Cryptocalypse

Originally published by AxiTrader

Market Summary (7.48am)

Some seriously interesting price action last night across a number of markets as US traders and investors returned from the Martin Luther King holiday.

Of course we’ve had a Crytpocalypse with (Bitcoin) down close to 20% at one point with many other crypto’s - like Ethereum and Ripple joining in the party. The debate over zero or $100,000 for BTC/USD this year continues however.

On more established markets it was more of the same for stocks as the Dow briefly traded above 26,000 and as the big three indexes pushed to fresh record highs. It’s been a bit of an up and down run since then and the Dow is currently just in the black at 25,819, up 0.07%. The S&P 500 has dipped 0.23% to 2,780 and the Nasdaq 100 is now down 0.14%.

As I say, interesting candlesticks.

European stocks were more mixed with the FTSE down while the CAC and DAX rose. Mining shares were down however along with quite a bit of weakness in base metals which augurs poorly for the start of trade on the ASX today. SPI traders have knocked a further 30 points from where prices closed yesterday when the S&P/ASX 200 finished down 28 points at 6,048.

On forex markets there are also some interesting daily candlesticks this morning. The US dollar was stronger initially but has given up the ghost as the night wore on and Jens Weidmann reinforced the ECB’s intentions. Euro is at 1.2271, pound at 1.3792, and USD/JPY is back at/below yesterday morning’s lows at 110.26. On the commodity bloc the Aussie fought back initially despite the fall in copper and mining shares but the recent sell off in stocks has knocked it a little lower and it’s at 0.7957 while USD/CAD is at 1.2433 as traders await the BoC tonight. Only the kiwi has made a noteworthy move against the US dollar, losing 0.33% to 0.7276 even after what looked like a pretty solid global dairy auction.

On commodity markets there is plenty of red this morning. WTI oil is off half a percent to $63.99 while Brent has dipped 1% to $69.51. Chat about US production increases and overhead technical resistance seems to be weighing. Gold recovered along with forex moves against the US dollar and is largely unchanged at $1338 but copper has continued to slip and is down half a percent to $3.21.

On bonds the US curve has flattened again to 51.9 points on a 2-10 basis as the 10-year drifts a little lower as the stock sellers get the upper hand.

On the day today we get the release of Home loan data in Australia. That could be important for the ASX because it speaks to demand for the products of the 200 indexes biggest sector. Machinery orders are out in Japan, we get the latest update of the Euro Area inflation rate, and of course the Bank of Canada will announce its decision whether or not to move interest rates. In the US it’s industrial production and the NAHB index.

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

International

• Does anyone else sense a tipping point in employee compensation across the globe? Of course it could just be me and my old friend confirmation bias but in the US I believe around 80 big listed companies have said they’ll be increasing wages and giving bonuses as a result of the tax package. Last night Citi announced it would be uplifting female and minority wages to bridge the pay gap as well. In Japan an influential business lobby group has called for increased wages. Yasumi Kudo, a vice chairman at Keidanren, told reporters “It is becoming more important to not only raise wages but also improve total compensation,” adding “Earnings are better than last fiscal year, and (a 3 percent wage increase) is part of a social mandate, meaning we should actively consider this”. Gee Whiz Piketty might be proud – I credit him with changing the global conversation after his book Capital a few years back. Equally though on the wages tipping point front we have IG Metall in Germany aiming at a 6% wages increase and news overnight was that the strike is spreading to Daimler. Here in Australia the NSW train drivers are pushing for a similar increase. I know, I know wages growth is still slow around the world. But change might be afoot. That’s going to be very important for markets – especially bonds.

• And speaking of bonds, Deutsche bank’s Torsten Slok has warned that the US Treasury’s issuance program to fund its massive deficit in a time of stimulus withdrawal, end to QE, and Fed tapering its balance sheet poses a big risk to bond markets. Business Insider reports Slok is so worried about the impacat on rates that he says “The bottom line is that investors should spend less time looking at US economic fundamentals and more time on where a doubling in demand for US fixed income can come from…If demand for US fixed income doesn’t double over the coming years then US long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating US assets. And this could happen even in a situation where US economic fundamentals remain solid”. OUCH. Here’s his chart, vis BI.

Source: Deutsche Bank (DE:DBKGn) via Business Insider Australlia

• The New York Fed last night released its latest survey for wages and inflation expectations showing a slight uptick in both during December. The survey showed that the year ahead expectation for inflation rose to 2.82% from November’s 2.61% while the 3 year look moved from 2.78% to 2.89%. The year ahead look at wages rose from 2.6% to 2.7% in December which is the highest level since 2014!!! Ahem!!!

• ECB members were speaking again overnight. Bundesbank president Jen Weidmann said again that ending asset purchases this year is still the most likely course of action and importantly, and to give real context to last Friday’s comments on rate hikes, he said that analyst expectations for a mid-2019 rate hike are largely in line with ECB guidance. That’s something that has helped the euro turnaround. But his colleague on the ECB governing council Francois Villeroy de Galhau warned about the recent strength of the euro. Speaking to a German newspaper he said “The only question is how long it will take to meet our target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices”.

• Steve Bannon has been subpoenaed by Robert Mueller’s inquiry to appear before the Grand Jury. Something to watch.

• It’s been a Cryptocalypse overnight with Bitcoin and other virtual currencies coming under heavy selling pressure as the regulatory scrutiny intensifies not only in China and South Korea but across the globe. But the debate rages over where Bitcoin and other virtual currencies could go. On the one hand we have many establishment figures such as regulators and bankers warning folks could lose everything in ICO’s as the chair of the European Securities and Markets Authority did last night. We also had a warning from former Wells Fargo (NYSE:WFC) CEO Dick Kovacevich who said of Bitcoin “think it's a pyramid scheme. It makes no sense. I'm just surprised it isn't even lower”. But then, on the other hand, we have the true believers who think it is going up with one analyst telling CNBC last night BTC/USD could hit $100,000 by the end of 2018 as institutional investors and futures traders move into the market. On this, all I would say is that while retail investors have chased Bitcoin under a fear of missing out, with the exception of dedicated Bitcoin funds and traders my sense is most institutional investors will avoid Bitcoin because of fear of embarrassment and job loss. FEJL is as powerful a motivator as FOMO.

Cryptocalypse (Source: Investing.com)

Just Quickly

• President Trump has told President Xi that the US trade deficit with China is “not sustainable” Bloomberg reports.
• The latest BAML survey is out and big global investors are moving more money into stocks, running down their cash balances, and thing the peak in the market isn’t for at least another year CNBC reports.
• Reuters had comments from Japanese Finance Minister Aso who said that he doesn’t see a problem with USD/JPY at 110.80. Interesting.

Australia

• It has been remarkable how poorly the ASX 200 has performed over the past week given what is going on in US markets and given what had been a solid pulse of interest in mining and metals stocks globally. But from a high around 6,150 last week the ASX200 has pulled back 100 points.

• Talking to Leeanne Jones on Sky Business each morning in our 7am chat I’ve been saying that it must reflect valuation considerations investors and traders hold for the market at current prices and yesterday I think I found some evidence. That evidence came in the form of a magnificent chart pack from JPM Asset management that the firm shared with Business Insider. It is an amazing resource and certainly worth a look. Anyway, while we all know where the ASX PE is at the moment I thought a chart in the pack put some interesting context around that PE level historically. Here’s that chart with my annotation in red.

Source: JPM Asset Management via Business Insider Australia

• Looking at the price action on the SPI and the only way to frame it is “poor”. Yesterday morning there was no real reason for the SPI to take out the recent 5,999 low. But as I highlighted yesterday if it did break it suggested a further fall toward the Fibo extension at 5,956. It’s almost there now at 5,966 this morning. The question now is whether the buyers will come back in at that level or whether the path of least resistance is back toward the bottom of the range, and November low in the SPI, around 5,921. Here’s the chart (it’s fallen to 5954 since I did this chart earlier).

• The Aussie dollar has done relatively well overnight along with other pairs bouncing back from its 0.7938 low. Of course the price action and almost tic by tic correlation with the euro and US Dollar Index suggests there wasn’t much “Aussie” in the overnight machinations. That’s important for the outlook. But it is also worth noting that coppers fall has resumed, globally the big miners were under a little pressure, and Barclays (LON:BARC) warned yesterday of an imminent sell off in iron ore (-1%+ overnight) back to $50 a tonne in Q2. It’s not a guarantee the Aussie will reverse, and certainly not currently as the US dollar weakness continues. But it’s something to watch in the outlook.

Forex

• HERE’S A QUESTION - Is sterling the most vulnerable currency out there right now? It would be if it was just about the UK economy and BoE policy rate outlook. But the last month’s correlation between pound and the euro and US dollar index has been above 0.9 in price terms. So the pound's move is mostly about US dollar weakness. But if that changes then the apparent relaxation in inflationary pressure in the UK – December data released last night showed 3% yoy inflation and a huge dip in producer prices to 4.9% from November’s 7.3% - and the apparent dovishness of BoE MPC member Silvana Tenreyro who said this week that “risks to productivity are skewed to the upside,” and that would impact the BoE’s policy path.

• GBPUSD is at a very interesting juncture on the weekly charts. Something I’m watching closely. This is all happening as the EU seems to be easing its approach to Brexit and the calls for a second Brexit referendum grow.

• Elsewhere on currency markets the reversal of the US dollar and the comments from Bundesbank president Weidmann on QE and rates simply reinforce the current trend of US dollar weakness. But lets see if the euro and US dollar index take out this week’s lows. If they do then it’s off to the races again and I can see a technical target in US dollar index terms around 89.30. If not though we may have seen the pessimistic crescendo we need to see the US dollar form at least a short term bottom.

Commodities

• Much more chat about the level of US shale oil production is in the air at the moment. Expectations are increasingly that the US will soon reach 10 million barrels a day and may eventually even rival Russia’s status as the global leader. That, and the overhead resistance in both WTI and Brent has seen prices stall at recent highs and now reverse. Of course this week’s inventory and production data is going to be crucial. Last week we saw big draws and a dip in production. We’ll see what get this week but prices could – in the short term at least – be vulnerable to a further pullback. Here’s the Brent chart:

• Gold is hanging tough as the US dollar reverses but copper has fallen again overnight. It’s at $3.2160 off a $3.1820 low. Down, but not out. I find copper's price action recently really curious given the ebullience of global markets about the growth outlook. Last night was the first one in many that mining and metals shares actually pulled back relative to the market and copper might be presaging a change in tone. Something to watch.

Have a great day's trading.