Fed Chair Yellen Has Supported Both The US Dollar And Stocks

Originally published by AxiTrader

Quick Recap

Not much happened but so much to talk about.

The yen is under the pump, stocks are up again, bonds aren’t selling off that aggressively, and metals recovered Asian weakness in London.

It sets up a good day for the local stock market.

Here's What You Need To Know

International

• Lots of chat about Janet Yellen in markets overnight. Or more particularly that she was pretty upbeat about the economy and didn’t step back from the hawkishness of last week’s Fed. It’s reinforced policy divergence to forex traders and strengthened the US dollar. But it hasn’t hurt stocks because traders are focussed on the economic strength side of the equation.

• So the S&P 500 is up 0.3% at 2269, the Dow is trying to break 20,000 and currently sits at 19973, the Nasdaq is at 5481 up 0.45% and the Russell 2000 is up 0.8%.

• U.S. 10-Year's are at 2.56% while the 2-year rate is sitting at 1.22%.

• China returned the US underwater drone.

• Italy is getting ready to support its banking system even as Unicredit (MI:CRDI) sells off a swathe of its bad debts.

• The Malaysian Ringgit is still under intense pressure. We’ll need to keep an eye on it and EM more broadly in 2017. But my sense remains some of Donald Trump’s nominal growth dividend will leak into the global economy while the US dollar is this high, or higher.

• And while I’m on EM last night the release of retail sales in Mexico showed a solid rise of 1.6% during October. We’ll see what the Trump effect is in the last two months of 2016 when the data is released in early 2017. But this is not terrible.

Much of everything else I picked up is below

Australia

• Another unexpectedly positive day as money came off the sidelines and fund managers get ready for a solid end to the quarter. The ASX closed up 29 points, 0.52%, at 5591. That was just a little below the years high yet it was also the highest close since August 2015. Once again the strength on the ASX was a lead, not a lag, for the bigger markets of Europe and the US.

• To be clear, the correlation I highlighted yesterday that I have noticed where the ASX is a leader not a lagger in 2016 has come on unexpectedly good or bad days. Not every day. My hypothesis, as discussed with Natalie on SkyBiz on Tuesday morning is that the big global funds, many who have offices here in Australia, move first here and then the asset allocation works its way around the global markets clock.

• Anyway looking at the day ahead the miners did okay overnight even though basic materials are again one of only 3 sectors on the S&P 500 in the red today, along with energy and industrials. So SPI traders have marked the March contract up another 10 points to 5562.

• As we head to the end of the year – and as I’m about to have three weeks off from tomorrow it’s worth thinking about the longer term. Naturally, the S&P/ASX 200 has to break and hold above the years high to get excited. But if it does a medium term look at the SPI suggests a move toward the 5760/5810 region.

• The RBA minutes were clearly written without knowledge of the GDP release the following day or were trying to convey the central bank's dismissiveness of the big fall in growth during Q3. I say that because the minutes continued to reflect the relatively upbeat outlook the RBA conveyed in the 6 weeks before the GDP release.

• Interestingly though it also strikes me that the Board knew the minutes would have to fill the gap between that meeting in December and the next in February. So it appears they are trying to signal they are not in a hurry to drop rates again anytime soon.

• The minutes said: “Members discussed the effect of lower interest rates on asset prices and the decisions by households to borrow, particularly given the already high levels of household debt. Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review”.

Forex

• The Bank of Japan was the big event in forex markets yesterday. The Yen had already lost ground after Janet Yellen chose not to walk back from the fed’s hawkishness. Instead, she told the audience at Baltimore Universities commencement speech they faced the strongest jobs market in a decade. Throw in the BoJ reiterating its commitment to low rates and control of the bond curve even as it upgraded the economic outlook and we have a Yen which is materially weaker this morning at 117.77.

• But it’s off the high of 118.24 overnight and below last week’s high of 118.66. Everyone is bullish USDJPY now. But while it’s below the recent high there is still a chance that its consolidation has not finished yet.

• Yesterday I did a quick look at the charts for EURJPY and it’s worth noting that even with a weaker Euro overnight it respected the trendline identified as key support. A break would be decisive though for both EUR/JPY and USD/JPY.

• Speaking of the Euro it is under 1.04 again as the US dollar surges on the back of Yellen’s reiteration of the markets expectation that policy divergence is going to broaden. At 1.0395 EURUSD is at risk of further breakdown.

• Sterling was lower last night as Nicola Sturgeon mapped out Scotland’s plan for Brexit. Naturally, that was an excuse to sell while the US dollar is bid and GBP/USD is down at 1.2360 near the lows for the past month. But Sturgeon's plan again reinforces what a messy business Brexit is going to be.

• For the commodity bloc the AUDUSD is up a tiny 0.14% at 0.7255, the CAD has gained 0.3% against the USD with USDCAD down a little at 1.3368 while the Kiwi is largely unchanged

Commodities

• Crude Oil is up a little overnight. The 20th (its still the 20th in the US) is expiry day for the January contract so we switch to a new contract tomorrow. Prices leap $1 between January and February and another 90 cents by march at overnight prices. The question for traders is whether they think this slope is right.

• Perhaps API crude stocks in a couple of hours will help us figure that out.

• Gold is down on its lows since the US election once again as the shiny stuff continues to struggle for relevance. If it couldn’t get a lift on the back of yesterday’s terrorist attacks, or the China drone incident, then it seems it needs to test lower or spend a very long time around these levels to rebuild support.

• Copper is still sitting around $2.49 unchanged but the narrative around supply and demand has changed in the past few days. That feels a bit like ex-poste rationalisation of why its pulled back when in fact all its done is retrace 38.2% of the big move. As I often write that’s just a garden variety pullback – even though it looks spectacular on the charts.

• My chart is a little messy but support looks to be in the $2.42/44 region.

• Here’s a graphic from Reuters of metals moves this year. In this context copper has fairly lagged.

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

• Australia -Nil
• New Zealand - Nil
• China - Nil
• Japan - All Industry Activity Index (MoM) (Oct) (3.30pm)
• Germany - Unemployment Change (Dec), Unemployment Rate s.a. (Dec) (7.55pm)
• EU - Nil
• UK - Nationwide Housing Prices n.s.a (YoY) (Dec), Nationwide Housing Prices s.a (MoM) (Dec) (6pm); Public Sector Net Borrowing (Nov) (8.30pm)
• Canada - Nil
• US - API Weekly Crude Oil Stock (8.30am); MBA Mortgage Applications (Dec 16) (11pm); Existing Home Sales (MoM) (Nov), Existing Home Sales Change (MoM) (Nov) (2am); EIA Crude Oil Stocks change (Dec 16) (2.30am)

Have a great day's trading