Originally published by AxiTrader
Market Summary
Another interesting night across global markets.
The prospect of tax cuts actually being passed appears to have prompted a value rotation away from the FANG stocks and the tech heavy Nasdaq and back toward financials and other sectors of the market that will benefit if the tax bill does indeed pass into law.
So this morning after a mixed day in Asia and Europe it is also a mixed day for the big US indexes. The Nasdaq has lost 2% to 6,291, the S&P 500 is just on the wrong side of flat with a 0.16% fall to 2,622 and the Dow Jones Industrial Average is up 0.39% to 23,939.
Locally the wash up is that we’ve seen a small fall in the SPI of 11 points which likely reflects the reality local stocks don’t benefit from US tax cuts overall and that metals and mining shares remain under pressure.
On forex market the pound is the big overnight with a 0.67% gain to 1.3427. That move is on the news that the UK has agreed a divorce settlement bill to leave the EU and can get on with other negotiations. Euro is a little higher as well at 1.1858 despite strong US growth. The market really doesn’t want to be bullish the big dollar against the euro it seems. The yen is a little weaker with USD/JPY at 111.84 while the commodity bloc is weaker with metals and oil. The Aussie has lost 0.3% to 0.7571, the Canadian dollar has dropped a similar amount with USD/CAD at 1.2849, and the kiwi has slipped to 0.6888.
Oil is lower as traders wonder is the Saudis and Russians are on the same page and as US inventories showed another build. WTI is down 0.93% and Brent lost 0.76%. OPEC has its big meeting tonight however. Gold is down as the solid data in the US and Europe drove rates a little higher in the back of the yield curve which saw the 2-10 steepen to 60 points in the US. Copper, like base metals more broadly is lower again – and still pointing lower.
On the day ahead we finally might have a catalyst for trade on local markets and for the Aussie dollar with the release of Q3 CapEx data for Australia. That’s an important lead into next week’s Q3 GDP result. A surprise to the upside might be a good thing and something I’m guessing at (that’s all it is).
Manufacturing PMI’s in China are also out and will be important here in Australia and across the globe. German retail sales tonight will be interesting as will euro area inflation and unemployment along with a speech by ECB chief economist Peter Praet. In the US its more PCE data and personal income and spending which will be closely watched.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The night after Jerome Powel took centre stage for his nomination hearing current Fed chair Janet Yellen addressed congress. The highlights for me was that she noted that while the Fed continues to raise rates it does so in a manner that is still accommodative and allows the labour market to continue to improve. But, she also highlighted that the unemployment rate is below what many at the Fed consider to be sustainable long term. The positive of that is companies are getting busy with training and ultimately wages will rise.
- Also speaking was San Fran Fed president John Williams who again reiterated that it is appropriate to keep raising rates in the year ahead.
- The beige book was released this morning as well. It reads as a reasonably upbeat take on the outlook for the US economy. And why wouldn’t it be? The latest read on US GDP for Q3 overnight showed the economy growing at a 3.3% annualised rate which is the fastest rate of growth in 3 years. Importantly for the Fed, US interest rates, and the Dollar is that the PCE data last night showed Core PCE prices up 1.4% and headline prices up 1.5%. Both are as expected and both are a big lift from the previous prints of 0.9% and 0.3% respectively.
- Data in Europe was positive as well. German inflation lifted to 1.8% after inflation rose 0.3% in November. Also out was the euro Commission’s monthly sentiment surveys which saw an increase to 114.6 from 114.1 the previous month. That’s the best result since October 2000.
- Speaking of Europe, or more correctly post Brexit UK I don’t want to rain on folks parade and Sterling buyers fun, but overnight the EU’s chief Brexit negotiator Michel Barnier warned the British economy had much to lose and told a German audience that “the future of the EU is more important than Brexit… My responsibility before you and everywhere in Europe is to tell the truth to European businesses… Whatever the outcome of the current negotiations, there will be no business as usual”. Yep. Interesting on the driver of the sterling rally – the exit cost for the UK – Barnier said much work still had to be done in regard to agreeing the exit bill. If a deal isn’t done watch what GBP/USD and EUR/GBP does.
- BoJ deputy governor Nakaso delivered the speech I thought he could yesterday evening as he again highlighted that the BoJ is headed toward the emergency monetary policy exits. He said “An exit from quantitative and qualitative easing (QQE) is very challenging. But I'm confident the BOJ can do this with its various tools, experience, expertise and appropriate communication with markets”. And added that the bank has the tools necessary to engineer a change in policy but noted “what tools we will use and in what sequence would depend on economic, price and financial conditions at the time”
- Yesterday’s DPRK launch yesterday was interesting insofar as it looks like – and the rogue nation claims – to be a bit of a game changer in terms of capability. How the US and China react. If they can react, given this could signal North Korea is a genuine nuclear power with the capability of delivering a nuclear payload to Washington and many other destinations on the continental US. Markets aren’t fazed at present. But it’s something to watch.
- And speaking of something everyone is watching and talking about – HOW ABOUT (BITCOIN). Gee Whiz it’s had a stellar run and then a big reversal overnight. I put my thoughts on it down in this little post yesterday. Overnight the ride has been as wild as the most bucking of broncos with prices trading up and through $11,000 (yes on the same day it traded $10,000) before collapsing back below $9,000 where it found support.
- Oh and NY Fed president Bill Dudley suggested overnight the Fed may be interested in Cryptos. I reckon the RBA should get ahead of the curve have a KangaCoin ICO and make the stuff legal tender in Australia.
Australia
- Former RBA Board member Warwick McKibbin has joined the OECD in calling for the RBA to raise rates. McKibbin believes that a little pain of higher interest rates now will be better for the economy, it’s stability, and the younger cohort of Australians coming through l. The AFR reports McKibbin said “let's have a mild bump now rather than a big one later”. It’s hard to argue against that idea – except of course that central banks have been boosters of growth for decades now and very reluctant to take away the punch bowl.
- One thing worth noting – something I highlighted yesterday when talking about the OECD’s call for higher rates in Australia – is that if the OECD, read RBA, is right about the outlook for the Australian economy then it is difficult to see how they can’t raise rates in 2018. Even with low inflation. That doesn’t mean I don’t have concerns about households and the possible headwind they may offer the economy. But if the RBA is right about growth and inflation then rates will be rising.
- Also in the AFR and something for the Banking Royal Commission boosters to think about. Ratings agency S&P says Australia’s banks are the best regulated in the world and that they haven’t seen any systematic manipulation of rules to warrant a parliamentary inquiry. Plenty will beg to differ. And the conduct of many bankers that has been revealed over recent years is beyond the pale. But is a banking commission any better than what has become the firm hand of APRA and the RBA on banks and management recently. I raise this because the discussion may be important for bank prices going forward and thus sentiment on the local index.
- And speaking of which, the last 24 hours price action in the SPI200 suggests yesterday’s nice little rally in the S&P/ASX 200 may be it for the moment. After climbing 27 points to close at 6111 SPI traders have knocked 12 points off where prices were at the 4pm close with the December contract (our CFD) at 6,007. Crucially though, the high of 6041 was only just a few points below the recent high. Price action suggests a further pullback.
Forex
- As noted above the GBP is still the big story. But in many ways for me the big story is actually that we have a host of individual currency pairs trading on what seems like individual drivers rather than an overarching narrative. That means we can’t talk in terms of US dollar positive or negative in aggregate terms but need to drill down to thee specific. Take the US 2-year bond spread with Australia and its impact on the Aussie dollar against the 2 year bond spread the US has with Germany and the EU and its LACK of impact on the euro. Why the differing outcomes for the two pairs, AUD/USD and EUR/USD? The answer is that like politics it seems all forex is local these days and the Aussie has a very different place in investors portfolios and traders minds than does the euro. It’s one of the reasons I do all the behavioural stuff – to understand the economic and then investment/trading fundamentals. Each pair has different drivers. Just something to think about.
Looking at the price action of GBP it’s close to a break and runt to recent highs. It just needs to close above 1.3415. Which it is a chance to this morning. That could suggest a full round trip to 1.3656. 
- Speaking of round trips have a look at USD/CAD. I got stopped out of a short this week as the Canadian dollar lost ground on the back of oil’s weakness and I think some residual concerns about the outlook for growth after recent BoC comments. It’s broken and closed above two trendlines and can easily run back to the highs if the US tax bill is passed. But, if it doesn’t take out the recent high there is every chance I’ll be selling again in the next few days to a week.
- The kiwi is slipping as well. It’s whole rally is at risk as it dips down and through the uptrend. I’m reminded of the price action in USD/SGD recently which was very similar and saw the Singapore dollar continue to rise against the dollar until its recent stall in the mid 1.36 region. Here’s the 4-hour kiwi chart. 0.6876 looks like the short term key level to watch.
Commodities
- The build in US crude inventories couldn’t have come at a better time as the Saudis and Russians try to agree a deal to be announced at this week’s OPEC meet My in Vienna. It’s another reminder that when Saudi Oil makes mister al-Falih says the job is not yet done that he is right. But so too are the Russians who appear to want a shorter and more flexible extension to the production agreement to account for the reality that the deal is having its desired impact on both inventories and crucially, prices.
- The question for traders is who will prevail because oil prices are at risk of decent price falls if OPEC fluffs its lines this week. Overnight these two forces of inventory build and concern on Russia’s commitment combined to see prices lower once again. WTI dipped 1.78% to $56.96 while Brent fell 1.38% to $62.73. But Saudi the Saudi oil minister has said he’s not worried about the price moves Bloomberg has reported around 5.40am AEDT.
- OPEC will no doubt try to remedy the moves of the last couple of days. But here is the WTI chart. It’s sitting on the 20 day moving average around which the Bollinger bands are calculated. A break of $56.40 (trendline support) would open the way for a move toward $54.65 overall range bottom.
- Gold still lacks a narrative but the rise in US rates and the steepening of the 2-10 spread back to 60 points has knocked it around $10 an ounce lower overnight for a fall of 0.77% to $1283.66.
- Copper and base metals more broadly, continue to be pressured. It lost 1.04% overnight as traders continue to worry about China, its growth and the outlook. Copper is now back and testing the downtrend from which it brokoe up last week before finding resistance exactly where it should have at $3.17. Copper is at $3.0385 this morning and at risk of heading to my medium term target of $2.95 a pound.
Have a great day's trading.