Hawkish ECB And Weak PPI Hit The US Dollar

Originally published by AxiTrader

Market Summary (7.45am)

We’ve seen a reversal overnight of the previous day's trade as stocks bounced, bonds caught a mild bid and the US dollar was hammered on the back of mildly hawkish ECB minutes and a big miss on US December PPI which fell for the first time in 16 months.

So as I write the S&P 500 is up another 0.55% to a new record at 2763. The Dow is up 0.61% to 25,524 and the Nasdaq 100 is 0.53% higher at 6,896. Earnings season kicks off properly in the US tonight with a couple of the big banks. Much is priced into prices and expectations and this period will give a good indication of where stocks are headed.

Asian and European stocks were mixed and the ASX 200 had another poor day finishing 29 points lower. But the lead sectors in the S&P’s rally last night are also prominent on the ASX so SPI traders have added 10 points to yesterday’s close.

On forex markets the US dollar is under pressure once again after suffering the one-two punch of relatively hawkish ECB minutes and then the -0.1% fall in PPI. Euro is up the best part of a cent as a result at 1.2027 while the pound has risen a more muted 0.25%. The yen is stronger again with USD/JPY dipping another 0.2% to 111.22, off its lows closer to 111. On the commodity bloc the Canadian dollar is a little stronger only despite oils strength and the US dollar's fall. But the Aussie and kiwi are surging. Indeed the kiwi’s gains are better than the euro’s. It’s at 0.7250 while the Aussie is at 0.7889.

Bonds in Europe were higher again which drove US rates up as well. But US 10's are back at 2.54% while the 2-10 curve is at 55.4 points.

On commodity markets oil was up strongly earlier but has given up those gains as both WTI and Brent approach important resistance. Gold is higher on the weaker US dollar, iron ore has lost a little in Dalian overnight and copper reversed some of its recent recovery.

On the day Chinese trade and investment data dominates the Asian day before the release of December CPI and retail sales for the US.

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

International

• The ECB confirmed what it feels like I’ve been writing for almost a year now, in the release of the minutes of the last meeting overnight. While most reports are focussed on the fact that the minutes reflect a need to change the “language pertaining to various dimensions of the monetary policy stance and forward guidance” in early 2018 I thought the key point was that the ECB said “gap appeared to be emerging between favorable economic conditions and a policy stance that remained in a crisis configuration”.

• That theme – the removal of emergency stimulus – is exactly what has been driving the discussions at the ECB, BoE, Fed, and increasingly it seems the BoJ. Of course that makes sense given the globe is growing in a synchronised manner for the first time in years. The question for the ECB as 2018 and 2019 evolves is whether ending QE and removing emergency stimulus swiftly morphs into higher rates as well.

• That’s a big question for European bond and currency markets. Overnight the minutes release saw the euro jump 50 points almost instantaneously before making further gains once US PPI printed poorly. Likewise EU bond rates were on the rise again overnight. Interestingly the minutes do seem to reflect the Governing Council is already readying the move toward guiding expectations about interest rates higher. “It was important for the forward guidance to be updated in line with evolving data with a view to avoiding more abrupt or disorderly adjustments at a later stage,” the minutes said.

• US producer prices for December were much weaker than expected as both core and headline prices dipped 0.1% during the month against expectations of a rise of 0.2% for both. That meant the headline rate of PPI growth fell back to 2.6% from November’s 3.1% pace while year on year core PPI printed 2.3% from 2.4% last. Both were well below expectations. Key to the undershoot was the services sector. Tonight wew get US CPI and retail sales which loom large over a weak US dollar. The market is expecting 0.2% and 0.4% respectively. Here's the relationship between PPI and CPI on a year to basis.

Source: TradingEconomics.com

• Another Brexit referendum? That’s what former UKIP leader Nigel Farage seems to be pushing toward. Appearing on UK television Farage said “maybe just maybe I’m reaching the point of thinking we should have a second referendum … on EU membership”. Why? Because he believes that Britain is sliding toward a soft Brexit and wants to revisit the vote to harden the exit from the EU up. As I’ve written before and reiterated yesterday the pound has been doing reasonably well – given the economy – on the back of traders sense it is in fact sliding toward a soft Brexit. Of course the government has said there will be no second referendum. And conventional wisdom is a hard Brexit would hurt the UK economy more than the soft approach Theresa May is pursuing. But it is likely to be another interesting year for negotiations and the politics of Brexit.

• German Chancellor Angela Merkel noted overnight there are still “big obstacles” to forming a grand coalition. And while I’m in Germany, the IG Metall Union is stepping up its campaign for that 6% wages rise.

• EU leaders have entreated President Trump to keep the Iran sanction deal in place. The President is due this week to recertify to congress that Iran is complying otherwise the sanctions go back on. I’m curious whether or not he’ll be able to do that. Hopefully he can – either way it’s important for markets.

• Trickle down economics gets a bum wrap. The idea that companies and managers won’t hoard gains from tax cuts and other largesse has been discredited many times. That’s one of the reasons why many economists and politicians have poo pooed the big corporate tax cut in the US. But whether it is embarrassment at the riches that are being delivered to them, a recognition that workers are also customers, or simply the fact that labour markets in the US are tight enough to make holding onto staff difficult, we are seeing corporate America share some of the spoils of the tax cut. Walmart (NYSE:WMT) is the latest to join that trend announcing it would pay bonuses and increase the minimum wage. We might see more of a trickle than everyone expects. Indeed, I think we will.

Australia

• November retail sales proved much stronger than expected with a 1.2% increase on what seems to have been a surge in purchases on the back of the launch of the iPhone X. But that said, the overall report looked pretty good and should go some way to assuage some fears about household consumption and where Australian consumers are at. Interestingly though TheKouk highlighted that the iPhone has been a boon for retail sales across the globe. So the question is whether this is a blip and pull forward of spending or whether its actually a sign that consumers are in good health.

Source: Twitter Screenshot

• For the second day in a row the sellers came for the ASX again yesterday knocking another 29 points, 0.48%, off the S&P/ASX 200 which closed at 6,067. That knocked the SPI 200 lower as well and it dipped just below 6,000 for a brief period. But it’s back at 6,015 this morning up a couple of points from where prices were at the close of the physical market yesterday. As I noted yesterday Wednesday’s reversal would have done quite some destruction to the bulls psyche and yesterday’s selling would have compounded that a little. Overnight rallies and records for US markets should provide a positive backdrop for today’s trade but we’ll have to see how things play out. Another day’s falls, should that happen, would be an ominous turnaround.

• Looking at the SPI chart 6042 is the 38.2% retracement of the reversal this week and would be a reasonable target and resistance. If the SPI can get up and through there then it is 6056 and 6069. A break of the past 24 hours low at 5999.5 would suggest 5956. Given the drivers of the S&P 500’s moves in the US – Energy, Industrials, and Basic Materials are also big sectors in Australia it should be a better day here today.

• Today’s China trade data could be important for the local market. And of course the Aussie dollar.

Forex

• The US dollar isn’t far from breaking wide open. Overnight it came under pressure once more from the ECB minutes and the clear indication that in a world of synchronised global growth the Fed is likely to be joined in the tightening cycle by many central banks across the globe. Then of course the big miss on PPI suggested that maybe the doves have a little more strength in their argument that the Fed can afford to wait and let inflation and wages actually turn higher before they hike again. In some ways it’s a compelling argument because the last 30 years has shown us that central bankers know exactly how to rein in inflation. It’s kickstarting it sustainably that appears to be the problem.

• Ultimately though that’s where the divergence between the Fed and ECB may actually re-emerge. I sense in the discussion in the ECB minutes about forward guidance a resolve to signal that even though QE will end that rates won’t rise in a hurry. Eventually, they will of course, but not in a hurry. But that is for another day. The next ECB meeting on January 25 should be very interesting.

• Looking at the price of the euro then, what looked finally like a chance for a consolidation below the 2017 highs has swiftly changed to an outlook with a high chance of a break of those highs and run higher. I’m still of the view that the combination of data over the last week from Europe and the US should have knocked the dollar for six – up and through these highs. We’ll hve to see but a move above 1.21 – giving some room for a false break of those highs – would be a sign that euro is leaping into a new range.

• Elsewhere the US dollar weakness has buoyed currencies across the board. All the signals I got to sell dollars and buy the pound, Aussie, Singapore dollar and so on earlier this week are likely to be reversed when I run my system this morning after the overnight move. That’s unusual volatility. But it’s exactly what we saw with USD/JPY this week which generated a buy then sell signal within 2 days. We’ve seen the big move in the yen as a result. Tonight’s CPI in the US is going to be very important.

• Looking specifically at the commodity bloc and the Aussie and kiwi remain well bid with gains of 0.62% and 0.78% respectively to sit at 0.7890 and 0.7251. I confess to being slightly baffled that the currencies of these two nations is so well bid this week while the stocks markets in Australia and NZ have been under pressure. Different markets, different traders, and somewhat different prospects of course – but interesting nonetheless. Anyway, for the moment both currencies look very strong and the Aussie in particular has a chance now of a full retracement toward the 81 cent level.

Commodities

• Oil was roaring higher again with WTI up another 1% at $64.24 while Brent was up half a percent at $69.59. That was about an hour ago and now the gains have been given up with WTI at $63.58 and Brent at $69.15.

• Overnight the UAE oil minister said that oil markets will balance this year even though “we’re not there yet”. He added “We need to take into consideration that we're in the winter, and typically in the winter the demand is higher. In the second quarter you could see some softening, some refineries go to maintenance. You see demand changes during the year, so the cyclic event of supply and demand is something we see every year”. In the end though he said he does expect further “correction” to inventory levels and expressed confidence that the achievement of “122 percent compliance” with the production cuts would aid the continued fall in inventory levels. So in the end “I am expecting that we will still see corrections in 2018 and I think it's the year of ... the market fully achieving the balance,” he said.

• That, and the chance that president Trump could reimpose sanctions on Iran, and the reality that US inventories are drawing down strongly has continued to support the market. But looking at the charts we see WTI has eclipsed both the top of the current uptrend channel and the $64.15 Fibonacci extension of the previous move. So it’s looking a little toppy at the moment, but momentum is with the bulls. Looking at Brent it’s closing in on the top of the upchannel as this strong trend continues. It’s looking a little toppy as well but as yet there is no sell signal in either of the two oil contracts I follow. But Brent is near a reasonable level for a turnaround.

• Even with all the excitement about the global growth outlook copper has been drifting recently. So it’s interesting that Bloomberg ran a story overnight with the headline “One thing missing from copper boom is buyers of actual metal”. Of course in this world of QE and low rates where almost everything has become financialised fundamentals can disconnect from prices for an extended period. But the article says:

“Evidence of the anomaly can be seen in the premiums that purchasers of physical copper pay over futures prices to cover shipping and other costs. Typically these rise as demand grows and buyers are willing to pay extra to access supply that’s being used up at a quicker rate. Yet, even with factories running at the fastest in years, premiums have been stuck at a low level. That’s a disconnect with the optimism in futures markets, where hedge funds have been adding to their bullish bets since the middle of December. Such wagers have helped fuel a rally in prices to their highest since early 2014”. Here’s the chart:

Source: Bloomberg

Have a great day's trading.