Originally published by AxiTrader
Quick Recap
US president Donald Trump has hit the ground running, signing an order to get the US out of the TPP and sending his representative Jared Kushner to Canada to meet with prime minister Trudeau to discuss NAFTA. President Trump also met with big US manufacturers as well as the leaders of a number of unions.
His clear focus on manufacturing in a world of services when combined with his spokesman’s comment that the Trump press secretary simply presented alternative facts about the inauguration has spooked traders across global markets.
As a result the US dollar has been weakening since the Asia open yesterday, stocks are lower, gold has rallied and bonds prices have risen as yields dropped. But the Trump era is about picking winners and losers.
So the Aussie and Canadian dollars have materially underperformed the vast majority of forex pairs as we start the week.
What You Need To Know
International
- US stocks, bonds and the dollar are all lower this morning after markets have reacted badly to the clear signal from president Trump that the policy platform he took to the election remains fundamental to his presidency. Quelle surprise right :S.
- With just 10 minutes to go before the close the Dow is getting back toward flat with a small fall of 0.07%, the Nasdaq 100 is down 0.06% and the S&P 500 is down 0.30%. US 10s rallied 7 basis points to 2.4%.
- To that end president Trump has signed an executive order withdrawing the US from the TPP. He said it was a great day for US workers. He’s also still focussed on NAFTA.
- He also met with a number of CEO’s from US manufacturers saying that he’d punish imports from firms which moved jobs offshore with heavy tariffs. He promised to cut taxes into the 15-20% region but the company bosses said that regulation was a big impost that needed to be addressed. Trump said he could cut regulation by as much as 75%. Worth noting is that it’s not just CEO’s the president is meeting with. Reuters reports he planned to meet with leaders of building and sheet metals unions.
- If I can editorialise it is worth noting that the fact that president trump is already more combative than the president-elect the market saw straight after the election is problematic. Clearly in his comments above he plans to deliver the tax and regulatory cuts which were so much a part of the rally we saw from November to December. But what’s also clear is traders and markets are a little uncertain about this focus on manufacturing and what it might mean for protectionism in the US, and as a result trade wars around the world. It’s part why investors are lightening their load and selling stocks, and buying gold and bonds.
- It’s not just Donald Trump with an interventionist bent these days when it comes to the economy and manufacturing. UK prime minister Theresa May released a “Modern Industrial Strategy” which Reuters reported “demands closer collaboration in key industries in exchange for government support, aiming to increase productivity, reinvigorate industrial production and stimulate investment in technology and R&D”.
- This is a big move folks. The US and the UK intervening to seemingly roll back the tide – or at least take a more interventionist role in their economy is something markets are not used to. May and Trump will have plenty of common ground when they catch up at the White House later this week.
- China is again warning Donald Trump on the importance of one-China policy. This is a potentially important flash point.
- The German government is holding a fairly benign forecast of 1.4% growth during 2017. Separately, the Bundesbank said inflation could hit 2% in January.
- A window into the French and German election? The Dutch prime minister Mark Rutte has been pushed to the right in response to the rise of populist/nationalist Gert Wilder and his party as the nation nears the upcoming election. In a full page newspaper message Rutte criticised people who “refuse to adapt, and criticise our values” and should “behave normally, or go away”. The key is that while the catalysts might be different in Holland, France, and Germany the rise of populism is changing the face of global politics. That matters for markets and investing because it changes – or potentially can change – the operating paradigm of global markets.
Australia
- Stocks had a shocker here in Australia again yesterday today with a 44 point, 0.8% fall. Again the banks were under pressure with Morgan Stanley (NYSE:MS) joining Citibank and Macquarie (AX:MQG) from Friday warning that the Big 4 can’t match the global rally in stocks. That said they didn’t fall too far but overall every sector of the local market came under heavy selling pressure.
- But even with the US market down overnight the ASX 200 performance is really starting to lag the stability we’ve seen in the S&P 500 over recent weeks. The question for traders is how far can the ASX fall. In a physical sense as I’ve noted before the 5500/30 region looks like a usual retracement and also the next really big line of support.
- While Brambles Ltd (AX:BXB) is the big loser after the profit warning, and Bellamy’s the talking point on the back of IMF Bentham confirming it’s mounting a class action against the firm perhaps some of the selling of Aussie stocks, and underperformance of the Aussie dollar, can also be placed at the feet of Donald Trump. I say that because if anything is clear it is that president Trump plans to implement as much of his policy platform as possible now he’s president. And it is also apparent that Mexico and China remain in his sights.
- That’s problematic because given China is Australia’s major trading partner that places Australia’s business and political class in the uncomfortable position between China and our major defence ally. Ultimately I’m not sure president Trump will start a trade war given – Chinese president Xi said in Davos last week – nobody wins in such a clash. But should investment committees at major money managers around the world be worried about such an outcome when they sit down for their next meeting in February Australian assets may continue to suffer. Time will tell. But for now it’s looking like we need a fall to 5500 or a powerful rally in the US to reverse the weak sentiment in Australian stocks right now.
Forex
- The US dollar has been under heavy selling pressure since Asia opened yesterday. Donald Trump’s use of the word “protection” during his inauguration speech is being bandied about as the catalyst for the selling. Some are saying that this offset the promises of tax cuts and spending – which were not explicitly mentioned by the president when he addressed the crowd.
- But the market is long US dollars and short yen, among other currencies. This positioning makes the market vulnerable to a reversal. But it is worth noting – again – that in US dollar index terms prices are holding above the important 99.50/100 zone I’ve been watching and highlighting. It's a big chance to break though.
- Looking specifically at some of the moves of the past 24 hours the Yen and pound are the big movers. USDJPY has fallen 1.36% to 113.04 as I write (7.50am AEDT) while the pound has gained 1% to 1.2503. I wrote about the outlook for the yen yesterday.
- Sterling appears to be benefitting both from a weaker dollar but also expectations the UK High Court will tonight reaffirm its decision to force prime minister May to ask parliament for permission to trigger Article 50 which would signal the UK’s withdrawal from the EU. 1.26/1.27 seems a reasonable target at present.
- The euro is comfortably above 1.07. But at 1.0734 is up just 0.4% while the Canadian dollar has only gained a similar amount with USD/CAD at 1.3261 this morning. In the latter’s case the CAD is weighed a little by NAFTA renegotiations and the dip in crude.
- The Aussie dollar is significantly lagging this US dollar move – and the Kiwi which has gained 0.75% to 0.7215. The AUDUSD made a marginal new high for this run in the high 7580’s but it is back at 0.7570 - up 0.25%. There is a real risk Australia gets marked down until the China/US face off – or not – is clarified in the months ahead.
- The currencies of Asia and LatAm also benefitted from the US dollar’s weakness. The KRW is the leader with a 0.7% gain which has seen USDKRW dip to 1165. The Mexican peso is next best with a rally of 0.52% which sees USDMXN sitting at 21.48 this morning. The Chinese Yuan offshore has has dipped with USDCNH down 0.24% to 6.82.
Commodities
- Gold touched it’s highest level in two months in the past 24 hours but needs to kick up and through $1219/20 if it is to kick onto higher prices. This level is the 38.2% retracement of the move from last years high to low as you can see below.
- How crude can rally under the weight of such heavy positioning is baffling. Perhaps that’s why it’s off a little this morning after a strong move on Friday night. More likely though was the focus I’m reading about on the size of the jump in the Baker Hughes US rig count which leapt more than any week for the past 5 years with the addition of 39 rigs last week.
- Traders are clearly watching this closely even though the Saudis and OPEC again said at the weekend’s compliance meeting that US production can be absorbed. Crude is off 0.6% to $52.91 in Nymex terms but again found support at the little trend line we’ve been watching. A break could be a big one if it comes.
- Iraq’s oil minister told Reuters he was “very happy” with the current production cut agreement and said the price is heading toward $60 a barrel and that “$60-$65 will be reachable”.
- Copper is higher in a more positive night for base metals. It’s a move that looks more related to the weaker US dollar given Chile, the world’s biggest copper exporter, said it expects to increase production by around 4% on the back of BHP Billiton Ltd's (AX:BHP) Escondido mine.
Today's key data and events (all times AEDT)
- Australia - Westpac Leading Index (MoM) (Dec) (10.30am)
- New Zealand - Nil
- China - Nil
- Japan - Nikkei Manufacturing PMI (Jan) (11.30am)
- Germany - Markit Manufacturing PMI (Jan), Markit Services PMI (Jan), Markit PMI Composite (Jan) (7.30pm)
- EU - Markit Manufacturing PMI (Jan), Markit Services PMI (Jan), Markit PMI Composite (Jan) (8pm)
- UK - Public Sector Net Borrowing (Dec) (8.30pm)
- Canada - Nil
- US - Redbook index (YoY) (Jan 20), Redbook index (MoM) (Jan 20) (12.55am); Markit Manufacturing PMI (Jan) (1.45am); Existing Home Sales (MoM) (Dec), Existing Home Sales Change (MoM) (Dec), Richmond Fed Manufacturing Index (Jan) (2am); 4-Week Bill Auction (3.30am); 2-Year Note Auction (5am)
Have a great day's trading.