Originally published by AxiTrader
Quick Recap
The US was closed for Martin Luther King day overnight so traders were left to their own devices.
Shares in the UK and Europe were lower on Trump and Brexit worries which helped bonds rally a little and gold hang onto its gains above $1200. Crude oil was little changed on compliance worries and some interesting Saudi comments while on forex markets the pound is the big mover on a day where the US dollar is a little stronger across the board except against the yen.
What You Need To Know
International
- The IMF has upgraded its outlook for the global economy from where it was just last October with the US, China, Japan and Europe all getting an uplift. It’s a recognition of the point I made about the flow of data recently across the globe but also a recognition that the US and China will be stimulating their economies through the year. China was upgraded 0.3% to 6.5% in the year ahead with the US expected to grow at 2.3% in 2017 and then 2.5% in 2018.
- The net impact of the upgrades is for global growth forecasts of 3.4% and 3.6% for 2017 and 2018 respectively. Add in some inflation and we are starting to get some decent levels of nominal growth across the globe and in the US in particular. That’s good for companies, but not so good for bonds or super low Fed rates.
- Worth noting also is that the IMF upgraded the UK economic outlook materially because things hadn't been as bad as forecast. Nothing like resilient citizens and a weaker currency to scotch the hopes of the doom and gloom merchants.
- WE HAVE A BULL LOOSE IN THE CHINA SHOP OF GLOBAL POLITICS AND ECONOMICS. Donald Trump just wants to do deals. In his world it appears everything is negotiable. Whether it is the one-China policy, Russian sanctions for a nuclear arms deal, or threatening Ford, GM, and now German carmakers with a big tariff increase if they don’t move production to the US. It suggests politics is again going to be a big driver in 2017 for traders and markets.
- But because he doesn’t have a playbook – not a conventional one anyway – political risk has risen materially for markets. The trouble is that I don’t know how to factor this heightened risk into prices explicitly. That's because you never know when a comment, a Tweet, is going to be blasted into cyberspace and move asset prices and markets.
- Last night for example German carmakers were down between 1.5% and 2.0% after news broke – via a Bild interview - that Trump said if German carmakers want to build cars for the world good luck but that in building cars for the US “every car that comes to the USA, you will pay 35% tax”. Yes he actually said that - Smoot-Hawley anyone :S
- Clearly he has Mexico in his sights again because he added “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35% tax, then you can forget that”.
- Trump also said NATO is “obsolete” but he likes it and opined that German Chancellor Merkel had made a big mistake letting all the refugees in. He likes Brexit and is happy to do a bilateral trade deal with the UK.
- Political risk is also high in the UK as fears of a Hard Brexit hit the pound in Asian trade yesterday. It stabilised once Tokyo opened around 9am Sydney and then gained a small lift in London. But it’s down 1.36 cents for a loss of around 1.11% this morning as traders await British prime minister May’s speech tonight. Hard Brexit rhetoric has to be on the cards it seems. otherwise why else leak the details of the speech.
- Speaking of politics, Chinese president Xi gave a warm-up speech in Switzerland before his Davos address. Xi said that China is confident and that the economy is “performing steadily” and expected to grow around 6.7% in the year ahead. But in a precursor of what we expect to see in his Davos speech he said “Protectionism, populism and de-globalisation are on the rise. It’s not good for closer economic cooperation globally”. China now playing the roll of globalisation cheerleader – Ironic but that’s what trump has done.
Australia
- The SPI 200 is down this morning with traders taking a lead from the falls in the UK and Europe and forecasting a small 0.2% fall after yesterday’s 27 point rise on the S&P/ASX 200. That seems a reasonable expectation given the lack of direction form US markets and given the positive day yesterday.
- Where we go from here today though is likely to depend on what happens in Asia and China today after a volatile day yesterday on stocks and commodity markets.
- On the data front yesterday the 0.5% rise in the MI monthly inflation gauge was huge. Price pressure’s are rising it seems in a broad-based fashion which the RBA will be noting when they next meet in a couple of weeks. It reduces the chance of another rate cut – as long as Thursday’s employment data is around expectations that is.
Forex
- Sterling is the big story over the past 24 hours with fears of “hard” Brexit knocking the pound to the lowest levels since last October flash crash. The low around 1.1980 odd came in early Asian trade before the Tokyo open saw some bids come into the market. Hard Brexit shouldn’t really be a shock to anyone given it’s what the referendum effectively voted for. But we’ve seen Sterling react positively to any notions that perhaps there’s a half in half out kind of Brexit in prospect.
- But clearly yesterday’s price action suggests folks are still very worried about a more belligerent UK approach to leaving the EU. That makes Theresa May’s speech tonight still a big risk for the pound. But as I noted in my update on Sterling yesterday only a break of the October low at 1.1825ish would get me and the bears hot for a big fall. A natural fibo extension – something I think many traders would extrapolate a GBP/USD move to – would suggest a further 6 big figure fall in time toward 1.12 with some support around 1.15. But the low has to break and hold first.
- Elsewhere in forexland the US dollar is a little stronger across the board. Only marginally so in the grand scheme of things with the euro down 0.4% at 1.06, the Aussie off 0.35% at 0.7471, the CHF lost a similar amount, as did the USD/CAD and kiwi dollars. So it’s a US dollar move.
- That said however it is still looking like the chances of a US dollar reversal remain high. But in US Dollar Index terms we’d have to see a move below 100.50 to get the technicians – and me – excited once more.
- Looking at the Yen it went the other way gaining 0.35% as it played the usual role of forex market safe haven. That’s given the mild uptick in geopolitical risk coming from Donald Trump right now.
Commodities
- Gold is holding above $1200 this morning after a high around $1208 in the past 24 hours. It has now essentially satisfied the 38.2% retecement of the recent sell off which means the easy money for this turn around has been made and gains from here get harder. My system has been long for a while though now and Trump is certainly adding to gold’s allure. If it can close above $1210 it can go for a run but a move back toward $1188/92 is still possible to retest the recent uptrend.
- Some interesting comments from the Saudis on oil with the energy minister Khalid al-Falih saying that an extension of the recent production cut agreement is unlikely to be necessary out past the current 6 month agreement. That suggests to me that my sense the Saudi’s were not trying to drive the price of crude through the roof is on the money. Equally Falih’s comments are consistent with the Saudi message throughout 2016 that the market was moving back into balance. That in itself is bullish for prices going forward.
- Copper had a down day yesterday after approaching the recent highs once again. That could suggest a range top and certainly gives me a level to short against.
Today's key data and events (all times AEDT)
- Australia - New Motor Vehicle Sales (YoY) (Dec), New Motor Vehicle Sales (MoM) (Dec) (11.30am)
- New Zealand - NZIER Business Confidence (QoQ) (Q4) (8am)
- China - Nil
- Japan - Industrial Production (MoM) (Nov), Industrial Production (YoY) (Nov), Capacity Utilization (Nov) (3.30pm)
- Germany - ZEW Survey - Current Situation (Jan), ZEW Survey - Economic Sentiment (Jan) (9pm)
- EU - ZEW Survey - Economic Sentiment (Jan) (9pm)
- UK - Retail Price Index (YoY) (Dec), Retail Price Index (MoM) (Dec), DCLG House Price Index (YoY) (Dec), Producer Price Index - Output (YoY) n.s.a (Dec), PPI Core Output (MoM) n.s.a (Dec), Producer Price Index - Output (MoM) n.s.a (Dec), Producer Price Index - Input (MoM) n.s.a (Dec), Producer Price Index - Input (YoY) n.s.a (Dec), PPI Core Output (YoY) n.s.a (Dec), Consumer Price Index (MoM) (Dec), Consumer Price Index (YoY) (Dec), Core Consumer Price Index (YoY) (Dec) (8.30pm)
- Canada - Nil
- US - NY Empire State Manufacturing Index (Jan) (12.30am); IBD/TIPP Economic Optimism (MoM) (Jan), NAHB Housing Market Index (Jan) (2am); 4-Week Bill Auction, 3-Month Bill Auction, 6-Month Bill Auction (3.30am)
Have a great day's trading