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Re-emergence Of A 'Presidential' Donald Trump Ignites Stocks

Published 02/03/2017, 10:50 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Key Takeaway

Markets have voted again and it’s clear they liked the version of Donald Trump that they saw address yesterday’s joint sitting of the US Congress. Certainly there was little additional specitifity – the so-called meat on the bone – but the president’s tone echoed the one that ignited the initial Trumponomics rally during his acceptance speech on election night back in November. Traders and investors clearly like that version of Donald Trump.

So we have the Dow Jones Industrial Average up more than 300 points and above 21,000, the S&P 500 up 35 points and just below 2400, and the Nasdaq 100 is up almost 80 points at 5900. The FTSE 100 rallied sharply to close at a new record high, the DAX and CAC 40 closed either side of 2% higher and local traders have taken the SPI up more than 50 points overnight signalling a solid day’s trade for the local market.

I’ve heard the overnight stock's rally characterised as irrational exuberance already on the BBC this morning. Who knows. But price action is price action and as the rally from 2011 to 2015 showed it’s much easier to call a top than actually see one.

On other markets the residual effect of comments by Fed speakers Williams and Dudley yesterday morning have seen bond rates across the globe move higher and the odds of a March rate hike approach 70%.

That’s helped the US dollar but only really against the yen, Canadian dollar, and on the margin at the moment. Crowded traded?

On commodity markets gold is a little lower, copper a little higher as the Escondida strike turns violent, and oil is off a smidge. Base metals, steel, and iron ore as a block are all higher.

What You Need To Know (with a little more detail and a few charts)

International

  • Presidential Trump. That’s all it took for stocks to ignite once more. And it’s taken the S&P 500 right up to, and a little under the old support line which could become resistance. Because the chart dates back to the low in 2009 it’s difficult to pinpoint the exact level because even the tiniest miscalculation of the angle can – 8 years later – mean a difference of 10 or 20 index points. So lets say the resistance comes in around 2400.
  • That’s the level Goldman Sachs (NYSE:GS) suggested earlier this week should pull the markets rally up. And it’s a level beyond most forecasters expectation of where the S&P 500 will end the year. It’s also a level that with the S&P 500 sitting just below many traders and investors will be shaking their head at given the president’s speech was long on rhetoric – positive though it was – and short on the detail markets were hoping for.
  • But price action is price action. Here’s the latest update of the S&P weekly since 2009 from my Reuters Eikon terminal.

Chart

  • On the data front last night in the US construction spending fell 1%, but the ISM manufacturing beat expectations with a rise to 57.7 from 56.0. That’s the best reading since August 2014 and another sign the economy is doing relatively well. Equally the release of personal income data in the US which showed an increase of 0.4% was a solid sign. The PCE price index rose the most in four years up 0.4% last month taking the year on year rate up to 1.9% from 1.6% last. That’s positive but personal spending only rose 0.2% against expectations of a 0.3% increase.
  • In terms of bonds, the US 2s and 10s are higher at 1.29% and 2.46% respectively. But that's not too bad - or stock rally threatening - all things considered. Indeed the 10's are still way below the recent high around 2.6%.
  • But the odds of a Fed rate hike in March have been materially repriced since last Friday when they sat around 25%. The CME's FedWatch tool says the market is now pricing close to 70% of a Fed tightening this month.

Chart

  • Also out this morning was the Fed's Beige Book. That's the briefing notes put together by Fed staffers from the 12 districts in preparation for the next FOMC meeting. It showed tightness in the labour market, some shortages in specific industries like IT, modest or moderate growth, but it lacked the kind of hard rhetoric we've been hearing from Fed speakers lately which is interesting.
  • Over in Europe German inflation will be giving the Bundesbank – and perhaps some of the older population – chills. Data released last night showed that German consumer prices in the year to February rose 2.2% up from 1.9% previously. That’s the fastest pace of inflation since 2012.
  • Also in Europe Francois Fillon is hanging on in the race for President even though he is now formally being investigated. That would appear to help Emmanuel Macron.
  • And EU president jean-Claude Juncker put forward a white paper which looks at the future of the EU. That includes closer integration or a more lose coalition. But what he did say he is trying to do is make sure the EU project - if I can call it that - is not threatened by individual country popular political movements because what the EU has achieved - in terms of stability across the region - is too important.
  • Yesterday China overhauled the way foreign bond investors are allowed to interact with onshore markets allowing them to hedge their holding via forex.

Australia

  • Yesterday wasn’t a terrible day for the local market once you factor in the drag that Telstra Corporation Ltd. (AX:TLS) going ex dividend had on the index. But the fall of 7 points to 5704 looks set to be washed away today if traders in overnight markets are correct.
  • The SPI is up around 46 points, 0.8%, this morning at 5729. That’s still a lag on the performance of US and European markets however which is testament to the sentiment destruction that may have happened over the past couple of weeks as the ASX has continued to slide regardless of what’s going on in US markets. There are naturally many reasons why the local market can underperform the moves in the US. But with the move overnight a serious gap has again opened up in the relative price performance of the S&P 500 and the S&P/ASX 200.
  • That may embolden the bulls to drive prices higher than the SPI traders are currently betting. Here’s the chart from my Reuters Eikon we’ve been watching for the past year of so.

Chart

  • Looking at the economy now and yesterday’s Q4 GDP was a cracker which shot the lights out with a print of 1.1% on the quarter and 2.4% year on year. That was much better than expected and the drivers of growth insofar as 15 of 20 industries recorded growth and household final consumption contributed 0.5% to the quarters 1.1% rate are encouraging.
  • From what I’ve read most forecasters appear to have characterised the result as a pretty good one for the economy. But there are still many lingering concerns about the outlook in 2018. That’s because the consumption side of the equation has largely come at a time when wages growth is stagnant and Australian households have run their savings rate down to 5.2%. The big question is can it last.
  • Time will tell – but the key thing from this strong bounce back from the September quarter’s -0.5% print is that there is little to no chance that the RBA will be lowering rates anytime soon.
  • Today we get the release of building permits and trade data in Australia. Trade is expected to deliver another bumper surplus to the nation with forecasters average guesstimates coming in at $3.8 billion. Trade has been a market mover over the past year so any material deviation could impact the Australian dollar.

Forex

  • Probably the most interesting market move over the past 24 hours – or should I say non move – has been the reaction of the US dollar. While the Fed has clearly signalled that it is genuinely considering a rate hike at this month’s meeting, while US interest rate futures markets have moved to increase pricing to reflect this, and while president Trump clearly signalled he still plans bug infrastructure spending and tax cuts the US dollar has hardly moved.
  • Sure the US dollar index is back at 101.57, and certainly the Japanese yen at 113.61 is a sign that the buyers are back. But it also leaves plenty of room for the US dollar to appreciate later this week if Fed chair Janet Yellen and her deputy Stanley Fischer back Dudley and Williams in their own speeches Friday.
  • Then we could really see a big US dollar move with the index up and through 102.
  • In the mean time though the rally in USD/JPY is encouraging for the bulls because it comes after yet another test into the important 111.50/112.00 support zone. While that zone holds it sets up for a surge in USD/JPY toward the 115/116 region.
  • Euro is interesting insofar as it remains strong. Data out of Germany – and the strength of it – is really opening up the chance that the ECB will be forced to change its monetary policy settings this year. Certainly the Bundesbank is already suggesting this and while Mario Draghi and ECB staffers have consistently rejected this saying they will look through the data at the moment there is a real sense the discussions are changing. I say that because behaviourally why else would Draghi and ECB chief economist Praet volunteer the information? So Euro could be weighted by US strength but outperform GBP and Jpy on the crosses (sounds like an idea for a paper)
  • For the Aussie there is nothing like strong growth and a surge in investor risk appetite to get the buyers back. But the battle rages because the Fed tightening cycle and potential US dollar strength will temper this. Were it not for the Fed comments yesterday morning before the release of GDP then there is every chance the AUD/USD would have blown through the high it set at 0.7699 and would be trading above 77 cents this morning not the 0.7672 level it is sitting at. Like the euro it can outperform on the crosses.

Commodities

  • Copper is up a little after the Escondida strike got a little violent yesterday as miners blocked roads and clashed with police. Throw in an internal memo Reuters seems to have from Freeport McMoran staff in Indonesia noting that mine will continue at below recent productive capacity and you had some support for copper which is at $2.72 this morning. That’s of its highs, but prices are also being supported by the overall base metal move.
  • Gold is interesting right now. Have a look at the piece I wrote yesterday on the blog saying it’s vulnerable right now given moves in US interest rates and the dollar. It’s out of whack in many ways. But at $1247 this morning it’s hanging tough.
  • Indeed it bounced neatly off one of the trendlines I highlighted in yesterday's piece as support.

Chart

  • Crude is only down mildly this morning even though production details from Russia suggest the production cuts are being done very slowly. Reuters also said that US shale production is also rising. Inventory data from the EIA showed the build over the past week in crude inventories was a little lower than expected but total inventories still rose to a record high.
  • All sounds bearish for crude but Brent is down just 0.09% at $56.46 and WTI is off just 0.13% at $53.94

Today's key data and events (all times AEDT)

  • Australia - Building Permits (MoM) (Jan), Building Permits (YoY) (Jan), Imports (Jan), Exports (Jan), Trade Balance (Jan) (11.30am)
  • New Zealand - Nil
  • China - Nil
  • Japan - Monetary Base (YoY) (Feb), Foreign investment in Japan stocks (Feb 24), Foreign bond investment (Feb 24) (10.50am)
  • Germany - Import Price Index (MoM) (Jan), Import Price Index (YoY) (Jan) (6pm)
  • EU - Unemployment Rate (Jan), Consumer Price Index (YoY) (Feb), Consumer Price Index - Core (YoY) (Feb), Producer Price Index (YoY) (Jan), Producer Price Index (MoM) (Jan) (9pm)
  • UK - PMI Construction (Feb) (8.30pm)
  • Canada - Gross Domestic Product Annualized (QoQ) (Q4), Gross Domestic Product (MoM) (Dec) (12.30am); BoC Gov Council Member Lane Speech (4am)
  • US - FOMC Member Brainard Speech (9am); Continuing Jobless Claims (Feb 17), Initial Jobless Claims (Feb 24) (12.30am); ISM New York index (Feb) (1.45am); EIA Natural Gas Storage change (Feb 24) (2.30am)

Have a great day's trading.

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