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Fresh Records For US Stocks

Published 25/10/2017, 09:24 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Welcome to my daily Markets Musings.

This is essentially my little black book, the diary of market moves I’ve been writing for myself since that day back in April 1988.

It’s not supposed to catch everything – just the things that help me build the fundamental narrative I need around what’s happening in the markets I watch, and which then readies me to take the technical signals when they come.

I’m on SkyBusiness at 8am.

Feedback always welcome

Greg

Market Summary

Earnings helped propel the Dow Jones Industrial Average 167 points higher overnight to a new record close of 23,441 after a gain of 0.72%. The S&P 500 was more circumspect with a gain of just 0.11% to 2,568, while the Nasdaq 100 was up 0.15% to 6,077.

European bourses were again more circumspect but locally SPI traders have added 15 points to yesterdays small rise.

Bond rates are higher in Europe and the US with 10-year bonds in the US on the cusp of a big break. At 2.4226% (up a point from the copy below) the 10’s are at their highest level since May and could run toward 2.6% on this break if sustained.

That should help the US dollar but not universally. That because German rates are also higher which is helping the euro remain calm at 1.1760. USD/JPY is higher however as is USD/CHF. The pound has lost half a percent as traders wonder about the BoE’s November rate hike and the Canadian dollar is again weaker in the lead up to tonight’s BoC meeting. The kiwi was hit again on more central bank and economic uncertainty. And the Australian dollar is down in sympathy and, I think, because traders are betting on a weak CPI.

On other markets crude oil is getting close to the range top, copper had a good day but pulled back from the highs and gold is down as rates and stocks rise.

Today is CPI day in Australia. Tonight we have UK Q3 GDP and the BoC meeting as the highlights along with US durable goods and German Ifo.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • Here’s the market I’m watching closely again. US 10-year bonds are sitting just below important resistance this morning with the yield of 2.4044% the highest level since early May. Bonds are rising as recognition grows that the US and global economy are looking extremely positive as we head into 2018 and as stocks make fresh record highs as risk appetite increases once again. A break of the 2.42% level I highlighted earlier this week opens a move toward 2.6%. Bond rates rising is something to watch across the globe. It’s my sense markets are far too complacent of this possibility and also the chances for a return of inflation over the next year.

Chart
US 10 year rates (Investing.com)

  • And here’s an interesting idea on why stocks keep rising from Greenlight Capital founder David Einhorn. Business Insider reports that Einhorn wrote in his latest quarterly newsletter “given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine”. To me that reads like “investors are buying stocks on hope that the disruptive companies – like Amazon (NASDAQ:AMZN) – eventually end up in a dominant position and crush all opposition”. Not entirely unreasonable an expectation.
  • Flash PMI roundup: The Japanese manufacturing PMI undershot expectations with a print of 52.5 yesterday. Europe was mixed with France stronger than previous with prints of 56.7 for manufacturing and 57.4 for services. Germany was slightly weaker than previous with manufacturing printing 60.5 and services 55.2. Euro Area wide services were lower than previous at 54.9 while manufacturing was stronger at 58.2. In the US the flash PMI’s were stronger than previous for both manufacturing and services which printed 54.5 and 55.9 respectively. The Richmond Fed manufacturing index dipped to 12 however against 17 expected.
  • Speaking of growth a new survey by Reuters reports Chinese growth is expected to print 6.8% in 2017 and 6.4% in 2018. Also in China, President Xi’s vision for “Socialism with Chinese characteristics for a new era” has been written into the new party constitution after a unanimous vote yesterday. This move confirms that President Xi is the most powerful leader since Chairman Mao
  • The argument in Spain continues with news overnight that Catalan leaders may call a snap election as Madrid moves to re-establish centralised rule of the region.

Australia

  • The S&P/ASX 200 stalled yesterday rising just 3.6 points to end the day at 5897 as the competing forces of the underlying stocks that make up the index left the index not far from where it began the day. BHP (AX:BHP) was higher, as was Fortescue Metals Group (AX:FMG) as they benefitted from a generalised rally in global metals, steel, and iron ore. Rio (AX:RIO) missed the memo and the banks were down a little net on net.
  • Overnight though SPI traders have picked up on the positive lead from the US adding 12 points, 0.2%, from where prices were at the end of trade yesterday afternoon. That move implies the market will be back above 5900 this morning again. But from a price perspective, the last two days trade has been constrained by Friday’s range. That suggests that in a physical sense the ASX200 needs to break either 5925 or 5867 to kick on to the next level. Which way you ask. I’m still inclined to see this as a topping pattern short term. But either break would be important short term for traders.

Chart
ASX200 Daily (Source:Investing.com)

  • I’ve written much this week about today’s CPI. Traders are expecting 0.8% with a range of 0.7% to 1.2%. A result 0.1% either side of consensus would garner little market reaction. But if we see a print of 0.6% or less or a print of 1% or higher and we’ll see a decent reaction for the Australian dollar, interest rate markets, and stocks exposed to the chances, or not, of an RBA interest rate move. We’ll know at 11.30am AEDT.

Forex

  • Traders just won’t give up on the euro as we await the ECB’s decision this week on the taper. The consistent narrative that seems to run through markets at the moment is that it is going to be very difficult for the ECB to deliver a taper and outlook which will surprise markets enough to weaken the single currency. I have great sympathy with that view. Mario Draghi and his colleagues could, of course, follow the BoJ’s approach. That would be a surprise and would likely weaken the euro. But the counter-argument is that at these levels of the euro the EU is still do well and the recovery is gaining traction. Anyway EUR/USD is sitting, becalmed, around 1.1756 this morning hardly changed from the previous day.
  • GBP came under pressure again in the past 24 hours as it backed away from overhead trendline resistance and traders reappraised the outlook for the BoE after the previous day’s comments from BoE deputy governor Cunliffe that the November rate rise remains an open question. You can see the setup for GBP/USD in this chart. Resistance is 1.3230 and support 1.3000/20. GBP/USD is currently sitting down half a percent at 1.3127 – about mid-range.

Chart

  • In US Dollar Index terms the US dollar is flat at 93.93. 94.25 still needs to break to signal the next move is on. USD/JPY is higher though back up at 113.84 for a rise of 0.4% over this time yesterday. USD/CHF is half a per cent higher at 0.9906 and the Canadian dollar continues to drift as traders await the BoC meeting and interest rate decision tonight. My sense is the bank will pass on the rate hike for two reason. First, they don’t want to see the Canadian dollar strengthen again. More important though is the second reason. The Canadian Citibank Economic surprise index has collapsed from over 100 in early September to -13.1 this morning. That is, Canadian data has been universally weaker than expected – and my a decent margin – for the past 7 weeks. USD/CAD is at 1.2680, up 0.2%.
  • The bears have the whip hand in Australian dollar trade at the moment. It’s up to today’s CPI to disabuse them of their selling. Currently, the AUD/USD is down 0.33% at 0.7779 after a sharp fall from 0.7820/25 late yesterday afternoon, early evening. And it will be an interesting day ahead for the AUD/USD. It’s almost impossible to think that we won't see it either at 0.7730 and heading south or back up at 0.7825/35 and testing resistance once the CPI is released. I say that because this is a very important inflation report for the market because it will so strongly inform opinion as to what the RBA is likely to do in the next 6 to 9 months. A solid report – a print of 1% or more – coupled with the NAB business survey, improved consumer sentiment, and employment will embolden the bulls. A low number, say 0.5% or 0.6% would reinforce what the RBA said recently – that just because everyone else is raising rates doesn’t mean it has to.
  • Kiwi traders voted with the feet – or should I say sell button – again yesterday afternoon as the incoming government reaffirmed a commitment to review the Act under which the RBNZ conducts policy. Why the inclusion of an employment mandate is so controversial for traders and why they are selling the kiwi so heavily is best explained in the abstract rather than the specific. That is, it’s not the dual mandate which is a big deal it’s the interventionist tendency of the Labour, Greens, NZ First coalition that it speaks to which has traders nervous. Uncertainty folks. Uncertainty is poison. The question now is whether the NZD/USD will stop at 68 cents once it’s made the round trip back to the low. It should. But if 0.6800 breaks the target becomes 0.6535.

Chart

Commodities

  • More bullish stimulus for crude oil overnight with Saudi oil minister Khalid Al-Falih saying in Riyadh overnight that the Kingdom is committed to ending the global oil glut and drive inventories back to the average of the past 5 years. “When we get closer to that (five-year average) we will decide how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced so we don't have a return to higher inventories” he said. Suggesting that OPEC is only half way there Al-Falih told Reuters “We have reduced the inventories by over 180 million barrels and we still have about 160 million barrels according to numbers I have seen last…The intent is to keep our hands on the wheel between now and until we get to a balanced market and beyond, we are not going to do anything that is going to disrupt the path we are on”.
  • That helped prices rise 1% in WTI terms and 1.6% in Brent terms to $52.43 and $58.31 respectively. If Brent breaks $59.22 and WTI takes out $52.83, the recent range tops, then we could see further gains to $62 for Brent and $55.50 for WTI. The range tops have to break first though.

Chart

  • Gold remains under a little pressure as bond rates rise and the risk appetite increases with the US stock market rally. It’s down $5, 0.3%, to $1277 this morning. It’s held above the previous night’s low so a break of $1272 would be needed to accelerate the down move. If it comes however $1260 becomes the target.
  • Copper hit a one-week high yesterday around $3.23/4 yesterday before pulling back overnight to $3.19 up 0.4% on the day. There is a lot happening in the copper market at the moment. Global growth looks solid, Chilean production is bouncing back after last years disruptions but there are a number of labour agreements coming up which could disrupt supply, and of course we know that Chinese refined copper production hit a new 3 year high in September.
  • But one thing I picked up overnight which is interesting and potentially destabilising for copper prices is the large position that is said to be held in copper by a Chinese coal firm. Reuters reported overnight “A private coal mining industry investor in Shanxi province is the main actor behind a dramatic increase in bullish bets in Chinese copper futures, a person familiar with the matter said, driving a futures brokerage to a nearly $3 billion position that has fuelled a surge in prices to 4-1/2-year highs”. This is one of those “persons familiar with the matter” and “sources who could talk on the record” type of story. But if ture it is something to watch given that Reuters also reports the broker holds “35 percent of the open interest in copper contracts for the first half of 2018 on Shanghai Futures Exchange”. Mmmmm. Watch the $3.11 level. If it breaks copper could fall heavily. But it has to break first.

Have a great day's trading.

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