Stocks And Oil Surge Again

Originally published by AxiTrader

Market Summary (7.26am)

Boomity, Boomity, Boom, Boom, Boom.

Stocks continue to bolt into 2018 like a dog let off its leash for the first time in ages.

As I write the S&P is 0.55% higher at 2,710 – new records again – while the Dow Jones Industrial Average is at 24,895, up 0.29%, and the Nasdaq surge continues with the 100 index rising another 0.87% at the moment.

Europe was sharply higher as well after underperforming the previous night and Asia was up for the second day in a row. Against that backdrop the ASX underperformed over the past 2 days and was only up around 9 points yesterday. But SPI traders have sought to remedy that with a 23 point, 0.38% gain overnight. Could the catch up be even bigger? Maybe.

On forex markets the proximity of 2017 highs for euro and the pound along with very strong US ISM data seems to have put a handbrake on the US dollar's fall. Throw in mildly hawkish FOMC minutes and we’ve seen the dollar make a little ground overnight. Euro is at 1.2017 down about 0.3%, the pound is at 1.3516, off half a percent and the yen bounced off 112 and is at 112.49 this morning. The Aussie was back up at the previous days highs before the FOMC minutes and at 0.7836 it is mildly in the black for the day. The Canadian dollar and kiwi are both mildly lower.

On commodity markets copper is continuing to drift and has lost another 0.7% overnight. gold might have found an interim top – It’s at $13111 off 0.5% but crude is through the roof up 2% as traders await the latest instalment of inventory data this morning and bets that Iranian tensions and strong growth will further tighten the market.

Looking at the day ahead we get the AiGroup services PMI here inAustralia before a raft of services PMI’s across the globe. In Canada PPI will be important before the next BoC meeting while EIA stocks and US production will be important for oil traders

And, in case you missed it, I published part one of a look at what I think might be the big emerging theme for markets in 2018 yesterday. Bonds and inflation - the dynamic duo to shake up markets in 2018 you can read it here. Part two will be out later today.

Here's What I Picked Up (with a little more detail and a few charts)

International

• Fed minutes show a policy making group still grappling with the the outlook for inflation and where and when it might show up but still wedded to a belief – for the most part – that this time is not different and inflation will eventually come back as a result of the strong economy. The minutes reflect that “most participants reiterated their support for continuing a gradual approach to raising the target range, noting this approach helped to balance risks to the outlook for economic activity and inflation”.

• US ISM manufacturing data showed US industry bounced back in December with a lift in the index from 58.1 the previous month to 59.7 as 2017 ended. Interstingly from a PPI and potentially CPI point of view the ISM showed that new orders leapt to 69.4 while prices rose to 69 from the previous months 64.8 and against expectations of 65.5. The question to ask is whether inflation’s forces are stirring.

• German jobs data was better than expected with unemployment falling to 5.5% - the lowest since reunification – with a fall in unemployment of 29,000.

• The Fed minutes and the surge in US ISM manufacturing data are the big news overnight. But as usual there is a political distraction that is dominating the airwaves. In our time zone yesterday it was president Trumps assertion that his nuclear button was bigger than North Korean leader Kim jong-Un’s. Overnight however the distraction looks potentially a little more serious while this Mueller inquiry is still under way. Former White House strategist Steve Bannon has said that the 2016 Trump Tower “meeting between Trump campaign officials and a Russian lawyer purportedly offering damaging information about Hillary Clinton "treasonous," according to a new book obtained by The Guardian,”CNN reports. The reason I highlighted the Mueller inquiry is that reports say the book is said to quote Bannon saying “Even if you thought that this was not treasonous, or unpatriotic, or bad shit, and I happen to think it’s all of that, you should have called the FBI immediately”.

• The President has said this morning that when Bannon lost his job he also lost his mind. Markets aren’t fazed, it’s a distraction. Until it isn’t. Something to watch.

• Stock pickers are bullish as we head into 2018 in a way they haven’t been since 2011 according to research from BAML. The bank’s sell-side indicator measures average recommended equity allocation of US strategists. There is currently no sell signal and Business Insider reports that BAML says the indicator suggests another solid year for US stocks. “The S&P 500’s indicated dividend yield currently near 2% implies a 12-month price return of 10% and a 12-month value of 2935”.

Source: Business Insider

• Part of the reason for the ebullience is that bottom up profit estimates have been revised higher Bloomberg reports. Again citing BAML research, Bloomberg says the S&P 500 three-month earnings estimate revision ratio to its highest level since 2011, according to Bank of America Merrill Lynch (NYSE:BAC). That means “the number of S&P 500 constituents who saw their “bottom-up” profit estimates rise from October to December exceeded those whose were trimmed by 25 percent,” Bloomberg said.

• Good news on North Korea. Despite the rhetoric from President Trump the North and South are talking again and have reopened communications via the emergency phone. As I’ve highlighted recently it seems reasonable to say the sanctions are working. But equally that the President’s tough talk might be too. Either way as Rep Hurd told Bloomberg this morning – “if you’re talking you aren’t shooting”.

• There is a huge storm in North America at the moment on top of the freezing cold which has broken records in many places. Some parts of Florida got snow overnight for the first time in almost 30 years. It could disrupt many commodity markets.

Australia

• For the second day in a row the S&P/ASX 200 underperformed the surge in Asia’s stocks which kicked higher again yesterday. The rise of just 9 points was lead by the basic materials sector. But the lack of follow through in other sectors mean that while the US gave a strong lead, and Asian stocks were generally ebullient the local market lagged. SPI traders have addressed some of that underperformance overnight adding 19 points, or 0.3%. That’s left the SPI up at the top of this trading range. The question is whether or not the impetus for local stocks to join in the global rally is going to be there. My sense is with Asia and Europe joining the fray that the bulls will at least push higher initially – then we’ll see. The 6080 region looks interesting on the SPI and 6090/95 on the ASX200 physical. Here’s the SPI.

• An interesting piece in the AFR from Adam Boyton chief economist Australia at Deutsche Bank (DE:DBKGn) in which he argues that Australia, and Australians, need income tax cuts to spur the economy. He notes that balancing the budget by 2020/21 makes this difficult. Butu he sees some upside in the fact that menas cuts would need to be “targeted” and that “the challenge might have another benefit: the constraint it presents could lead both the government and Parliament to have a closer look at the spending side of the ledger”. You can read the story here.

Forex

• The US dollar is stronger this morning after solid ISM data and the release of the Fed minutes. As discussed above the Minutes make it clear that the Fed is still wrestling with low inflation but that there is a number of members who think that more rate hikes than the projection will be needed in 2018. Some believe less. But with the economy evolving stringly and with growth lifting on the back of tax cuts it’s clear that at this early juncture forex traders are placing a little more weight on the hawkish side of the debate.
  

• That could be important if it signals a change in approach from traders. As I highlighted yesterday we either need weaker EU data or stronger US data to shake up the US dollar. Last night ISM was solid, and perhaps the minutes of this meeting might start to influence traders views about the real chance of the Fed executing on the dot plot forecast perhaps even more. Currently, futures say there is a 67.5% chance of a March rate hike and a 44% chance of another by June. We’ll see how these evolve – they’ll be important for the dollar.

• Just as important at this early 2018 juncture are technical and the fact that the euro and pound both were near their 2017 highs a day ago. Traders need a catalyst, an impetus to drive prices through it seems and with that lacking we are seeing a pullback in the Euro and Pound (among others) and a recovery in the US dollar. The daily Euro chart certainly gives me levels to sell against.

• Likewise the yen again found support just above 112 and sterling has had a big reversal back inside the range. Could it revert back to the bottom at 1.33? Maybe.

• For the commodity bloc the Kiwi is breaking lower, the Aussie is defying logic and gravity as copper prices continue to slip and iron ore has reversed yesterday’s gains, while the Canadian dollar has found resistance at the 50% retracement level of the rally from 1.2060 which is also a previous congestion zone.

Commodities

• As the US dollar recovers a little and after a solid rally gold looks like it may have made a top. For the moment at least anyway given the speed and slope of the recent rally. Bonds are fairly quiet – 10’s rallied a point or two last night – and copper and base metals are drifting already before the slightly stronger US dollar post FOMC minutes.

• Crude is through the roof this morning. What’s going on here is that geopolitics is back in play as a result of the proxy war between the Saudis and Iranians across the region. But geopolitics has become a bigger factor now that the Iranian protest movement has launched into the open in the past week. Equally on top of geopolitics my sense is there is some expectation that President Trump may use the protests as a pretext to reimpose sanctions on Iran and possibly unwind the deal which the previous administration did which allowed Iran to increase its exports. That would take a significant number of barrels per day out of the market. We’ll see how it plays out.

Have a great day's trading.