Originally published by AxiTrader
The hype and hope seems to have faded a little this morning with most European markets ending the day lower while US markets are currently in the red at 6am AEDT.
In Europe there seems to have been a negative reaction to the rise in bonds rates which saw German and French 10’s – among others – jump 8 points overnight. US bonds were also on the rise with 10-year Treasuries up at 2.4680% and on the cusp of a break of the downtrend line that stretches back to 1990 (see below).
Naturally rising bond rates impact valuations – so this is something worth watching. Now, and in 2018.
At the moment though – and after a rare broker downgrade for Apple (NASDAQ:AAPL) - the Nasdaq is down half a percent at 6,481, the Dow has dipped 0.1% and the S&P 500 is down 0.16% as traders await the passage of the tax bill. The House has passed its version and GOP leadership says the Senate will vote Tuesday night US time on tax.
Here at home, after a solid day’s trade and close at a 10-year high the ASX 200 looks set to open down a few points this morning with SPI traders having subtracted 6 points from yesterday afternoons close for the front contract and 7 points for the March contract.
On forex markets, the divergent price action continues. The euro is stronger this morning up half a percent at 1.1853, the yen is 0.4% weaker with USDJPY at 112.98, while the pound is largely unchanged after recovering a dip at 1.3380. For the commodity bloc the Aussie failed again under the 200 day moving average – despite reasonable metals price action – with AUD/USD largely unchanged at 0.7662. . The Canadian dollar is off 0.1% as USD/CAD sits poised below resistance at 1.2877 and the kiwi was unfazed by the dairy auction overnight and is at 0.6990 this morning.
On commodity markets gold is at $1260, copper is a little stronger at $3.1265 and oil is around half a percent higher for both WTI and Brent.
On the day the highlight is kiwi trade data, before the Westpac leading index of Australian economic growth, and the Japanese all industry activity index. Tonight it’s US existing home sales as the highlight.
And, and, and China will unveil its growth blueprint today for the year ahead…rumours are its growth over deleveraging that is going to be announced.
KEY DATA RELEASED IN THE PAST 24 HOURS
Here's What I Picked Up (with a little more detail and a few charts)
International
- US 10’s folks! If there is one observable risk for markets as we head into 2018 it is not that the US heads into recession but rather as a result of Fed intentions and solid US growth that longer bond rates in the United States head higher. This morning 10-year treasuries are back up at the recent highs and sitting at 2.46% - the curve is back at 61 points.
- We haven’t seen a break out yet but a move through and close above 2.475% would be a break out. US rates heading to 2.6%, probably 2.8% seems to me a reasonable chance in 2018. But as this next chart shows bonds are actually breaking a very long-term downtrend. It’s a break which – if it holds – could signal a big move higher in US 10’s and thus global bond rates. That will have implications for valuations across many markets. Early days yet…but certainly, something to watch in 2018.
- Elsewhere there were a couple of really interesting things that occurred as well particularly in CHINA. Today China is expected to unveil its outlook for growth in 2018 with Dow Jones reporting “people familiar with the plan say it will show that Beijing is finding it hard to cut debt without jeopardizing growth” apparently the desire to bring down debt is “gone in favour of a pledge to just control the rise in borrowing”. My guess is there will be plenty of negative press and hand wringing over the debt bomb. But, if true, it’s a pragmatic recognition that deleveraging is inherently growth limiting. So less deleveraging could be good for growth assets – and in the them of bonds above positive for inflation.
- Also last night we got the latest update from the BAML global fund manager survey. You won’t be surprised to see that institutional investors think Bitcoin is the most crowded trade. FANGS, Short Vol, and corporate bonds ranked second, third, and fourth. Folks they are the big trades and big winners of 2017. Could they be at risk in 2018? That’s what this survey result might suggest.
Just quickly, some highlights:
- Germany is going to borrow more in the year ahead – there is some talk this is part of what drove German 10's higher.
- Japan upgraded its growth outlook for the next two years to 1.9% and 1.8% respectively yesterday. But it said inflation is going to stay quiet.
- ECB’s Hansson called for a change to the policy message because growth is strong – that’s the narrative which is keeping the euro bid.
- Japan and Singapore both warned on Bitcoin yesterday – the MAS specifically warned investors and Japanese finance minister Taro Aso said BTC is not yet proven. Yes we know that.
Australia
- The RBA minutes didn’t offer me anything new yesterday. But it seems that in this quiet time of year the fact that the bank said households posed a “significant risk” to the economic outlook has received plenty of coverage. Readers of this note will know that I have been writing about my concerns – and indeed the RBA’s own worries - on this front and its possible impact on the economic outlook. That’s why I say there was nothing new. But what is clear in the minutes with expectations that wages will stay low and that households still face a tough time even with employment strong is that the RBA sees itself on hold for some time.
- Turning to the market now and yesterday was a very solid day on the ASX as prices traded up to 6080 before closing back at 6071 – the best close in a decade. The preconditions for further gains remain intact given the combination of risk appetite, metals prices, Australian and global growth, and benign interest rates here and around the globe. But, the reality is the ASX will react to what happens offshore and on that front whether this is a monster buy the rumour sell the fact trade on US stocks, and whether the rise in US (and global) bonds gets any traction in stock traders minds will be important.
- So for the moment stocks in Australia look like they might slip on the open. But how they do across the course of the day will be determined by the Senate vote and how US futures trade during the night session in response.
Forex
- The lack of singular narrative continues in forex markets. But it’s clear that the single narrative which has dominated forex trade in the euro this year remains in place. That is traders want to believe in the euro and discount the US dollar. The first hints of that came back at the beginning of this year when the BAML fund manager survey said long US dollar was the most crowded trade. It was a clear “tell” that fund managers didn’t believe in the buck and its strength. So when we saw US data collapse from April, euro bulls and dollar bears were back in play. As it stands now – and as I wrote yesterday – there are precious few catalysts to see this theme change as we head toward years end. So it looks like my expectation euro could trade lower is wrong.
- Looking at the euro chart then and it is clear the single currency is trying to break higher and out of this most recent downtrend. 1.1865/70 is the big level to watch now with a break opening the way for a run to the recent high at 1.1960. And if that breaks then it is 1.2045/50 which comes into the frame.
Commodities
- The Saudis released their budget last night and if it shows anything it is that the kingdom intends to stay the course on production cuts. I say that because the budget revealed the Saudi’s expect to see a material increase in revenues from oil sales and they are going to spend that increase in an expansionary budget. Thus the kingdom needs, and will work towards a tighter oil market in the year ahead and an upward pressure on prices.
- That said in the short term WTI and Brent are both higher on a little anticipation the API data this morning will show another big draw in the US. Production data in the EIA version of inventories tomorrow is likely very important as well – and a risk to prices which are in a wedge for both oil markets at the moment. For WTI a break of $58.10 would signal a run toward the highs.
- Gold is trying to break higher, but can’t do it yet. I’ve pencilled in $1263 close as the level that I need to see to convince me gold can run higher. Copper continues to rally amid an overall uptick in metals.
Have a great day's trading.