Originally published by AxiTrader
Key Takeaway
European stocks had a day to forget as traders nerves fray as the French election becomes more uncertain and Mario Draghi hit back at Donald Trump’s deregulation plans. He also promised more QE and said the bank would look through temporary inflation rises. That didn’t help European bonds though….Spanish, French, and Italian bonds continue to climb…it all fed into a lower euro.
That in turn aided the US dollar which strengthened against most majors. Except the yen of course, which is this morning having a below 112 to gauge the real level of support for USDJPY. Eisuke Sakakibara says it will head under 100 later this year – I write more on that today. But for the first time in years I find myself sympathising with him. The Aussie is lower with 77 cents again proving a level that turns traders into “fraidy cats”.
Oil has dipped 1% as traders looked around and wondered who’s left to buy while all of the tension in Europe and unease about the Trump presidency continues to buoy gold which is sitting at $1230 and looking increasingly likely to trade to the $1247/57 region.
What You Need To Know
- S&P 500 -7 (0.30%) 2291
- Dow -19 (0.09%) 20,052
- Nasdaq 100 -7 (0.13%) 5659
- SPI 200 -8 (0.1%) 5557
- AUDUSD 0.7660 -0.3%
- Gold $1235 +1.25%
- WTI Oil $53.09 -0.1.37%
International
- Without anything concrete to drive them higher US stocks were a little lower this morning. Looking at the S&P 500 it seems that close above 2300 is proving a tantalising but tough nut to crack as traders grapple with the outlook and uncertainty surrounding the trump administration's timeline for implementation of the policies traders believe will drive growth and company profits. .
- In that vein yesterday I wrote that this stock market rally is president Trump’s to kill. But essentially my argument is that the rally was supported and driven by data flowing stronger than expected. Trump’s victory and the hope of Trumponomics gave investors the chance to trust that data. But inevitably data flow stops printing stronger than expected and stocks fall again. Or president Trump could get mired in trade. Islamic State, and immigration battles delaying the positive aspects of his platform.
- It was a tough night in Europe with bonds rising and stocks under pressure as traders seem to be taking the view the EU project is in real peril as Marine Le Pen’s star rises in France. Italian stocks in Milan fell 2.2%, the CAC in Paris dropped 1% while in Frankfurt the DAX dropped 1.22%. On bond markets the carnage was far worse with Italian 10’s up 11 points to 2.373% while their Spanish counterparts rose 14 points to 1.78%. French 10’s were up 7 points to 1.14% while in Germany the 10 year Bund rallied 4 points.
- Mario Draghi picked up the gauntlet in a speech overnight. He is worried that president Trump’s rollback of regulations will sow the seeds for the next crisis. Speaking at the European Parliament’s committee for economic affairs Draghi said “The last thing we need at this point in time is the relaxation of regulation. The idea of repeating the conditions that were in place before the crisis is something that is very worrisome." Yup.
- He also hit back on the idea of currency manipulation. But my guess is that horse has bolted given German finance minister Schaeuble essentially agreed with Trump and Peter Navarro over the weekend. Anyway Draghi said, “First and foremost: we are not currency manipulators." Draghi said. "Second, our monetary policies reflect the diverse state of the (economic) cycle of the Euro zone and the United States."
- He also talked about inflation and again reiterated both that he thinks the current reflationary pulse is temporary and policy could still be eased. “Our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation. We therefore continue to look through changes in (harmonised) inflation if we believe they do not durably affect the medium-term outlook for price stability”, Draghi said.. So more QE could be in the pipe if needed.
- French conservative presidential candidate Francois Fillon announced overnight he was staying in the race for president of France.
- Chinese data yesterday was a little weaker than expected and the PBOC set the Yuan weaker against the US dollar even though it ended the week under pressure. The Caixin Composite and Services PMI dipped to 52.2 and 53.1 respectively from last month’s 53.5 and 53.4. It was a little disappointing and it’s worth noting Chinese data beats are starting to slip. That could be important for sentiment.
- Elsewhere on the China front the nation welcomed the conciliatory tone from Defence Secretary Mattis who on the weekend said that while China had “shredded the trust of nations in the region” over its South China Sea action that diplomacy was the key to resolution. Reuters reported this morning that yesterday the English Language China Daily was upbeat. The paper said Mattis comments were a "mind-soothing pill" that had "dispersed the clouds of war that many feared were gathering over the South China Sea…Mattis has inspired optimism here that things may not be as bad as previously portrayed," the newspaper said.
Australia
- Well that’s understandable but disquieting. For the third day in a row the ASX 200 wasn’t able to hang onto its highs. It’s also the third day in a row where the ASX has clutched losses from the jaws of gains. I said understandable because this is a very technical – chartist driven – market right now and the high on the ASX200 was right on the little down trend line from the 200 index’s highs a little less than a month ago.
- The US market move overnight isn’t going to help and the SPI 200 is down 16 points as I write this morning. So, with more than 100 of the 200 stocks in the main index lower yesterday and with retail sales (-0.1% v +0.3% expected) suggesting consumers ended the year in a poorer state than anyone anticipated we could be seeing negative divergence between the Australian economy and a reflating global economy. Equally for our market the Chinese Caixin PMI printing a little weaker was a weight.
- But sentiment could be suffering as traders continue to recognise the ASX is a derivative of global growth not the beneficiary of reflation. I say that because earlier today Bloomberg ran their version of the chart I’ve been using for some time now – the one that shows how the ASX is currently underperforming the ASX.
- Over more than a year whenever the ASX has dipped, and the S&P has remained bid, the Australian market has eventually found its feet again. The question for now is whether we’ll see this pattern emerge again and the ASX head back above 5700. I think we will. That’s also though because the outlook for US stocks remains solid while global economic data continues to print better than forecast. Data, and stocks, are truly climbing a wall of worry.
- Looking at the data flow yesterday and the 0.1% fall in retail has been explained away by many as the result of a fall in hardware. That is then being laid at the feet of the pull forward of demand from the closing sales of the Masters chain of stores. That might be the case. But with November being revised lower to 0.1% as well as the weak 0.1% fall it’s clear something is up at a consumer level – or was as we ended the year. January’s data when we get it is going to be very important.
- Equally important will be how the RBA views the strong uptick in the Melbourne Institutes monthly inflation gauge which rose 0.6% in January after December’s 0.5% rise. It won’t cause them to hike anytime soon but it suggests inflation pressures have risen in Australia as the year on year rate printed 2.1%. That’s a good thing. A little bit of inflation is welcome.
- No change expected from the RBA today. But what they say is going to be very important for stocks and the Aussie dollar. My sense is they will straight bat it and retain a fairly healthy, if cautious, outlook for the economy. We’ll know at 2.30pn AEDT>
Forex
- It’s an interesting time for the US dollar and forex markets right now. There seems to be much going on but the reality is we are on the cusp of much going on if some of the key levels in big currencies like the yen, euro, and Australian dollar given way. They haven’t yet, and the US dollar index traded back above 100 for a time overnight. It’s back at 99.92 now as traders aren’t yet ready to drive a break out and position unwind.
- For me the key to the outlook is USDJPY as the key driver of the US dollar move. It has just broken 112 and if this weakness persists then the US dollar can come under more pressure and perhaps the Aussie can head above the graveyard of 77 cents where bulls went to die in 2016.
- What’s most interesting about the dollar is that Trump wants it lower, as he thinks other countries benefit from devaluation. That’s true…we do it in Australia all the time. It’s the economic shock absorber. But with German finance minister Schaeuble agreeing with Trump’s trade negotiator that the euro is too low for Germany, and with a market still long dollars, short yen and euro, there is a chance of a sharp reversal in the offing.
- Anyway as I write USD/JPY is 111.73, the euro is getting a little mojo back and is at 1.0747, GBPUSD is 1.2477, and the AUD/USD is sitting at 0.7660.
Commodities
- Gold is breaking higher. It’s bested $1120 and has risen strongly to $1231 this morning. This daily close above $1220 suggests a move to the $1247/57 level I’ve been talking about. That should be good news for gold miners in Australia. As long as it’s not also associated with a strong pulse in the Aussie dollar.
- Goodness me what a crowded trade oil has become. I know I’ve been wrong this past week as oil rose but this remains to me a big danger to the longs. As I noted in the introduction, who is left to buy when traders have a record net long position? It’s an important consideration even though the natural tendency to bid prices higher when Iran and the US are facing off again is so strong.
- A move back toward $52 for WTI, more likely the $50.20/50 region is still me base case unless or until the recent highs are broken.
- Copper bounced back and is at $2.62 a pound this morning as traders focus on the chances of supply disruptions and the chances of a strike at the massive Chilean Escondida mine and Freeport McMorans difficulty in getting permits in Indonesia.
Today's key data and events (all times AEDT)
- Australia - AiG Performance of Construction Index (Jan) (9.30am); RBA Rate Statement, RBA Interest Rate Decision (2.30pm)
- New Zealand - RBNZ Inflation Expectations (YoY) (Q4) (1pm)
- China - Nil
- Japan - BOJ Summary of Opinions (10.50am)
- Germany - Industrial Production n.s.a. w.d.a. (YoY) (Dec), Industrial Production s.a. (MoM) (Dec) (6pm)
- EU - Nil
- UK - Halifax House Prices (MoM) (Jan), Halifax House Prices (3m/YoY) (Jan) (7.30pm)
- Canada - Building Permits (MoM) (Dec), Exports (Dec), International Merchandise Trade (Dec), Imports (Dec) (12.30am)
- US - NFIB Business Optimism Index (Jan) (10pm); Trade Balance (Dec) (12.30am); JOLTS Job Openings (Dec) (2am); Consumer Credit Change (Dec) (7am)
Have a great day's trading.