Originally published by AxiTrader
Market Summary
News that Marco Rubio and Mike Lee got what they wanted and the joint House/Senate tax bill is likely to pass the Congress this week helped Wall Street to close at record highs Friday.
That saw the S&P 500 climb 0.89% to 2,675, the Dow was 0.6% higher at 24,651, while the Nasdaq rose 1.2% to 6,466. Europe was more mixed – naturally given it does not get the tax effect – but the FTSE was 0.57% higher as sterling fell out of bed.
Locally the US move has had a positive impact on SPI traders who added another 29 points after Friday’s lacklustre 0.25% fall.
On forex markets while rates traders haven’t got the memo on growth (10’s 2.35%, 2’s 1.84%) the US dollar is stronger with the dollar index up 0.42% at 93.93. Euro dipped to 1.1750 where it has opened the week this morning. As highlighted above, the pound dropped to 1.3319, while the yen lost the ground it had gained near 112 with USDJPY back up at 112.63. Like the yen, the commodity bloc gave back its gains with the Aussie dollar reversing off the 200 day moving average – it’s back at 0.7658 this morning. The New Zealand dollar has had a wild couple of days it’s at 0.6996 while USD/CAD is at 1.2869 but surely with a downside bias after BoC governor Poloz’s weekend comments (see below).
On commodity markets the battle over the outlook for supply and demand in oil markets is keeping prices within a range. That said, WTI and Brent were both higher Friday and closed the week at $57.30 and $63.23 respectively. Gold can’t retake $1260 and is at $1255 while copper had another good move higher and is at $3.11.
On the day today we get MYEFO and New Motor Vehicle sales in Australia. Japan and Singapore’s trade data is out also while tonight the highlight is Euro Area inflation data. NAHB confidence in the US will also be watched.
Markets are likely to start to thin out this week as we head toward the holidays and year’s end.
Here's What I Picked Up (with a little more detail and a few charts)
International
- On Friday I highlighted that the Atlanta Fed’s GDPNow model had upgraded growth to 3.3% for the current quarter. That’s solid. So it’s worth noting that the New York Fed’s Nowcast of Q4 GDP was upgraded to 3.98% on Friday. BOOM!
- And while I’m on growth here’s one for the flat earth, hand wringing, yield curve knows everything crowd. Also for those of us who think that all the recession stories are just click bait. Via Zerohedge comes a neat yarn (and chart) showing that the pointers to recession just aren’t there right now. Daniel Nevins of FFWiley.com writes:
“In our view, the above chart (GMc: below in my note) is the best way to judge recession risks—with a strong reminder of how current conditions compare to the conditions that shaped past business cycles. That comparison looks favorable as of mid-December, just as it did in August. Here are our takeaways, moving from right to left along the chart:
- Although the yield curve is likely to become more recessionary as the Fed continues to tighten, it’s not yet as flat or inverted as it normally is at business cycle peaks.
- Business earnings aren’t yet recessionary, either, although gains over the last four quarters reflect depressed earnings in 2015 and 2016, which isn’t quite as bullish a signal as it would be if earnings had risen consistently over that period.
- Outside of the commercial real estate sector, lending conditions aren’t constraining borrowing growth, and even CRE lending conditions aren’t restrictive when compared to the last three business cycle peaks.
- Asset gains have been stellar over the past four quarters, far above the flat or declining performance that nearly always precedes business cycle peaks.
We think the last point is the most convincing. Of all the “rules” in economics, the rule that asset prices lead the business cycle is as reliable as any, and they’re a long way from recessionary as of this writing”.
And the chart:
- SO HERE IS THE QUESTION WE SHOULD CONTEMPLATE. Could the US economy surprise the way the Australian economy has for so long now and keep growing for years to come? It could I think. Time will tell. But it is important for markets.
- And on growth, the Bundesbank said Friday that German growth could start to slow after 2018. “Aggregate capacity utilisation could soon reach similarly high levels to those seen at the peak of the last economic cycle in 2007," meaning "it will therefore be increasingly difficult to maintain a rate of growth that is markedly higher than that of potential output,” Buba said. As a result "this broad-based, robust economic upswing is reaching an increasingly mature state, which means that the pace of growth is likely to slow in the medium term and converge to that of potential growth," the report said.
- Here’s a welcome shift in central bank policy. I’m old enough to remember trading in an environment when you didn’t even know what central banks had done with monetary policy. You had to work it out by watching the morning balances for the system and how rates moved. It was an era before central bankers moved to policy by decree, and so far removed from the current situation of forward guidance and not wanting to surprise the markets that it would be unrecognisable to the younger cohort of dealers these days. It is my fervent belief that a little bit of uncertainty is a good thing – it keeps traders and investors on their toes and guards against complacency.
- Of course forward guidance was a policy tool initiated during the dark days of the GFC when measures to calm the nerves of the market were necessary. But like other emergency measures it is a policy tool who’s time has passed. That’s the view of BoC Governor Poloz in an interview with Canada’s Globe and Mail over the weekend (HT to the folks at Forexlive). Governor Poloz said “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too”. Oh and he’s likely to give the Canadian dollar a boost too because he intermated rates need to continue to rise saying “We need to get ourselves up there for real, and to the 2-per-cent zone, so we have room to manoeuvre for the next shock that comes along”.
- Also welcome is news this morning I heard on the ABC that the CIA tipped off Russia’s security agencies to avert a terrorist attack in St Petersburg that was to occur over the weekend. Seven suspects on a suicide mission were apparently detained. Lives saved and cooperation regardless of other tensions. Good news. Not so good, the suicide attack in Quetta. Such is the world we live in ☹.
Australia
- A better day for the local market beckons today after SPI traders added 29 points on Friday night after the day session saw the market lose 14.3 points, 0.24%, to close at 5,997. That’s taken prices back up toward the top of the range. Last week’s high for the SPI was at 6,066 but prices closed back inside this range. Should we see a daily close above 6050 then we could see a decent end of year rally. This range top looks strong however so it could be an interesting battle between the bulls and the bears. Recall that even though the US is shooting higher other markets in Asia are struggling, the Nikkei is caught in a range, as the DAX and FTSE. So while the local backdrop will by buoyed by the US lead a surge higher is not necessarily a lay down misere.
- Today is MYEFO day. That’s the day the Treasurer gives us his Mid-year Economic and Fiscal Outlook. You’ll see a lot of smiling from Scott Morrision because the economy has tracked much better than expected just last May when the budget was delivered. The AFR reports this morning that as a result of the improved circumstances “the government is working on trying to deliver a personal income tax cut to low and middle-income earners without deviating from its promise to restore a surplus. The budget update's improved revenue position should enable that”.
- MYEFO is a political document often but it’s also important for markets as it updates thinking on the outlook for growth and government receipts which feeds into expectations of debt issuance, interest rates, and the Aussie dollar. So it will be worth a read.
- Also worth watching will be whether the fall off in new motor vehicle purchases has continued. November data will be released at 11.30am AEDT
Forex
- European data is not terrible. But US data is finally printing better than that of Europe – at least in terms of the Citibank economic surprise indexes. You can see it in the upgrade to Q4’s GDP model forecasts I’ve highlighted above. So far it hasn’t really helped the US dollar and frustrated US dollar bulls like my rhetorical self (remember my trading self takes signals from my system). But I sense a change is coming. The market is still very long of Euro’s and as at last Tuesday, before the Fed decision was announced, Euro bulls had taken net positions (in terms of specs reported by the CFTC) to the highest level since May 2007.
- That sets up a potential for reversal if – and I say if – a catalyst turns up in the week or week’s ahead. Of course it also shows the conviction of the bulls and highlights the theme I’ve been talking about where the US dollar can hardly take a trick. But this level of positioning and the fact I was part of just 2% or respondents in a big global investment bank survey who though EUR/USD could end the year under 1.16 suggests the balance of risks remains downward for the euro.
- GBPUSD looks similarly finely poised with a risk of further downside. Though positioning is nowhere near as extreme a break of last week’s low at 1.3303 could usher in a fall of at least another cent. USD/JPY looks well supported at 112.00, but would have to breach 113 to break back into the uptrend it broke down and out of last week.
- For the commodity bloc the highlight for me is the failure of the Aussie dollar at the 200 day moving average last Friday. That’s a very important technical and psychological indicator that traders watch. For many it’s the delineation between a bull and bear market. At present, it’s fairly flat and sitting around 0.7691 which makes this 0.7690/0.7700 region an important one for the Aussie. I’ll write more on my AUD/USD daily.
- The Canadian dollar is interesting as well and while it’s trading in its box at the moment the comments by governor Poloz I’ve referenced above could be a catalyst for a break lower.
Commodities
- The battle over the outlook for supply and demand in crude oil markets continues to rage and it continues to keep WTI and Brent in a bit of a range. The question is whether the IEA in PAris is right that US shale is the swing player that can bring barrels to market quickly and thus soak up OPEC's increased demand expectations or whether, as OPEC seems to think, US production will be slower to ramp up. Sometimes the easiest way to understand where a trend is going is to simply extrapolate it. So for mine the IEA is likely right. Especially at these WTI prices and the recent curve shape.
- In price terms that's likely to see the recent range highs cap any price rises. And it puts a downside bias into Brent and WTI. You can see the WTI levels in the chart below.
- Gold is still struggling below resistance and copper pulled up perfectly at the downtrend level I’ve been watching. A break higher would be interesting and could be very beneficial for the Aussie. As usual though I respect these levels unless or until they break.
Have a great day's trading.