Originally published by AxiTrader
Welcome to my last Markets Morning for 2017.
I wanted to wish you and yours a wonderful New Year and I look forward to a happy and prosperous 2018 – with maybe a little more volatility we can trade off.
Feedback always welcome
Greg
Market Summary (6.38am)
The US dollar's rout is the big story of the past 24 hours as the buck came under heavy selling pressure from the euro and other currencies in Asia yesterday. It was pressure which has continued and driven the euro and US Dollar Index to important levels which – if broken – could precipitate substantial further US dollar weakness.
So this morning the euro is near 1.1960, the pound is up at 1.3440, and the yen is stronger driving USD/JPY back under 113. That US dollar weakness helped the Aussie to rally above 78 cents at one point but it’s back at 0.7792 this morning while the Kiwi is at 7082 and the Canadian dollar has broken its range with USD/CAD at 1.2581.
US dollar strength wasn’t celebrated by European bourses, which were down across the board. The FTSE eked out a 0.03% gain with the S&P 500 in the US up a similarly tiny amount as I write. The Dow up 0.16% and the Nasdaq is flat.
On commodity markets the weaker dollar has helped gold, precious and base metals all rally strongly. The yellow stuff is at $1294 while the red stuff (copper) is up another 1% to $3.29 a pound this morning. Iron ore is higher as well with Dalian May up a little more than 3%. Oil is looking fully priced at the moment even though both WTI and Brent were higher gaining 0.34% and 0.2% to $59.84 and $66.57 a barrel respectively.
It’s the last trading day of the year today so window dressing and very thin markets are a risk.
Other than that Korean and German inflation are the key releases today and then the Chinese NBS PMI’s are out on Sunday.
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)
- The US dollar was under pressure again in Asia yesterday and that pressure continues med through the European and US sessions as the euro approached recent highs near 1.1960 and the yen is back below 113. Whether it’s month end flows or simply that there are no catalysts to buy dollars at the moment that traders can grasp doesn’t matter. What matters is that for months now the US dollar has been unable to capitalise in its improved economic outlook, on the tightening plans of the Fed and of the reality that even though forex traders want to deny it there is clear policy and timing divergence between the Fed and other central banks.
- So, as I’ve written often, the US dollar just can’t take a trick. That’s important folks as we head into the new year. What can cause it to change? Will it change? Or, as my LT charts suggest is euro on the way to 1.26/28 in 2018. It’s a big question.
- But back to the last 24 hours and the break of trendline resistance yesterday saw the euro surge which in turn precipitated a collapse in USD/JPY. Other currencies went along for the ride such that the pound is now sitting at 1.3450 against the US dollar while the commodity bloc has also rallied. The Aussie dollar is above 78 cents at 0.7805, while the kiwi is back at 71 cents and the Canadian dollar is in the cusp of a range break with USD/CAD at 1.2589. As you can see above – and as euro near 1.1960 suggests. The US dollar is at a critical juncture. 1.2090 could be on the cards for the euro – that’s the year’s high – if this level breaks.
- The local stock market had a better day than expected yesterday as the metals strength in Asia buoyed stocks in that sector. That saw the S&P/ASX 200 lift 18 points for a 0.3% gain and close at 6,088. In the short term the SPI traders have knocked 9 points off prices overnight suggesting a slightly weaker open. Longer term though as the globe reflates in 2018 and given the relative under pricing of commodities and mining and metals shares relative to overall stocks and with the ASX200 closing the year with a solid break higher the outlook for the year ahead looks positive. 6,305 seems a reasonable target at some point.
- I’m not going to bang this drum too hard, but it seems to me the BoJ is becoming more comfortable that it WILL be able to adjust policy in 2018. I say that based on many comments over recent months and with reference to the release yesterday of the summary of opinions expressed at last week’s BoJ meeting which showed that some policy makers are calling for a debate about the level of ETF purchases and or raising rates in Japan on the back of the improving outlook. That’s an outlook which was supported by a big beat in November retail sales (2.2% versus 1.2% expected and from -0.2% last). Industrial production was also a little higher during the month at 0.6%.
- Bitcoin continues to slide and is off around 9% in the past 24 hours and trading around $13,795. The catalyst yesterday for further weakness was South Korean threats to close exchanges. My system is still short and I sense a changed narrative in the press reports I see about this crypto, which may be changing the psychology of traders at the moment. Anyway the $13,000/$13,200 region looks like important support but the chances of a trip back toward last week’s lows seem high for the moment.
- Commodities did really well in the past 24 hours. It’s a sea of green for base metals, iron ore surged higher, while precious metals continued to drive higher as well. Of course there is a certain circularity to the move insofar as the weaker US dollar helps drive prices higher. But there is another dynamic at work it seems as well as the rally in copper, base metals, and gold is also consistent with a reflationary bet on the year ahead. I’m on board with that. But these moves at a notoriously thin time of year and at such a pace are somewhat problematic and may be reversed a little in the new year. Of course in no small part that depends on the US dollar. For the moment there is clear resistance in copper around this $3.30 level (I have a target of $3.70 LT) and $1297/$1300 for gold. Here’s gold:
- And, I won’t belabour my view that we’ll see a rotation away from FAANGS in 2018 (and into mining and metals among others). But, in another example of me finding articles to support my view (recall I am a behavioural economics and finance guy so I know I’m doing it) here is an interesting piece I picked up in the WSJ this morning. Headlined “The Growing Peril of Index Funds: Too Much Tech” the article highlights “Investors who loaded up on US and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them”. Now of course index fund investors are index fund investors. And index funds are constructed to reflect the index. So there won’t be any necessary adjustment there. But for other managers the article simply highlights the growing concentration in this sector and if they do come under further regulatory scrutiny we could see that rotation I’ve highlighted is possible.
- Let the games begin. The Italian President has dissolved parliament and the nation is set for elections in March. Before the French election, Italy was seen as a big risk for Europe. But the tide seems to have turned back toward European inclusiveness meaning this is not currently viewed as the kind of risk it was just 12 months ago. Something to keep an eye on though in the next couple of months.
- Oh, and a day after Chinese data showed the nation has essentially cut off the North Koreans from trade – either buying its coal or selling it oil – US President Trump accused the Chinese of doing just the opposite. Why? So he can claim they reacted to his entreaty perhaps at some future point? Anyway Korea will be something to watch again in 2018 although I’m hopeful with Chinese efforts and the fact no one really wants war that negotiations will be the feature of discussions.
Have a great day's trading.