 82 cents. CPI tomorrow is going to be huge!
Forex
- The US dollar’s fall went into hiatus overnight as prices stabilised from last week’s steep fall and volatility and as the greenback started to climb off the mat. It did that with the help of extreme positioning, some more solid consumer data, and as bond rates across the globe started to climb.
- The question now is whether this is just a short-term reversal before more USD weakness continues or the start of a sustainable recovery in the US dollar. After just one day it’s too early to tell. But across a number of pairs the dollar is recovering from important support. Take the US Dollar Index for example, I’d highlighted the 8.30/60 region as support and that is where last week’s low was. Likewise, for GBP and EUR both pairs are retracing off their own resistance and the USD/CNY too rose a little over the past 24 hours after getting within 1.6% of the 6.20 level from where China devalued back in August 2015.
- So there is every chance that this is a decent retracement for the US dollar and that would put some of these extended trends in euro, GBP, Aussie, NZD and so on under pressure. But as I was reminded reading a blog yesterday about the strength of the US equity market “trends weaken before they reverse”. So things might get choppy if the US dollar is to recover. On the other hand if it is not a clear break down and through 88.30 in DXY terms would suggest an eventual run below 80.
- As for today’s Forex chart of the day I’ve chosed the Kiwi because it shows the trend weakness that could, stress could lead to a reversal. Trade could be interesting this morning. And my fast moving average comes in at 0.7286. I have an order to sell a little below that if it breaks.
Commodities
- Commodities continue to have a very high correlation with the US dollars move. So it’s no surprise this morning that oil and gold are lower as the US dollar has risen overnight. But in the case of oil there is a little more to it than just the US dollar move me thinks. For example the Iraqi oil minister was spruiking the nations increased oil capacity overnight while stressing both Iraq and OPEC’s commitment to the production cuts in 2018 yet he also said after that Iraq looks forward to upping production. More telling though is the increased chatter about the level of speculative longs in the oil market at the moment. Data released last week showed a new record long positions for speculators and its getting plenty of attention with market players suggesting the current price is unsustainable.
- To me both WTI and Brent are showing signs the stellar uptrend is tiring. Indeed Brent has broken the uptrend line I highlighted in yesterday’s piece overnight. The easy pullback is to $68.25. Below that and targets back toward $61 and $62 come into the frame.
Have a great day's trading.