Originally published by AxiTrader
Market Summary
Make no mistake, folks - the bond market and its vigilantes are the scariest force in financial markets. It’s the case now and it’s been the case that interest rates, bonds, and rate products lurk somewhere in every market conflagration since the run on the Knickerbocker Trust in 1907.
So it is no coincidence that with US 10's failing to to break and hold above 2.95% for the second time in a month last week that the subsequent rally in US stocks from its lows and again on Friday was accompanied by a more benign bond market which had ingested the massive supply from the US Treasury last week and seen the curve flatten.
At the close of trade in New York at week’s end the2-year Treasury rate was at 2.24%, the 10 back at 2.87% and thus the curve was back 63 points – along way from the February high of 77.4 points.
Thus US stocks were able to have a positive close to the week with the S&P 500 up 1.6% to 2747 – just above important Fibonacci resistance. The Dow rose 1.4% Friday to close at 23,509 while the Nasdaq 100 was 1.99% higher at 6,896.
Europe missed the best of the price appreciation which happened in the last few hours of trade and was thus mixed with the FTSE down 0.11% and the DAX and CAC up 0.18% and 0.15% respectively. But the SPI 200 was still open so futures traders here at home were able to hitch a ride with the SPI adding another 31 points – to 6,004 – on top of Friday’s stonkingly good 0.82% rally on the ASX 200 which closed tantalisingly close to the 6,000 mark at 5,999.80.
Earnings have been robust and a positive global backdrop surely calls 6,100 maybe even 6,150 into the frame.
On forex markets, the Aussie rode the coattails of the buoyant attitude toward risk higher closing the week at 0.7843. Lower certainly from the previous Friday’s close but about half way back from the lows of the week. The euro looks to be struggling however at 1.2293 while the yen is off its highs as well with USD/JPY at 106.88. GBP/USD is at 1.3965 and the kiwi's capitulation seems finally upon us – it’s at 0.7288.
On commodity markets, oil looks to have broken higher and set to retest this year's highs after spending the last two week’s consolidating before the late week rallies. Brent is at $67.31 and WTI is at $63.55 – both made gains of more than 1%. Gold is largely unchanged at $1328 while copper dipped around 1% to $3.20.
On the day today it is a quiet start to what could be an important week with speeches from ECB president Mario Draghi, Fed chair Jerome Powell, and of course US GDP, PCE and non-farm payrolls on Thursday and Friday US time respectively.
There are also a raft of other central bank speakers, German inflation US durable goods among other things. Here in Australia, the back end of the week sees the release of the partial indicators for next week’s Q4 GDP release including CapEx.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Bonds, bonds, bonds. They are the key to everything right now but it appears that we may be seeing a stall in the US 10’s below the important 3% level. That’s instructive as I highlighted in last Monday’s post with the chart set up suggesting a move back to 2.81% maybe even 2.71%. That remains a chance especially because we have seen both German and UK 10’s break their recent uptrends over the past week. That’s going to be important for stocks, and for forex markets because what’s behind it is weakness in economic data. I’ll have a separate piece out this morning with a quick look at the pressure on the euro from the economic and rates moves. But for now here is the chart of the US, German, and UK 10’s. Maybe we’ve reached peak economic optimism for the moment? Stocks are reacting as if that’s a good thing because of the pressure it releases from them as rates stop increasing.
- But just quickly on the US economy, the US dollar, and Europe. Check out this chart. As I highlighted last week EU data has collapsed. The Citibank Economic Surprise Index for Europe has collapsed to -4.1 which is its lowest level since September 2016. The G10 CESI has fallen as well, the UK has dipped, and Canada has collapsed yet the US is holding up at +50.1. That’s important FOREX traders because it drives rates expectations and policy divergence.
- And on policy divergence, influential San Fran Fed president John Williams said Friday he expects 3 to 4 rate rises this year as “the right path”. While across the Atlantic BoE deputy governor Dave Ramsden said wages may lift faster than expected meaning the BoE may need to raise rates “somewhat sooner rather than somewhat later”. The ECB and BoJ are still pumping money into their banking systems don’t forget
- Warren Buffett is all over the news after the release of his annual newsletter. There are many things he’s written which are important to think about. But this one on valuations might be germane to the overall stocks conversation. Buffett said Berkshire was struggling to find a deal to do. “in our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price,” Buffett wrote. “That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.”
- Here comes the second leg of Trumponics stimulus – austerity. An oxymoron? Yes, absolutely. But I framed it that way after reading on Bloomberg that Mick Mulvaney, White House director of the Office of Management and Budget said over the weekend that at the current economic growth rate government revenue will rise faster than spending and debt servicing, “if we can control our expenses and grow the economy”. Not many folks agree with him by the way.
- On my enduring theme that we might also be or have reached peak tech giants. Check out this poll from Larry Tentarelli. Larry is a well known trend follower with 44 thousand followers on Twitter and is conducting a poll on how often respondents check their Facebook. Even adjusting for a “Twitter” audience and the likelihood of underreporting by respondents, Facebook (NASDAQ:FB) might have a problem. My guess is this poll would have been very different 2 years ago. Me? I have Facebook for family and the kids' sports teams. I check it twice a week. Instagram – for surfing pics – 3-4 times a week.
- GEOPOLITICS: Couple of things – Turkey and others have again expressed their disquiet over the administration moving the US Embassy in Israel to Jerusalem by May this year. Turkey said the US was damaging peace. And there is not much of that in and around Syria though. The big face off continues and although the UN finally voted on a cease-fire for a time there is no sign the Assad regime is keen to comply. Though Russia did vote for it in the Security Council. CHINA has said that new US sanctions targeting companies and individuals that do business with North Korea threatens cooperation on the Korean Peninsula. China’s foreign ministry said in a statement, “China resolutely opposes the U.S. side enacting unilateral sanctions and ‘long-armed jurisdiction’ in accordance with its domestic law against Chinese entities or individuals,” the ministry said adding “we have already lodged stern representations with the US side about this issue, and demand the US. side immediately stops such relevant mistaken actions to avoid harming bilateral cooperation in the relevant area”. Why’s it matter? Geopolitics is the mostly likely area for a Black Swan to emerge in 2018 it seems (and yes I know that that is a stupid statement because we never know where a Black Swan will come from).
- AND SPEAKING OF CHINA, HUGE NEWS over the weekend that the country is going to change the constitution to allow President Xi to rule beyond his mandated term, which ends in 2023. The NYT reports the term limit will be abolished. The party leadership, “proposed to remove the expression that the president and vice-president of the Peoples republic of China ‘shall serve no more than two consecutive tems’ from the countries constitution,” the NYT said citing Xinhua.
- Latvia’s third largest bank, ABLV – the one caught up in the DPRK money laundering accusations – has folded. The ECB withdrew support after a run on the bank since the scandal broke. The EU’s Single resolution Board and the ECB said Saturday this was because saving it was not in the public interest. European banking, butterfly wings???
Australia
- For so much of 2017 I was writing about – and we were all watching – an utter underperformance of the Australian stock market relative to the US and globe. In no small measure that was because it looked and felt like the “Trumponomics” rally had little resonance here in Australia because we had a different economic outlook. But the latest earnings season shows that a focus on costs, a global economy that is doing well, and a domestic economy that is doing better than many feared has been the furl to earnings which are printing very much on the stronger side of the ledger. The AFR put it perfectly on Friday when it said, “investors are witnessing an unlikely turn of events in the Australian sharemarket – more companies are upgrading earnings than downgrading”. Based on UBS research the AFR reported, “Around 33 per cent of large cap results were better than expectations, and only 15 per cent fell short. In the previous reporting season, only 14 per cent of large cap results were beats and 25 per cent of results missed”.
- So it’s no surprise that the ASX held up so well last week. That it not only showed resilience in the face of offshore weakness in stocks but that it also took part in the rally in those stock markets as they bounced back. As a result, and after the 1.6% rise of the S&P 500 on Friday, SPI traders have added another 31 points, around half a percent, to Friday’s close on the ASX at 5999.80. ON the physical market 6,100 perhaps even 6150 is back in the frame while global stock market positivity remains intact.
- Looking at the SPI itself the recovery from the lows might be steep but that reflects the strength of the move. It’s on track back to the 6,071 level which it broke lower from earlier this month. If that gives way the target is 6,113.
Forex
- The US dollar is not strong. But it has certainly stopped being weak over the past 6 sessions after climbing off that low of 88.26 (I kept writing 88.11 last week – apologies). It’s still not out of the woods though, but my sense is the worm is turning. If for no other reason that the Fed – forget about the squawking doves – stands so resolute in the plans to tighten 3 to 4 times this year and the economy appears to support that. But equally because EU growth has collapsed relative to excited expectations and rate expectations are thus undergoing a recalibration. But the Buck is not yet out of the woods. It needs to break 90.35 in US Dollar Index terms this week and I’d prefer to see it above Fibo resistance at 90.91 (lets call it 91 to be safe) to get a sense a bigger move is afoot. Otherwise this is just a hiatus within a much bigger downtrend. Non-farms Friday will be huge. Not to mention GDP and PCE data Thursday night my time.
- In the run up though as I wrote last week my sense is the US ollar can rally with bonds given that a wholesale liquidation under the weight of Treasury issuance fear should have been assuaged with last week’s bond market digestion and performance. Here's the chart from Investing.com
Commodities
- The Saudis have a cunning plan to turn this production cut, which includes OPEC and non-OPEC members like Russia, into a much bigger version of the cartel. I say in reading and watching what the Kingdom’s oil minister Khalid al-Falih has been saying recently. Over the weekend CNBC reported that al-Falih said (my bolding) “A study is taking place and once we know exactly what balancing the market will entail we will announce what is the next step. The next step may be easing of the production constraints. My estimation is that it will happen sometime in 2019. But we don't know when and we don't know how. What we want is an evergreen framework that brings producers from OPEC and non-OPEC (countries) together in a market monitoring fashion that allows us to take quick decisions”.
- There are three messages to unpack in that. One, OPEC and its confederates are firm on holding production cuts across 2018. Two, the market is not yet in balance – because the Saudis have their finger on the scales and are moving the point at which they see balance. And third, the Saudis are trying to expand OPEC permanently to include Russia.
- To prices now and last week was a good one for oil bulls. Indeed the last two weeks have been good for the bulls. After WTI and Brent both spent 4 days consolidating near important levels prices have moved steadily higher in the past week or so. Brent has broken up and through the $66.79 region I was watching and looks set now to retest the highs. The first target is $69.94.
Have a great day's trading.