Originally published by AxiTrader
Key Takeaway
The Trump trade continues to unwind and although US stocks recovered toward the close European stocks down again overnight. The US dollar also came in for a hammering as a combination of decent GDP data in Europe and president Trump and his trade negotiator both signaled that they don’t like a strong dollar.
As uncertainty grows and folks recognise there are some uncertainties around Trumponomics and the reflation of the US economy – which is being lost in the immigration debate and a focus on other battles – they are taking some cash off the table.
The big question is how deep and how long the unwind is.
What You Need To Know
International
- European stocks were the big losers, indeed the euro project was overnight. The DAX was down 1.25% last night, the CAC in France dropped 0.75% and in the UK the FTSE was 0.27% lower.
- US stocks recovered from their weakest levels with the S&P 500 now only down 2 points, 0.1%, and the Nasdaq 100 actually ended higher up 0.02%. The Dow is off 0.5% while US 10's are at 2.44%, down four points.
- It’s all about Trump again in markets overnight. The stock market selling, the weakness in the US dollar, the rally in gold and other commodities can all be laid at the feet of president Trump’s rush to tick each box of his to-do list from the campaign. It’s a rush that has policy formulation, implementation, and execution as apparent second order issues to simply making the change. That’s something US House speaker paul Ryan highlighted overnight when discussing the immigration move last Friday. This is what has spooked traders and investors across the globe.
- Certainly what Trump has done is not exactly a shock given – as the president said himself – his policy platform. But traders and investors the world over had invested in the conciliatory president-elect not the aggressive executive order writing president now in the Oval Office. That in itself has created the uncertainty which is weighing on sentiment right now.
- Who do you blame is a question many might ask. The simple answer is traders and investors almost exclusively focused on the “good stuff” that Trumponomics contained ignoring any of the bad stuff – what I called the darkness of Trumponomics yesterday. So as much as many would like to blame the president’s actions the blame must be shared with markets.
- That said though I doubt anyone expected Trump’s trade negotiator to kick off by calling Germany a currency manipulator as he did in an FT article overnight. The FT reported that Peter Navarro, the head of president Trump’s new National Trade Council, told the paper that Germany is using a “grossly undervalued” euro to “exploit” the US and its EU partners.
- From the FT “A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued,” Mr Navarro said. “The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity [diversity] within the EU — ergo, this is a multilateral deal in bilateral dress.” That last bit of the quote reminds me of an old editor saying to me once – Can You Even English!
- German Chancellor Angela Merkel kind of hit back saying “We won’t exercise any influence over the European Central Bank, so I can’t and I don’t want to change the situation as it is now… Beyond that, we strive to trade on the global market with competitive products in fair trade with all others.”
- So is it any surprise that stocks in Europe came under pressure with the DAX falling 1.25%. It, and other markets in the UK and across the continent had been mounting a rally at one point. But comments like this just add a level of irreducible uncertainty because who knows where they lead.
- The net result is traders and investors simply retreat to cash, bonds, or their home currency until things settle and the outlook becomes clear.
Elsewhere
- Employment costs in the US rose 0.5% in Q4 2016, with wages and salaries up 0.5%. But the Chicago PMI whiffed with a dip to 50.3 from 55. US consumer confidence dipped a little to 111.8 from 113.7.
- EU GDP rose 1.8% yoy and 0.5% qoq during the final quarter of 2016. Theoretically, if you annualise the 0.5% rate that’s strong that US growth.
- Reuters released a survey showing just how much confidence global investors have placed in Trump’s reflation last night. US equity positions are up to 41.8% which is the highest since June 2015. But the comments from some of those 47 big global fund managers to questions about Trump reflation suggest even though these same investors are long they recognise there is some risk of policy implementation delay and that stocks are proced to perfection. That helps explain the selling and reinforces the money off the table idea.
- Yesterday the BoJ left rates on hold but upgraded its GDP outlook while leaving its CPI forecast essentially unchanged. It also signaled that it is committed to keeping 10 year bond rates either side of zero. That’s a signal that as it said when it instituted its latest version of QQE that it will not let rate rise derail a healing economy.
- US Senate democrats boycotted the confirmation hearings of Donald Trump’s pick for Treasury Secretary Steve Mnuchin, and one other cabinet level position overnight as they signal their opposition to him is growing. That’s a small window into the kind of issue the president’s legislative agenda may have even though the Republican’s have control of both houses.
Australia
- Yesterday was another bad day on the local market. But we only had 130 of the 200 stocks in the S&P/ASX 200 down so it was a mildly better day than Monday even though stocks ended at 5620. We did hold 5600 however which is the level the charts suggest is critical to the medium term outlook for the market. That’s a level prices struggled to best last year for a time and so far on two occasions it’s provide support. SO it’s the one myself, and others are watching.
- But SPI 200 traders seem to be betting that we have a better day today. They have the March futures marked up by 19 points. Here’s hoping US stocks can rally into the close.
- Yesterday we got the release of the NAB business survey. And even though the NAB itself was very cautious about the recovery in business conditions I’m very encouraged. Yes confidence stayed at 6 but conditions rose to 11 from 6, trading surged to 20 from 10 and profitability rose to 14 from last month’s 6. That’s a good combination on my read and I am a little more encouraged about the outlook for the economy in the months ahead.
- Combine that with the ridiculous re-emergence of investors driving Australian housing – as RBA data showed yesterday – and the chance of another rate cut anytime soon diminish a little. One thing though. The RBA credit data yesterday showed an increase in business borrowing. Animal spirits
Forex
- The US dollar was absolutely hammered at one point last night. The Dollar index dipped to 99.43, euro rose to 1.0811, USDJPY fell to just above 112, and the Aussie dollar was briefly above 76 cents. A big part of the move is because of the uncertainty – I’ll make that my charity word for 2017 and give a $1 to St Vincent de Paul every time I write it – that has risen in the past few days around Trump.
- But the real reason for the US dollar’s swoon is that it is clear president Trump detests a strong dollar. The comments from his trade negotiator Navarro are really bleating about a strong dollar. Then, meeting with CEO’s from the Pharma industry the president said of China and Japan (the FT reports) “They play the money market, they play the devaluation market, while we sit here like a bunch of dummies”.
- So even though the dollar is off it’s lows it remains under pressure as the US Dollar Index chart shows.
- Interestingly – and this is perhaps just a nascent early morning thought – Trumps policy implementation and execution issues, along with the clear obstruction democrats are now going to run, means his policies to reflate the economy may be further out in time than we all thought probable. That means the Fed might be less likely to tighten aggressively in 2017 and 2018.
- Anyway this morning we have Euro breaking out at 1.0792, USD/JPY at 1.1296, the Pound substantially higher again at 1.2575, and the Aussie at 0.7579.
Commodities
- There is nothing like uncertainty to drive the price of gold higher. So the Trump teams ham-fisted execution of its immigration ban, Navarro’s attack on Germany, and a weaker US dollar were all that gold traders needed to push price back up toward the recent highs. As I suggested yesterday this has been the missing piece in real market disquiet...if gold pushes much higher we'll know the fear bear is out of the cave. The level to watch is $1219/20 resistance. If it breaks a move into the $1248/53 zone (existing fibo retracement and a new fibo projection) is likely to become the focus of many traders.
- Crude oil is higher, but off its highs, as reports surface that there has been 82% compliance with the planned production cuts. That’s seen WTI up just 0.18% after being 1.43% higher around 5am Sydney time this morning at $53.38. At that time Brent was up up 1.12%, it's up 0.8% now. One thing I would note about the high level of compliance that Reuters reported in aggregate, doesn’t show in particular that it is Saudi Arabia and Kuwait that are bearing the brunt of the production cuts. The Saudis themselves accounted for something like 60% of the cut - more than it agreed to reduce production – while other nations such as Iraq, Algeria, and Venezuela have cut production less than a quarter of their quota.
- No one wants to hear that this morning though. The US dollar is weak, compliance 958,000 of the promised 1.1164 million bpd cuts in production so traders see this as a good start. Perhaps they also see the obvious desire by the Saudis to get production down, and compensate for their partners, as a sign the Kingdom is serious. It’s something to watch though going forward.
- In the mean time the rally in WTI saw a retest of the trendline crude has slipped out of. Prices would need to get back above last night’s high and above the line to move the focus higher again. My focus is still on lower prices.
- A weaker US dollar let copper, and other base metals, rally nicely overnight. The rally in copper of 2.59% is a solid one and has taken prices up to $2.71 a pound. That’s back near the highs of last year's rally as traders fret a little about the chances of a strike at Escondida, the world's biggest copper mine.
Today's key data and events (all times AEDT)
- Australia - AiG Performance of Mfg Index (Jan) (9.30am)
- New Zealand - Participation Rate (Q4), Unemployment Rate (Q4), Employment Change (Q4), Labour cost index (YoY) (Q4), Labour cost index (QoQ) (Q4) (8.45am); RBA Commodity Index SDR (YoY) (Jan) (4.30pm)
- China - Non-manufacturing PMI (Jan), NBS Manufacturing PMI (Jan) (12pm)
- Japan - Monetary Base (YoY) (Jan) (10.50am); Nikkei Manufacturing PMI (Jan) (11.30am)
- Germany - Markit Manufacturing PMI (Jan) (7.55pm)
- EU - Non-monetary policy's ECB meeting (7pm); Markit Manufacturing PMI (Jan) (8pm); European Commission Releases Economic Growth Forecasts (9pm)
- UK - BRC Shop Price Index (YoY) (Jan) (11.01am); Markit Manufacturing PMI (Jan) (8.30pm)
- Canada - Nil
- US - API Weekly Crude Oil Stock (8.30am); MBA Mortgage Applications (Jan 27) 911pm); ADP Employment Change (Jan) (12.15am); Markit Manufacturing PMI (Jan) (1.45am); ISM Manufacturing PMI (Jan), ISM Prices Paid (Jan), Construction Spending (MoM) (Dec) (2am); EIA Crude Oil Stocks change (Jan 27) (2.30am); Fed's Monetary Policy Statement, Fed Interest Rate Decision (6am); Total Vehicle Sales (Jan) (n/a)
Have a great day's trading.