Originally published by AxiTrader
Quick Recap
China seizing a US Navy underwater drone hit sentiment on US stocks Friday and they ended the week in the red. That left the S&P 500 down 1 point the week. It also left traders wondering if the Santa Claus Rally will continue into years end or if enough is enough and it’s time to book profits.
That’s a question for forex traders also with the euro just above 1.04, yen just below 118 and the Australian dollar now under 73 cents.
Bond traders too might be wondering if the highest rates in years have moved enough.
No doubt they’ll all be hanging on Janet Yellen’s commencement speech this evening.
What You Need To Know
International
- The Chinese have said they’ll return the US underwater drone and also that the US has overhyped the incident. But it is a reminder of the potential downside of a Trump presidency from a geopolitical standpoint. Markets have factored all the good news and hardly any of the potential bad news. So we need to keep a weather eye on Sino-US relations as a potential pressure point for markets.
- Interestingly though no one seems to be worried – or hardly anyone anyway – that US stocks will do anything but go up. Barron’s this week has its usual catch up with strategists who are all in varying degrees bullish stocks for 2017. Naturally it’s never a straight line but that is instructive for the contrarians. But to me this is less about everyone piling onto the boat and the chance that Trump is a real catalyst for change in the US economy, in economic thinking, and in company earnings which flow from his policy platform. So I’m bullish too.
- Anyway back to Friday night and even though Europe had a good night with mild gains on stocks the US indexes were down a little. The Dow was essentially unchanged at 19843, the Nasdaq 100 dipped 0.36%, the S&P 500 ended at 2259, down 4 points of 0.175% while the Russell 2000 was off just 0.16%. Interestingly the VIX dipped again and is firmly in the bottom end of its range this year at 12.20.
- Richmond Fed president Jeffrey Lacker said Friday that the fed is likely to need to raise rates more than 3 times next year. I couldn’t agree more. Lacker doesn’t want to get behind the curve butu he also highlighted the pace would be gradual.
- This is a really important point. I’m seeing things being compared to the last 10 years as if this has been a normal period for markets or the economy. IT HAS NOT. Which means that many of the articles you see written by analysts or in the press are using the wrong anchor point. 4 hikes next year, 1 a quarter, is still gradual. Sure we’ve only had two hikes in the past 12 months and they are the only two in a decade. But the reality is we’ve had emergency settings in the US economy and rates need to be normalised. That was before Trumponomics promises to add further stimulus to a healing economy.
- I doubt we are looking at 1993/94 or 2005/06…but this chart shows fed Fund rates in the US are aberrant given current economic settings. It also puts context around how the Fed might move if Trumponomics works effectively.
- Italian bank Monte Paschi is going to tap the market this week Reuters reports as the bank tries to raise 5 billion Euros to avoid being bailed out by the Italian state.
Australia
- It’s MYEFO day here in Australia today. That means that Federal treasurer Scot Morrison will be delivering his mid-year economic and fiscal update. That’s where he reforecasts growth, and the budget deficit – among many other things – and it’s a potential flash point for Australia’s AAA rating.
- The NAB says the chance of Standard and Poor’s downgrading Australia in 2017 is likely and about 50:50 after Morrison delivers MYEFO. I say who really cares about a AAA rating if it is one of the reason policy debate in Australia is stuck in a do nothing track. But a loss of AAA doesn’t mean things will get any better. So let’s try and keep it and still undertake reform. But with this parliament, and the ones that proceeded it it’s clear the noisiest voices in the room usual win the debate.
- And I think that’s essentially why the ratings agencies are getting bolshie. It’s not just that Australia’s deficit and fiscal situation is this or that – it’s that there is no appetite to actually put it back on a sustainable footing. A real one. Not one where the backpackers tax is elevated to supreme importance.
- Anyway…moving on
- SPI 200 traders are suggesting a small negative start to trade this week with the March contract down 4. But the reality is after last week’s high of 5595 being so close to the year’s high for local traders it’s really down to the S&P, and Santa Claus, to kick the local market higher over the next few days – if they can.
- Here’s the latest update of the S&P v ASX 200 chart.
Forex
- The Aussie and Kiwi dollars were the big under performers on Friday night. The AUDUSD closed the week at 0.7303 and it’s opened this morning at 0.7289 while the Kwiw is at 0.6963. Both the RBA and RBNZ will be pleased with this turn of events as the falls give both economies a lift if they are sustained. And in many ways these moves are a delayed reaction to the overwhelming US dollar strength we’ve seen on other currencies. It’s as if traders looked around and thought “heck we haven’t thumped the antipodean pair”. Of course there may also be some MYEFO nervousness – but I’d underweight that.
- Technically the AUDUSD and Kiwi are biased lower now. Support for the Aussie is around Friday’s low at 0.7260/65. A break opens the way toward 0.7150/60.
- And then we’ve had the reversal in USDCAD which suggests the commodity bloc is the real target. USDCAD is sitting at 1.3332.
- Elsewhere the US dollar remains fairly strong with Euro still in the low 1.04’s at 1.0433 and the Yen just below 118 with USDJPY at 117.95. Will this week bring a hiatus to the dollar’s run? In no small part that depends on the speech tonight from Janet Yellen and what the Bank of Japan does or says at today’s meeting. The Ifo and Bundesbank reports tonight in Germany will also be interesting.
- Euro is struggling and looks terrible on the charts right now. It needs to break and hold back above 1.0670 to change the medium term outlook.
Commodities
- Crude Oil was higher after a combination of news suggested that compliance is going to be better and prices higher in 2017. Russian oil companies have got on board with the deal agreed by the nation’s energy minister a week ago. Also Goldman Sachs (NYSE:GS) was out with an upgrade to its WTI forecast for 2017 to $57.50 a barrel.
- It’s been a volatile week for oil but WTI found support where I expected in the $49.50/$50 a barrel region Thursday. So at $51.90 it is trying to claw back above $52.25/40. CFTC data showing Crude specs longs at 2.5 year highs means we could continue to trade in a volatile manner. Here’s the chart.
- Gold rallied but had an inside day Friday finishing at $1133. It still looks very weak and would need a fall in US interest rates or a material uptick in uncertainty or stock selling to find support right now.
- Copper and base metals were mixed as a complex. But the Dr fell to my intial target of $2.54 a pound. A break of this level could usher in some position liquidation and drive prices sharply lower quickly. My system remains short.
Today's key data and events (all times AEDT)
- Australia - CB Leading Indicator (Oct) (2.30am)
- New Zealand - Westpac consumer survey (Q4) (8am); Building Permits s.a. (MoM) (Oct) (n/a), ANZ Business Confidence (Dec) (11am)
- China - House Price Index (Nov) (12.30pm)
- Japan - Imports (YoY) (Nov), Exports (YoY) (Nov), Adjusted Merchandise Trade Balance (Nov), Merchandise Trade Balance Total (Nov) (10.50am); BoJ Interest Rate Decision, BoJ Monetary Policy Statement (2pm); BoJ Press Conference (n/a)
- Germany - IFO - Business Climate (Dec), IFO - Current Assessment (Dec), IFO - Expectations (Dec) (8pm); German Buba Monthly Report (10pm)
- EU - Labour cost (Q3) (9pm)
- UK - Rightmove House Price Index (YoY) (Dec), Rightmove House Price Index (MoM) (Dec) (11.01am)
- Canada - Nil
- US - Markit Services PMI (Dec), Markit PMI Composite (Dec) (1.45am); 3-Month Bill Auction, 6-Month Bill Auction (3.30am)
Have a great day's trading