Originally published by Rivkin Securities
The US Dollar continued gains on Thursday as traders bet that inflationary policies by Donald Trump would increase the pace at which the FOMC will need to raise interest rates in 2017 and 2018. The US yield curve continues to steepen as higher levels of inflation are priced in, the yield on two-year debt rose +2 basis points to +0.9151% while the ten-year yield jumped +6.75 basis points to +2.1395%. The Dow Jones Industrial average pushed higher to close a new record up +1.17% at 18,816.13 and the S&P 500 erased initial declines to finish up +0.20%.
Expectations of stimulus are boosting cyclical sector equities in the US, industrials & basic materials gained +1.53% & +1.75% respectively on promises of US$500 billion in spending on projects. Financials were the strongest performer, up +3.03% as Trump also pledged to dismantle the Dodd-Frank Act and put a hold on new regulations as they are reviewed. Healthcare also continued to benefit up +1.37% following statements that he would repeal the Affordable Care Act.
Higher yields are putting pressure on the more defensive sectors which have stable earnings and are in demand when rates are low. Utilities was the weakest, down -2.52% following by consumer non-cyclicals -2.47% and telecommunications -1.96%.
It was fairly quiet for data overnight, continuing claims for October 29th were slightly higher than forecast at 2.041 million vs 2.025 million expected and 2.023 previously. Meanwhile initial claims for November 5th was slightly better than anticipated at 254,000 vs 260,000.
Metals continue to benefit from stimulus expectations, spot iron ore jumped +4.72% to close above US$70 per tonne, nickel gained +2.77% and copper futures continued their extraordinary run up +3.27% shown on the second chart below. Elsewhere oil was weaker, both Crude Oil & Brent trading -1.52% & -1.19% lower, as did natural gas -2.34%. Spot gold was also -1.5% weaker despite the higher inflation expectations as the prospect of higher rates reduced demand for the precious metal, while Silver which does have industrial uses gained +0.60%.
The immediate focus will undoubtably remain on Trump and his rhetoric around his first 100 days as he seeks to deliver on campaign promises. The next focus will switch to the Italian referendum of the 4th of December where Italian PM Matteo Renzi is attempting controversial reforms to the constitution. I’ll refrain from making a call as to the outcome of this referendum given the outcome of both the Brexit & Trump victories has called into question the markets ability to accurately price in these outcomes.
Following the Italian referendum we will see elections in both France, German and a number of other European countries in 2017 which will come into focus more and more over the coming months. All of these events certainly have the ability to impact markets and increase volatility, if that is the case it is likely the ECB will step in to calm markets and provide reassurance.
The week prior to the FOMC meeting in December the ECB will meet to decide monetary policy on the 8th of December. This will be a big focus as to whether or not the ECB will extend its current stimulus program past March 2017. Mario Draghi has specifically highlighted this meeting noting that the governing council will “benefit from the new staff macroeconomic projections extending through to 2019 and from the wok of the Eurosystem committees on the options to ensure the smooth implementation of our purchase program”.
Looking at the data it logically makes sense that the ECB should at a minimum extend its program, EU GDP is currently at +1.6%, wage growth is weak around +0.9% unemployment has improved over the past few years to be stable around 10% but well above the 7.2% low in 2008. Core inflation also remains below target at +0.8% and PMI reports have signalled a mixed outlook. The story of Europe is one of stabilisation, earlier concerns have eased and things are improving just not at a rate where it would make sense to taper stimulus.
In Europe equity markets were broadly weaker, the Euro Stoxx 600 & DAX down -0.27% & -0.15% as bond yields rose. German two-year yields increased +4 basis points to -0.613% and the ten-year jumped +10 basis points to +0.282%. In the UK the FTSE100 was -1.21% weaker as yields also increased, two-year debt rising +1.4 basis points to +0.231% and the ten-year up +8.1 basis points to +1.340%. The pound strengthened +1.2% following data that should housing prices rise +23% in the year through to October surpassing estimates of +18% as limited supply continues to support prices.
Locally the S&P/ASX 200 had one of its best days on record surging +172.28 points (+3.34%) to close at 5,328.84 led by gains in resources and financials. The Australian dollar was -0.41% weaker against the US dollar and bond yields jumped, two-year debt yield roses +11.4 basis points to +1.700% and ten-year yields spiked +27 basis points to +2.509%.
I’ve included a third chart below showing the ASX200 from a technical perspective, the close above the 5,300 level is a very encouraging sign. Momentum indicators which measure the strength of moves in price, have highlighted the formation of bullish momentum divergence. This is where the price moves to a new low, in this case the September low of 5,192.20 and the November low of 5,052.10, however momentum indicators do not move to a new low. This signals that recent declines are likely becoming exhausted and the decent probability of higher levels in the coming weeks towards resistance between 5,500 and 5,600.
Looking ahead to today we can expect a flat start to trading with ASX SPI200 futures down 4 points in overnight trading.
Data releases:
- German Consumer Price Index (MoM & YoY Oct) 6:00pm AEDT
- U.K. Construction Output (MoM & YoY Sep) 10:30pm AEDT
- University of Michigan Consumer Confidence Index – Preliminary (MoM Nov) 2:00am AEDT
- U.S. Baker Hughes Rig Count (Nov 11) 5:00am AEDT
