Originally published by AxiTrader
Market Summary
A day after being nonplussed with the passage of the US tax bill through the House and Senate it seems stock traders decided that yes, after all, they do think the tax cuts will help valuations and the economy.
So this morning US stocks are higher by around 0.4% to 0.6% for the S&P 500, Dow, and Nasdaq. European stocks are also higher with the FTSE rising 1% and European markets making more muted gains.
Here at home it seems that after yesterday’s 15 point fall on the ASX we’ll have a better day of it in what’s like to be a half day of pretty thin trading. SPI traders have added 28 points overnight.
On forex markets the big news was the strength of Canadian retail sales and inflation (ahem folks inflation) which saw the Canadian dollar rally 0.85% against the US dollar which saw USD/CAD reverse sharply off the top of the current channel – it’s 1t 1.2722. That, and more base metal strength helped the Australian dollar take out the 200 day moving average and it sits back at 77 cents as I write. Likeiwse the kiwi is holding above 77 cents. On the other majors day on day there has not been a material move with euro at 1.1864, the pound is at 1.3375, while the yen is at 113.44 after the BoJ left rates and policy as it was at yesterday’s meeting.
On commodity markets gold's grinding rally continues. It’s at $1,267 this morning. Oil is marginally higher as more investment banks upgrade their forecasts for 2018. WTI is at $58.21 while Brent is at $64.66. Copper is higher again and if you want to use a single factor very short term model it’s responsible for the Australian dollar strength. At $3.21 a pound copper is closing in on the recent highs in what is a continuation of the recent recovery in metals.
Bonds had a quitter night. A little off recent highs but still elevated relative to recent history. US 2’s are at 1.88 while the 10’s are at 2.48%. European sovereigns remained at recent highs.
On the day it should be quiet and thin. Nothing is out in Australia but the UK releases the latest read on Q3 GDP and US durable goods are personal income data are out.
And while I’m on data – Here’s The Key Releases Of The Past 24 Hours.
Source: FXStreet
Here's What I Picked Up (with a little more detail and a few charts)
International (everything is in this section till the new year)
- As you can see in the data table above US Q3 GDP was downgraded marginally. But it’s the solild retail sales and lift in the Canadian year on year CPI which is noteworthy. 2.1% is hardly an earth shattering result and the core of 1.3% is still low (though this was a big beat). Two things are worth noting – especially for forex traders. First it highlights that the BoC will be likely to again raise rates in H1 2018. Recall what governor Poloz said last week in regards caution over the outlook does not mean doing nothing. Second if, as I expect, inflation and wages do start to increase in 2018 bond rates will which can impact valuations across many markets.
- Indeed as we head into 2018 and as bond rates start to rise and particularly as we face a solid year of synchronised global growth here’s a chart worth contemplating. As I say a bond sell off could materially impact other markets and their valuations. Chart via TopDown Charts on Twitter.
- Oh and check this out, CNBC says US companies using the tax cut to raise wages and hand out bounses could become a trend. Yeah, yeah I know, trickle down economics doesn’t work right. History proves that right, doesn’t it? Yes. BUT, that was when markets were seen to have primacy and companies free to do as they please. Now – and I’m going to write the most dangerous words in finance – This Time Is (or at least might be) Different. There is a man in the Whitehouse who might actually bully US companies to do something. I say that with great sincerity. President Trump is clearly a complex man. A billionaire who does seem to care what happens to ordinary folks, those who have been left behind by the elites and their thinking. So there is every chance that if he sees CEO’s and companies hoarding what I’m sure he’ll see as his largesse my sense is hell call them out. That’s what’s different about trickle down economics this time – there is a disruptor in the form of the American president, the most powerful man in thee world, who just might change the game. That’s my theory anyway. And if I am right the US economy and Donald Trumps re-election campaign in 2020 will have just received a big boost.
- Here’s the weirdest statistic I’ve seen in ages – it’s almost unbelievable. A Reuters survey reported yesterday that Japanese fund managers made an unbelievable asset allocation shift between November and December. The survey showed “respondents on average allocated 49.7 percent of their portfolios to equities in December, compared with 37.7 percent in November”. A 12 percentage point shift, in on month folks. Or put another way respondents increased their stock holding by 32% over the course of the month. US stock exposure increased from 30.5% to 35.5%. Of course that money had to come from somewhere. So there was a corresponding fall in bond allocation with Reuters reporting “fund managers reduced their overall bond holdings to 42.9 percent in December from 56.9 percent in November”. Again folks that’s in one month. The question is whether it’s late cycle FOMO or the start of a broader trend across markets given the positive outlook for the global economy in 2018.
- And while I’m on Japan, the BoJ left rates and policy on hold yesterday. The bank noted that the economy has improved buy governor Kuroda said that this improvement was not yet enough for the BoJ to change policy. He said the bank needed to “patiently” maintain loose monetary policy. He also pushed back against comments in recent months which suggest – some from the BoJ itself mind you – that the ultra loose policy would harm the banking system. IT seems to me the BoJ floated the idea that the time for change might have come recently and has received feedback.
- OPEC is apparently already working on plans to exit its production cut deal reports suggest overnight. That’s my read. But sources told Reuters that “It’s a continuity strategy, rather than exit,” which the secretariat in Vienna is working on. As I have written just this week the Saudi budget fairly screams that the Kingdon will be doing its darnedest to keep production at a level such that it can earn the extra cash it has already allocated toward fiscal expansion. But we also know the Russians seem keen to exit the deal once the market is stabilised. So that OPEC is working on a plan is actually a suggestion the withdrawal from the current deal will be as orderly – maybe an “oil taper” – as OPEC can make it. That helps prices which are approaching their recent highs once again. You can see that in the WTI chart here:
- It’s pretty quiet on the Australian economic front at the moment and will be for a little while yet. But stocks are having an interesting time of it. Prior to the last 24 hours trade the SPI had indicated it wanted to push lower. Two positive days but well of the highs suggested a downside probe. To a certainly extent we got that yesterday and overnight the rally has taken prices substantially higher and suggest a good day. In many ways what the rally has done is close a substantial part of the gap between the December and March SPI futures contracts. That is something that I’ve seen happen a lot in my trading over the years and it strikes me as a fairly bullish sign for the local market. Of course we are taking our stimuli from offshore – but that stimuli this morning is like my first cup of coffee this morning – just fantastic. Here’s the chart. It should be quiet today but the year-end rally has a decent base, and chance, of happening.
- On forex markets things are pretty quiet at the moment for the majors. The move in the Canadian dollar last night however does signal what ails the US dollar. The growth outlook across the globe means the US has been joined by the rest of the world and as such other central banks are tightening along with the Fed and will continue to do so. And it’s this policy convergence – even though many are at different stages in the cycle – which is holding the US dollar back from the gains that would normally be associated with front end or long bond spreads. My sense is that can change in 2018. But for the moment traders are reacting to immediate stimuli which is why the Canadian dollar rallied so hard (USD/CAD lower) against the US dollar overnight. It’s still I the recent box. But the chance of a break lower has risen. Here’s the chart;
- And just quickly on the Aussie dollar. It’s at it’s highs for the past 14 hours at 0.7705 and I am now targeting the 38.2% retracement of the fall from just above 81 cents to the recent lows – that level is 0.7730/31. With metals doing so well – especially copper – and with China signalling it will go for growth rather than aggressive economic restructure the Aussie can benefit from a weaker US dollar and positive sentiment. And of course now that the 200 day moving average at 0.7592 has been bested some traders will also take that as a bullish indication. I’m more positive than most into 2018 for the Aussie. It doesn’t mean it can’t dip. But my sense is the preconditions are for a test back to the 2017 highs at some point.
Merry Christmas everyone. Whatever your plans for this holiday weekend, I hope you and yours have a wonderful time.
Stay safe and I’ll catch you next Wednesday.
Have a great day's trading.