Originally published by AxiTrader
Market Summary
For the second day in a row tech stocks are leading US indexes higher in what is a generally positive day for stocks, oil, and the US dollar while US rates are relatively quiet.
With 10 minutes to go before the close of trade in New York the Nasdaq is up another 0.35% to 6315, the S&P 500 has risen 0.3% to 2636 and the Dow Jones Industrial Average has lifted 40 points, 0.2%, to 24,178.
These gains come after Asia’s bourses had a mixed day yesterday and European stocks were mostly higher, save for the FTSE 100 which fell 0.4%. But with the US lead and despite weakness in iron ore and metals markets the ASX looks set to open higher again today after yesterday’s solid 32 point gain with SPI traders marking prices up another 19 points overnight.
On forex markets it’s a tale of US dollar strength almost across the board - particularly since Reuters broke a story saying President Trump still favours a 20% tax cut and is seeking a @ YEAR extension to the debt ceiling.
The Australian dollar was assailed yesterday by the disappointment of the lower than expected trade deficit but the the stronger dollar has knocked it down below the recent range low and it sits at 0.7512 this morning. The kiwi is down a similar amount at 0.6826 and the Canadian dollar lost 0.4% - even though oil rose – with USD/CAD sits at 1.2842. USD/JPY is 0.71% higher at 113.08 (up 40 points from before the article hit the wires) while the euro is at 1.1776. The pound has had a ride down and up on fears and hopes around the ability to agree this stage of the Brexit deal before next week’s deadline. GBP/USD is at 1.3473 up 0.62% and the only major currency to resist the US dollar strength. .
On commodity markets, oil is higher this morning as prices found some support after the big drop and threats of a strike in Nigeria gave the bulls a reason to buy. WTI is up 1.3% to $56.69 while Brent is at $61.90. Gold has broken the bottom of the recent range and looks on target for a run toward $1223 – its at $1251 this morning. Copper continues to stabilise at $2.94 but base metals generally have been weaker and iron ore lost another 3% yesterday.
On the docket today we have the latest read on Japanese GDP, Australian home loan data, and Chinese trade data. Tonight Germany releases its trade data as does the UK which also has industrial production data out and then, of course its US non-farm payrolls and associated unemployment rate and wages data which will close out the week with a bang.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’m a bit, and perhaps the market is too, blasé about the chance of a US government shutdown as the deadline looms. I guess we’ve all been focused on the Tax cuts passage, but President Trump is meting with Democrat leaders Nancy Pelosi and Chick Schumer in the Oval Office Thursday afternoon his time. The deadline for passage of an agreement to prevent a government shutdown is midnight Friday US time. EDIT - news just in around 7am of a possible deal hit the wires and the US dollar shot higher.
- The article that got the dollar moving and suggests a deal is going to be done on tax and the debt ceiling says. Reuters reported an exclusive interview with Whitehouse legislative affairs director Marc Short in which he said the President wants a 20% tax rate and believes he can get a 2-year extension to the debt ceiling. That's very bullish.
- The pound bounced neatly of trendline support last night as it looks like the UK, Ireland, DUP, and EU might be getting closer to agreeing on a deal if overnight comments are to be believed. There has been some tooing and froing with British foreign secretary Boris Johnson saying that the UK is the UK and all parts should exit together. But comments subsequent, especially from the EU’s Oettinger that a deal is close are encouraging. EU President Donald Tusk is making a Brexit statement on Friday which traders are taking as an encouraging sign.
- (Bitcoin) is having a wild ride as the sell side disappears from the market and prices have pushed sharply higher. The price is at $15,500 at the moment. The lack of price discovery, issues at some exchanges - in terms of functionality overnight - and hacking this week, continue to worry many and the FT reports that Wall Street banks have, via the Futures Industry Association, pushed back on the launch of the CBOE and CME BTC futures starting next week. That, the FT says, is because of the self certified regime the BTC futures are based on. The banks say that the futures launch “did not allow for proper transparency and input”. This week’s rally in Bitcoin makes the point and I’m fairly certain will attract regulatory scrutiny all over the world. For the moment though Bitcoin's rally continues.
- BoJ governor Kuroda continues to play both sides of the fence when it comes to the outlook for policy. This week he has stressed the need for continued accommodative policy but yesterday did hint at an end, or at least a change to QQE. Kuroda suggested that it all depends on the economy but noted that “when considering our future communication with markets, an exit from quantitative and qualitative easing would be quite an important topic”. Indeed it would. My sense is that policy will change in 2018. But that has no resonance with the yen at the moment which is again on the back foot.
- US jobless claims data last night was again indicative of a tight labour market in the US with initial claims at 236,000 and continuing claims at 1.908 million. That sets up an interesting non-farms tonight with the market expecting 200,000 jobs to be created, and unemployment rate of 4.1%. More important I think, unless of course non-farms diverge materially from expectations - is the expectations that wages rose 0.3% in November. This is crucial for the outlook for the Fed and inflation.
Australia
- I gave a presentation in Newcastle last night on the outlook for the Australian economy – where we are and where we are headed. The summary is that there is a dichotomy between where business, investment, and infrastructure are and where retail and households are. I know you knew that. But the point I made is that the RBA always has had to manage an economy, and thus its policy settings, which had disparate outcomes at a state, regional and industry level. But the point I made to the audience at the fantastic Fort Scratchley Function Centre was that in the era of central bank independence and certainly in this period of 26 years without a recession the RBA has not overseen an economy where one sector – retail – is apparently so assailed by household retrenchment and competitive pressures.
- But like the RBA I hold a positive outlook for the economy – in aggregate. Retail and households remain the big risk to that outlook and something we’ll all be watching closely over the next couple of months to see where sentiment heads and what the outlook for domestic consumption heads.
- Looking now at stocks and we’ve had a good rally yesterday and another is in train today. Again that rally is despite the weakness in metals, and despite what was a midday swoon in Asian stocks. The ASX just ignored that and powered higher. And SPI traders have added another 18 points overnight. It’s pretty clear the ASX has now established a sideways range.
Forex
- The US dollar continues to strengthen as we head toward next week’s FOMC meeting. The focus is not going to be on the long anticipated December rate hike but rather what the Fed suggests for the outlook on rates in 2018 and beyond. There is also a focus on what the Fed will say about the impact of Tax cuts on the economy. So the US dollar has caught a bid and euro continues to look biased down toward 1.17. That’s the 61.8% retracement level of the recent run up near 1.20.
- Sterling bounced of that trendline last night as support came back into the market after hints that a deal is actually close on the Irish border issue. It’s not confirmed yet but there is enough positivity in forex markets that traders are prepared to bet – and thus respect the trendline – that a deal will be done. That creates an important volatility point for the pound if a deal is not done. As I wrote earlier this week – GBP/USD could fall 100 points (done) and if ti does it could fall another 200 more. Support has held for the moment.
- The commodity bloc is under pressure at the moment. The AUD/USD has broken down and through the recent lows which suggests that a move toward 0.7450 support is on the cards. Yesterday’s miss on trade – with a much lower surplus than expected – hurt the Aussie and sowed the seeds for the fall once US dollar strength was in evidence across the board once again. LIkewise the Canadian dollar and kiwi are under pressure as well. We need to watch both pairs recent lows against the US dollar. If they break it would be a signal for a much deeper fall (rally in USD/CAD).
- USD/JPY is in a similar position. It’s moving back toward recent highs and a break would see it rally hard. Perhaps back towards 114.73 if 113.32 gives way.
Commodities
- Oil was higher overnight on the back of the threatened Nigerian strike and also I’d hypothesise as a result of such a sharp fall the previous night. We talked about the crude draw yesterday which should have been positive for prices which instead focused on the increase in gasoline and distillate stocks together with US production. An on that front I thought it worth sharing a chart of US production I saw on Reuters this morning.
- It’s clear that is only going one way. And the elevated level of prices which are in the zone where US tight oil is profitable supports this increase in production. Recall recently the IEA in Paris said that US oil would add significant production in the years ahead. But as I’ve written recently shale oil investors, and by extension companies, aren’t just interested in pumping out crude these days they want an economic return as well. That means production is likely to increase but not go wild. Why am I gibbering about this? Because my sense is the rig count is going to become important to prices again. Tonight’s release is the next trigger point for crude oil moves.
- Looking at the charts the dailies suggest a move toward the 38.2% retracement level of the recent rally. That’s where I’m positioned anyway. If I’m wrong and stocks rise above recent highs then oil will have a huge run higher.
- Gold has broken down folks and looks like it is heading to $1223. You’ll no doubt read of gold’s irrelevance in this Bitcoin induced world. But for me gold has only really lifted over the past year or so on risk events and has had an overall down side bias. So with stocks up, the global economy looking healthy, and no seemingly no concerns about the many flash points around the world gold is slipping once more. As I’ve written recently it simply lacks a compelling narrative. Anyway, as I say, it’s broken lower.
- Copper is stabilising above $2.93. If that level holds for a little longer it could be a solid base from which copper can lift. Indeed copper’s price stability in the past couple of days has been a pointer to support as base metals and iron ore have fallen.
Have a great day's trading.