Originally published by https://www.axitrader.com/au
Quick Recap
There is nothing like clarity to turn around a market. And that is exactly what British prime minister Theresa May sought to give UK citizens, traders, and markets in her speech overnight. That ignited a monster rally in the pound which in turn hit the US dollar for six across the board with the euro, yen, Aussie, other currencies and many commodities – including gold – rallying hard.
Stocks in Europe were lower however and US equities finished in the red. Financials in particular were hammered in the US down around 1.9%.
What You Need To Know
International
- Prime Minister May’s speech had been largely leaked in Asian trade yesterday. I summarised what we knew about May’s plans here in a piece yesterday. But the key was 4 guiding principles and 12 core objectives. But essentially the UK is out and wants a new deal with the EU.
- The fact that what we saw in Asia was the core of a hard exit for Britain yet Sterling didn’t go down was a sign of Sterling strength but the kicker was May’s signal overnight that both Houses of parliament will get a chance to vote on the deal meant that traders appear to have taken this as a salve for the fear of super hard Brexit.
- Yes I know that sounds nuanced and stupid. But the reality May appears to be doing a reasonably job of being both strong and conciliatory and that has encouraged foreign exchange traders and investors. So sterling is up 2.86% at 1.2389 (at 5.30 am AEDT).
- Pound strength had already encouraged traders in early Europe to sell dollars and that continued overnight. Many are now attributing that to Trump’s comments about the US dollar as well – something I talked about on Monday. More on that in the Forex section below.
Elsewhere
- President Xi went to Davos bearing gifts in the form of an opening of the Chinese economy to new foreign investment while at the same time making a case for China to take a global leadership role. Xi argued against protectionism saying it was like “locking oneself in a dark room” in the hope of staying safe and protecting from danger when in fact all it did was cut off “light and air”. He also added – perhaps iron hand in a velvet glove style – “No one will emerge as a winner in a trade war”.
- Xi did also acknowledge the downside of globalisation noting that it had become a Pandora’s box and then quoting Charles Dickens opening line to a Tale of Two Cities saying “it was the best of times, it was the worst of times”. A tale of two economies perhaps. But that is exactly what is driving the populist surge in developed economies as many voters have felt left behind by globalisation.
- Xi also said China’s economy would be driven by a “new normal” of household consumption.
- Back in the US and Fed Governor Lael Brainard said that Trumponomics fiscal arm and stimulus could fuel a lift in inflation. “If fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid” she said. Brainard also said full employment is within reach.
- But NY Fed president Dudley said that regulatory changes could make businesses and workers more productive. That would be an important offset to any upward inflation pressures.
- After the IMF upgraded its global growth outlook the previous night the UN joined the party overnight. The UN said it upgraded 2017 growth from 2.2% in 2016 to 2.7% this year and 2.9% in 2018. Importantly it has China penciled in for 6.5% growth and India in for 7.7%. It’s a little worried about Trumps policy prescription however. NB: UN has lower growth numbers than the IMF because the fund uses PPP. But the message is clear…the global economy is picking up after a slow 2016.
- Bonds are lower again this morning. US 10’s are down at 2.33%, German 10’s at 0.32%, and 10 year UK gilts are sitting at 1.4%.
- UK inflation has been getting a lift from a weaker pound. For the month of December headline CPI inflation rose 0.5% taking the year on year rate to 1.6% its highest level in two years.
Australia
- The local market had a bit of a shocker yesterday with the ASX 200 dropping around 50 points to close at 5699. The big banks lost 1% and the materials sector was under pressure as well as base metals and iron ore were sold heavily in Asian trade.
- The overall level of weakness was in ine with the weekly rejection of the big downtrend line from the alltime high I highlighted earlier this week. So on that basis it feels like the Aussie market needs another rally in US stocks to regain its footing. Otherwise its at risk of a deeper retracement. Here’s the SPI 200 chart.
- On the data the chances of an RBA rate cut receded further into the ether yesterday with a 4.9% jump in investment lending and and another surge in new motor vehicle sales. Both stats talk to an economy that doesn’t need any further monetary accommodation.
Forex
- You won’t be able to turn around this morning without reading that the US dollar is under pressure because of president-elect Trump’s comments that the US dollar is too high. But what’s important about this is that he said that on the weekend and I mentioned it in Monday’s report. So it was in the market. That means I don’t believe Trump’s comments caused the move. Rather Sterling’s move caused some dollar selling which cascaded across forex markets more broadly and then the press and others did what folks like to do and fit the narrative around the move. Ex-poste not ex-ante.
- Now please don’t think I’m getting on my high horse about me being right and everyone else wrong. Please don’t. My point here is not to say that at all. My point is to highlight again what I said last year many times before my summer holiday and what I wrote again on Monday:
- “Why the reversal in the US dollar is not hard to understand. The stronger the US dollar gets the more chance there is that the expected lift in growth can leak out of the US and into the global economy via the exchange rate and net exports. Traders recognise that and when you throw in levels that were overbought – in a US dollar sense – some sort of retracement was on the cards. Add in Trump's recent rhetoric about the US dollar being too strong -he was talking in context of China in this sense but the message is a broad one – and you get a chance for further US dollar weakness.”
- The market is very long dollars, and the obvious problems with that positioning, and for the US economy given Trump’s plans, policies, and indeed his approach to what he wants to achieve mean more weakness for the dollar in the short term is on the cards. Monday I highlighted the Yen as the leader of the pack. Today many other currencies caught up a little.
- So this morning we have a sea of US weakness and the US Dollar Index under the 100.50 level I highlighted yesterday. 100 flat is psychologically important. But a break would signal a deeper pullback for the dollar.
- Looking specifically at prices this morning USDJPY is down 1% at 113, the euro is up a little under 1% at 1.0696, the Aussie dollar is up a similar amount at 0.7541. The Swiss franc and Canadian dollar are also up by a similar amount while the Kiwi is doing a little better up 1.3%.
- Worth noting is that the move in GBPUSD has broken the one-month downtrend for the pound. The question is where too from here. Another 2-3 big figures is not out of the question for the next week or so.
Commodities
- Gold is up 1% this morning as the US dollar weakness and I think traders become enamoured with its risk management properties in an uncertain world. Having broken the 38.2% retracement of the big post-Trump selloff and through the $1210 level gold is sitting at $1215 today. Traders may now be focussing on a move toward $1230.
- Crude Oil is up as the US dollar weakness lifts all boats – many anyway – with NYmex crude up more than 1% to $52.97. There is continuing uncertainty about the increase in US production and so worries about how that can impact the supply demand balance. But as I highlighted yesterday the Saudis still believe the market is moving into balance. ON that note the Reuters reports production data from southern Iraq suggests it too has been sticking to its quota in terms of a cut.
- Copper was caught in the awful sell off in base metals and iron ore in China and across the globe in the past 24 hours. It’s down 2.41% at 2.61 this morning.
- Here's a look at the carnage on metals, steel, and iron ore markets over the past 24 hours.
Today's key data and events (all times AEDT)
- Australia - Nil
- New Zealand - GDT Price Index (n/a)
- China - Nil
- Japan - Nil
- Germany - Consumer Price Index (YoY) (Dec), Consumer Price Index - Core (MoM) (Dec), Consumer Price Index - Core (YoY) (Dec), Consumer Price Index (MoM) (Dec) (6pm)
- EU - Consumer Price Index (YoY) (Dec), Consumer Price Index - Core (MoM) (Dec), Consumer Price Index - Core (YoY) (Dec), Consumer Price Index (MoM) (Dec) (9pm)
- UK - ILO Unemployment Rate (3M) (Nov), Average Earnings including Bonus (3Mo/Yr) (Nov), Average Earnings excluding Bonus (3Mo/Yr) (Nov), Claimant Count Rate (Dec), Claimant Count Change (Dec) (8.30pm)
- Canada - BOC Rate Statement, BoC Interest Rate Decision (2am)
- US - MBA Mortgage Applications (Jan 13) (11pm); Consumer Price Index (MoM) (Dec), Consumer Price Index Core s.a (Dec), Consumer Price Index n.s.a (MoM) (Dec), Consumer Price Index Ex Food & Energy (MoM) (Dec), Consumer Price Index (YoY) (Dec), Consumer Price Index Ex Food & Energy (YoY) (Dec) (12.30am); Redbook index (MoM) (Jan 13), Redbook index (YoY) (Jan 13) (12.55am); Industrial Production (MoM) (Dec), Capacity Utilization (Dec) (1.15am); Fed's Beige Book (6am); Total Net TIC Flows (Nov), Net Long-Term TIC Flows (Nov) (8am)
Have a great day's trading