Originally published by AxiTrader
Market Summary
US stocks hit new record highs and the euro surged in thinnish trading the day after Thanksgiving.
The fact that Chinese stock markets found a bid Friday certainly assuaged worries of a funk and that gave Asian and European traders a fillip and for the most part – save for the FTSE, TWII, and S&P/ASX 200, most of the two region’s markets finished higher.
That lead helped US markets open higher and stay that way all day. At the close the S&P 500 was up 0.2% to a new closing high of 2,602. The Dow Jones Industrial Average was likewise bid up 0.14% at 23,557 while the Nasdaq 100 rose 0.36% to 6,409.
The improvement in Asia and the positive tone on Wall Street helped the SPI recover from its lows – it traded down to 5959 Friday – closing at 5993 on Saturday morning, a point stronger than the afternoon close.
But it was forex and commodity markets that were the most active.
The euro surged against the US dollar and across the board as a result of more solid economic data (German Ifo 117.5 v 116.8 exp) and concerns that the Fed is going a little soft on its inflation outlook after last week’s interview with Janet Yellen and minutes from the last FOMC meeting. That saw the euro rise 0.7% to 1.1930 on Friday and it’s up a smidge more this morning at 1.1936. The yen is also strong with USD/JPY at 111.40, just not as strong as the euro. GBP/USD likewise rose with the pound surging to 1.3335. The commodity bloc utterly lagged with the big three of the Aussie, Canadian dollar, and kiwi missing out on the euro’s strength. The Aussie is at 0.7619, USD/CAD is at 1.2712 and the kiwi is at 0.6875.
On commodity markets oil was higher again with WTI and Brent up more than 1.5% each. They closed the week at $58.95 and $63.86 respectively. This week’s OPEC meeting is likely to rubber stamp the expected extension of the production cut – they’d be mad not to – but its still important for the outlook.
Gold lost a few dollars to $1287, copper rose 1.24% to $3.17 and iron ore was a little higher as well.
Looking at the week ahead here in Australia it’s a very light one with the release of private CapEx data on Thursday the highlight. Globally we have a bit of Fedspeak on Tuesday and Wednesday with the current big 3 from the Fed all talking. Incoming Fed chair Jerome Powell appears before the Senate banking Committee tomorrow, NYC Fed president Bill Dudley also speaks, and on Wednesday it’s Janet Yellen’s turn before the Joint Economic Committee of Congress. All are potential market movers as is the Beige Book on Thursday and the PCE data for the US Thursday most certainly is.
In Europe I’m interested in employment data and of course the OPEC meeting is huge. And all eyes will still be on the Senate in the US and its attempt to pass its Tax Bill.
Here's What I Picked Up (with a little more detail and a few charts)
International
- It’s no wonder the euro is shooting the lights out – the data flow has surged. Last week I was getting ready to write that the Citibank economic surprise index for the US was above that of Europe for the first time since March this year. But then we had last week’s economic releases – including the EU and German PMI’s – which has seen the Citibank economic surprise index for the EU surge to 92.9 at the end of last week. The US is not doing too bad with a print of 50.6 itself. But the strength and outlook for the EU economy, and the fact the minutes from the last ECB meeting showed a level of disquiet over QE, has combined for a positive outlook for the euro. This week’s EU employment will be interesting…especially in light of what I’m about to write about Japan.
- Just quickly though on German politics. The pressure is growing on the SPD to re-enter coalition with Angela Merkel’s CDU to avoid minority government or fresh elections in 2018. Merkel reiterated over the weekend that she is pursuing this so-called grand coalition. Reuters reports that the youth wing of Merkel’s CDU called for an agreement by Christmas.
- Japan, folks. Watch Japan. The BoJ has been warning for a couple of weeks that it might be time to adjust rates as the negatives of its policy are starting to outweigh the benefits. So far USD/JPY hasn’t paid a lot of notice – otherwise it would be down at the bottom of the 2017 range near 108 – but we heard from another BoJ voice over the weekend that the time to address policy is at hand. The Mainichi newpaper reported that BoJ board member Hitoshi Suzuki said “There is room to debate a fine-tuning of YCC once inflation heads near 2 percent, so that markets can gradually accept the changes,” adding “It's inappropriate for interest rates to show no changes until the 2 percent inflation target is hit, and then jump abruptly once the target is achieved”. That’s a pretty positive expectation of the trajectory of growth and inflation embedded in that statement.
- And while I’m on Japan the FT reports this morning that corporate Japan has been “hit by severe labour shortages” and as a result wages are starting to rise. Don’t underestimate this folks. I still believe in the Phillips curve its just that technology and globalisation mean in many cases we need to think about a GDP weighted global Phillips curve not the individual ones central banks look at. That way its only as the global labour market tightens that the individual country labour shortages and market tightness can start to exert upward pressure on inflation. Except of course in industries where you need physical humans to do the work. Now this is a hypothesis I need to generate the data and do the research. But it’s interesting that the FT says “Companies across a range of sectors — from construction to aged care — have warned in recent days that a lack of staff is starting to hit their business”. The ones that need humans. Anyway something to watch. My sense is inflation’s not dead. Even though the Fed minutes and chair Yellen last week suggest a growing fear it might be.
- The flattening of the US yield curve is a misunderstood phenomenon. Hands up if you really think that the flattening of the 2-10 curve to 59 points as the front end rises and US 10-year Treasuries stay fairly benign is really an indicator of a recession to come. No? I didn’t think so. Of course the outperformance of the back end of the curve has a lot to do with enduring QE from the BoJ and ECB and that fact that US Treasuries offer a pretty hearty “risk-free” yield of 2.34% right now. But it is also worth noting something I read but am not sure I mentioned a Little while back. The US Treasury has said it wants to issue more bonds at the front end of the curve and maintain its WAM around 70 months. The FT has more here.
- For all the posturing and aggressiveness of the British and EU sides of the Brexit debate, the person to watch is Irish Prime Minister Leo Varadkar. Yes the Government is teetering a little at the moment, but Ireland has signaled it will play hardball over the hard border that might result between Northern Ireland and the Republic post-Brexit. This is important as Ireland appears fundamentally opposed to the return of a hard border and the signals that could send to former combatants. What’s worth noting here is that recently on the Business Insider podcast "Devils and Details" former Irish Taoiseach (PM) Enda Kenny said a hard border won’t, or can’t, come back. So this idea runs deep. Also worth noting the Conservatives in Westminster are being propped up by a Northern Irish party unlikely to acquiesce to the Republic’s concerns. Seriously, what a mess Brexit has become.
Australia
- It’s getting messy on the local market. Last week we saw some concerns over China hitting stocks and the Aussie dollar. But the stabilisation and the rally we’ve seen in metals and iron ore – not to mention the lift in global stock prices – has helped the local market recover. The question though traders and investors are asking themselves when it comes to the local market is one of valuation. Of course I’m no stock picker, but this is the conversations I’m picking up when I watch Sky or read research notes.
- And to that end it could explain why the local market is again lagging the latest lift in the US stock market indexes. With a relatively quiet few days – before CapEx Thursday – the local market is likely to take direction for offshore moves, especially China, and short-term traders.
- Looking at the SPI and you see the messiness I noted above. For me, it’s in a bit of a short-term range with 5950 the bottom and 6025 the top.
Forex
- As noted above the euro surged on the dovishness of the FOMC minutes, strong EU data, and questions revealed about the outlook for QE in the ECB’s own minutes. As I noted in the wake of the FOMC minutes last week there is a chance that this disquiet over the Fed continues in the weeks leading up to the next meeting in the middle of December. Whether or not that is the case will in no small measure be influenced by the three speeches from Powell, Dudley, and Yellen on Tuesday and Wednesday.
- Looking at the chart of the euro now and there is a clear break higher in the euro through the 1.1860 level that opened up this topside. I’m watching how euro goes at 1.1975/80 as that is the region where the Fibo projection of the move off, and then back through, 1.1860.
- USD/JPY may have stabilised with Thursday Doji being followed by a neat rally back to 111.37. I say might because the overall downtrend remains in tact and it is hard to miss – even though traders are ignoring – the non-too-subtle suggestions from the BoJ that it is thinking of changing tack on its monetary policy
- The commodity bloc lagged the rally in the euro and GBP. That’s most interesting when you consider the Canadian dollar's performance even as oil surged once more. Likely after a solid improvement and break of an important trendline USD/CAD traders are just a little more circumspect after last week’s disappointing retail sales data. The bias is lower however. The kiwi is grappling with and struggling to sustainably best trendline resistance . But it has managed to stay just above, which is a appositive.
- And the Aussie, well the Aussie, is lagging as the focus on the lack of spread pick up to the US goes mainstream. Readers know I’ve been banging on about this for some time, so the fact I’m now reading it everywhere could be a sign that for the moment it is baked into the cake. That suggests while stocks remain strong, while metals and iron ore are doing likewise, then the chance for an AUD/USD break out are growing. The key level to watch is 0.7635/40 a break could signal a run of a cent or more.
Commodities
- Bullish. That’s what oil traders are right now in the run up to an expected rubber stamp of a 9 month production cut extension at this week’s OPEC meeting. The Russians are supportive, and market positioning reflects the speculative community has faith a deal will be done and prices continue to rise. Of course in many respects that’s the greatest threat to this rally – OPEC’s deal is baked into the cake. So this week’s meeting is not without risk. But right now who would sell oil? I know I’m not keen to, and my system doesn’t suggest I should.
- And over the weekend former Goldman Sachs (NYSE:GS) guru Jim O’Neill said prices could run as high as $80 a barrel. That just adds to the lack of selling. As it reflects the overall bullish tone. Again though – is the good news baked in. And can OPEC surprise us?
- As the chart shows…. price has gone vertical. Danger Will Robinson
Have a great day's trading.