Capital Flows From Bonds And Emerging Markets To Stocks And The Dollar

Originally published by AxiTrader

Quick Recap

Stocks stalled a little, but only a little while the US dollar and bonds continued to surge. This combination is driving a massive re-evaluation of expectations of risk and the future across global markets. It’s also driving big fund flows. Not just out of emerging markets but also US retail investor money into stock funds and out of bond funds.

The wash up is that US 10’s are at 2.33%, the highest since December 2015 and the US dollar index is at 101.34. That in turn is driving the local market with Australian 10-year bonds up to 2.73% – around 90 basis points higher than the August lows, while the Australian dollar closed at 0.7345 – its lowest weekly close since early June.

What You Need To Know

International

• It’s a short week in the US with Thanksgiving Thursday and limited trade likely Friday. That means we could all the action front loaded into the next three days of trade. But what a shortened holiday week could also mean is profit taking. We’ll see.

• On Friday night the US dollar and bonds pushed higher again but the stock market rally stalled a little with the Dow drifting 0.2% to 18,867, the Nasdaq 100 was down 0.23% to 5321 after a new record high and the S&P 500 dipped 5 points, 0.24%, to 2181.

• Over the weekend we’ve heard from more Fed speakers reiterating that December is a lock for Fed policy.

• The big question traders and investors are asking themselves is whether stocks have gone too far, too fast. The US dollar probably has. Bond’s may not have. But Trump is paradigm shifting – of that I have absolutely no doubt. The narrative has/is changing and the shape his administrations appears to be taking is to grab up the brightest and best of the GOP. Early days I know, but this could be a real opportunity for the US economy and markets.

• It's an opportunity that is driving massive capital flows according to data out on Friday night. Here's what I said at Business Insider this morning

  • Barrons reports that Charles Biderman, the head of TrimTabs Investment Research which tracks money flows, says his data shows $44.6 billion flowed into US equity ETFs in the 7 days after the election. That’s the seconds biggest weekly flow on record behind flow in July 2007. Ahem!

    Separately Akin Oyedele reports Bank of America Merrill Lynch (NYSE:BAC) says a “violent rotation” is taking place in the market. “If Brexit marked 5,000 year low in global interest rates, Trump marked [the] moment investors started to position for [a] bond bear market,” Michael Hartnett said.

    Jeffries Sean Darby agrees writing “Last week’s fund flow data may go down in history as the first real indication of the switch from bonds to equities’.

• In Asia countries are worried not only about the capital flows and the impact on their currencies but also the impact the US dollars march is having on perceptions that they are currency manipulators. It is well understood in currency markets that when the US dollar is on the march, higher or lower, because of investors appetite and investment trends, there is little any nation or central bank can do to stop it. But outside forex circles that is less well appreciated and Asian concerns may not be misplaced.

• German Chancellor Angela Merkel is going to run again and in France they having primaries to see who will be the conservative face to take on Marine Le Pen.

• China is stepping into the breach to replace the US - should it withdraw from the TPP or the region – as the dominant player. President Xi told president Obama the relationship between the two nations was at a “hinge” moment. I guess he means a sliding door moment as well.

• Keep watching the bond market. U.S. 10-Year are at 2.33% looking ugly but overdone.

• South Korean prosecutors say president Park has immunity due to her office but also that she was an accomplice to corrupt conduct.

Australia

• The market had a reasonable rally to end the week up 21 points for a 0.4% gain to close at 5359. It’s been messy recently on the local market. Large rotation between sectors under the surface of the overall S&P/ASX 200 index is the order of the day and to a certain extent that is preventing it from participating in the rally we’ve seen in the US.

• That’s natural because a lot of Donald Trump’s policies – if fully implemented – would be expected to be net positives for the US and net negative for the rest of the globe. So there are two questions for local stock traders. Is all the good news of the commodity rally and economic outlook priced into the miners and the banks, or is it time for the ASX to play catch up to the move in US stocks and drive back toward 5,500 as the relationship with the S&P 500 (crude and price based as it is) suggests (chart from my Reuters Eikon).

• Naturally it is a very uncertain period. But as I’ve been writing recently if the SPI can get up and through 5370 it could run hard. SO it’s worth noting December SPI futures on Friday night closed up 7 points at 5369. Today could be the day for a gallop higher. Investors have had plenty of time now to digest their true thoughts on the world and markets in a Trump world.

• Looking ahead to the week and it is a pretty quiet one for data locally. We do have speeches from RBA operatives but overall the key drivers of Australian markets continue to be global ones. Commodities, interest rates and the US dollar.

Forex

• It’s still all about the US dollar. From a of 95.85 low on the Asian day that Donald Trump won the presidency the USD Index has risen 5.7% to 101.34 this morning.

• That’s belted currencies all over the forex universes. Euro is at 1.0610, USDJPY is at 110.78 and the Aussie is at 0.7322 – the lowest level since June and on track for a full retracement toward 0.7150 if the US dollar keps pushing higher.

• But that’s the big question isn’t it? Can the US dollar actually keep pushing higher. The US Dollar Index and USDJPY both look hyper extended, as do a number of Asian currencies. The question of whether a Trump presidency is paradigm shifting is already answered in my view in the positive. But the question remains as to whether it needs a pause in the rally – either time or price – before it pushes on again. The move we’ve seen in copper, and the stall/pullback in the rally is a good analogue for the US dollar at the moment.

• Whether today, tomorrow, or next week is the day that consolidation starts is uncertain – I haven’t received a sell (or buy depending on whether it’s a commonwealth currency) yet on any of the main pairs I watch. But the US dollar is extended.

Commodities

• Rates rising, risk appetite elevated, and the US dollar stronger is almost the perfect storm for gold right now and it’s back at $1208 an ounce. It’s seems clear the market wants to test the $1180/1200 support zone and see how strong it is. Time will tell but abstracting the weight that higher rates are having on gold at present it seems that the shiny stuff is perfectly placed to benefit in a trump reflationary environment.

• Oil had a better day Friday up a little. We are in the last week and a half before OPEC meeting which the members are still suggesting is going to deliver a deal on production. That remains my view as I’ve stated often given the fiscal imperatives weighing on the budget positions of most of the OPEC and non-OPEC oil producers. While I’d not the geopolitics of such a deal is more problematic with Donald Trump soon to become the 45th President of the United States I’d also say that the US does not lose is prices stabilise in the $55-60 region I think OPEC is aiming at. That’s because at that level more shale is economical so they’ll get production and also investment in the US.

• Looking at the chart you can see the level traders are eyeing in the chart below. If Crude Oil (it’s rollover day tonight in the US so things might get messy) can climb back inside the old trendline it could roar a few dollars higher. But it has to break $47.15 first.

• Copper's consolidation continues and $2.43 remains a critical level to watch to gauge whether this is a time or is going to be a deeper price consolidation from the recent spike to $2.74 a pound.

Today's key data and events (all times AEDT)

• Australia - Nil
• New Zealand - Nil
• China - Nil
• Japan - Adjusted Merchandise Trade Balance (Oct), Merchandise Trade Balance Total (Oct), Imports (YoY) (Oct), Exports (YoY) (Oct) (10.50am); All Industry Activity Index (MoM) (Sep) (3.30pm)
• Germany - German Buba Monthly Report (10pm)
• EU - ECB President Draghi's Speech (3am)
• UK - Nil
• Canada - Wholesale Sales (MoM) (Sep) (12.30am)
• US - Chicago Fed National Activity Index (Oct) (12.30am); 3-Month Bill Auction, 6-Month Bill Auction (3.30am); 2-Year Note Auction (5am)

Have a great day's trading