Originally published by AxiTrader
Market Summary
US markets are getting hot that the Senate’s tax bill will soon pass and that President Trump may well have something to sign into law by Christmas.
That’s seen stocks surge, bonds break higher, and the 2-10 curve steepen once more.
So as I write, with 30 minutes before the end of trade on the NYSE, the S&P 500 has slid from the highs and is now only up 0.7% at 2644, the Dow Jones Industrial Average has surged 290 points to 24,233 for a 1.23% gain, and the Nasdaq 100 is 0.6% at 6,350. That’s all after a mixed night on European bourses and a poor day’s trade in Asia yesterday (despite solid Chinese PMI data).
So while SPI traders have added 17 points overnight after yesterday’s 41 point loss for the S&P/ASX 200 the question of whether that’s sustained by the close is a reasonable one.
Back to bonds now and we’ve seen the hype on tax – and solid, if not spectacular, US data overnight – but upward pressure on the back end of the US curve. 2-year treasuries are at 1.79%. But it’s the breakout in the 10's which are trading at 2.425% which, if sustained into the close, which is going to garner the most attention. The passage of the tax bill with a Fed biased to hiking rates in 2018 already before the stimulus is a recipe for higher rates.
Forex traders don’t care though. The algos are more interested in the new headlines that President Trump is going to replace Secretary of State Rex Tillerson. So the euro is up half a percent to 1.1903, pound is still riding a wave of Brexit deal euphoria (latest news is the Irish border issue may be solved) and has gained another 0.8% to 1.3517. The yen has lost about what the euro has gained and USD/JPY is up at 112.54.
For the commodity bloc, it is a tale of woe. The Aussie dollar's CapEx and China PMI lift yesterday faded and it’s a little weaker than where it was this time yesterday at 0.7564 after making a high of 0.7594. The kiwi is off 0.7% and the Canadian dollar has lost 0.3% with USD/CAD at 1.29 and at risk of a serious break higher.
On commodity markets OPEC appears to have struck a compromise deal between the Saudi and Russian positions. The cuts have been extended to the end of 2018 but a June review is slated if the market overheats. Traders are a little non-plussed though WTI is down marginally at $57.28 while February Brent is largely unchanged at $62.62. Gold lost $10 an ounce and is back at $1274 while copper is largely unchanged at $3.04.
Today is the first Friday of the month but this time it’s NOT non-farms day in the US. That’s next Friday because of the calendar. But there is still plenty of data out to end the week.
In Australia we get the AI Group’s manufacturing PMI before a raft of manufacturing PMI’s across Asia and around the globe. The final read of Korean Q3 GDP is out as is Korean trade data, Japanese inflation and household spending. Canadian GDP and employment data is out tonight. In the context of where the Canadian dollar is right now that’s a huge event for forex traders. We have a couple more Fed speakers and the ISM manufacturing PMI in the US along with construction spending and vehicles sales data.
A huge way to end the week – and start December.
Here's What I Picked Up (with a little more detail and a few charts)
International (Bonds and Equities today)
- Tax, and its passage through the Senate is clearly the big story to watch. But the move in bonds is interesting as well given the 10 year Treasury is up at 2.43% at the moment. Clearly, it hasn’t broken the little downtrend (tentative) from this years highs. But perhaps a run above that level of 2.46% and the recent high of 2.475% would open up a lot of topside.
- It would also likely hose down the recessionistas who are confusing the shape of the curve this far into the rate hiking cycle – which is not inconsistent with history – and a recession indicator. Anyway here’s the 10’s via Investing.com.
US 10 year rates (Investing.com)
- And of course should this tax bill become law and be signed by President Trump (yes the two bills of the House and Senate need to be reconciled) then there is every chance of further upside for stocks. And likely gains for the US dollar. The euro probably has most to lose given what passage implies for the path of the US economy, Fed rate hikes in 2018, and US bond spreads. For the moment though euro traders only see the bad stuff from the US and good stuff in Europe.
- And if you are wondering – as we all are – just where stocks can head I offer this chart as perspective. It’s the S&P 500 weekly going back to the low in 2009. Clearly there was a trend which broke with the fall in 2011 but which then became the top of the channel for the 2011-2015 rally. The bottom of that channel has since proved solid resistance. Until recently when the S&P 500 broke back inside it. The channel is about 240 points wide. The current bottom is 2570/75 on this weekly chart and a run to top would be above 2800 right now, let alone in 3 or 6 months time. This is not a forecast, I’m just conveying what the chart shows.
- Feels frothy doesn’t it? That’s something Carl Icahn said overnight when he told CNBC “I really think even though earnings are going to be very good ... I just think this thing has gotten into a euphoric state". It probably has. Stocks have started to go straight up if you look at the weekly and monthly charts. But while we know we can’t forecast black swans even the grey ones don’t look too worrying. 2018 seems like it is going to be a good year for global growth. But we do need to watch bonds – if anything can rain on this parade it is a little bit of a bond market selloff.
- And while I’m on this theme today Reuters reports that in a survey of big global investors this week respondents report that stock allocations have risen to 48.1%, which is the highest level since November 2015. Cash has been cut to just 4.4%, which is the lowest since 2013. And Reuters says “70 percent of respondents saw continuing throughout 2018”.
- Normally I’d be saying how much more good news can there be…and I kind of feel that. But the reality is my indicators suggest this is a bull market and I’m not going to fight it until my indicators turn. I’ll naturally keep readers updated.
- Quickly on the data in the US – it was not terrible.
Australia
- Yesterday’s CapEx and building approvals data in Australia were solid and reflect an economy that – as the RBA has told us – is doing well at the moment. Capex printed the 1% increase the market had expected for the quarter but the increase in expectations for the current financial year to $108.9 billion was a bigger lift than expected and suggests – again – the RBA has its read on this side of the economy right. Building approvals were much stronger than expected at +9% against expectations of a fall of 0.9%. Again its another sign that the only headwind right now is the household sector and consumption. IT’s one heck of a head wind though if households are feeling pressured and rein in their spending. But we’ll have to wait and see how the Christmas period runs.
- So far though it’s looking like its RBA 1, pessimistic handwringers nil.
- Looking at stocks and the Royal Commission announcement certainly put the cat among the pigeons yesterday. Before the announcement, I was going to sell some SPI on the open, but it got away from me so I left it. The big question for investors and the market – the index performance – is what will the impact of the Royal Commission ACTUALLY do to the banks, their valuations, their businesses, and thus their share price. We may see fines, we will see lots of negative headlines.
- But in the wake of David Murray’s review of the financial system and the new rules APRA and the government have instituted is there much else other than the distraction impact that the Royal Commission will have? I doubt it. Strangely – as a director of a member owned bank – it seems to me that the burden will fall disproportionally on the smaller players. The big banks have, or can obtain, the resources to deal with the Commission. The rest of us? Not so much. So for all the bad publicity, this Royal Commission is likely to generate, like much APRA has done (take the 10% investor cap for example), the major banks position is enhanced and strengthened in the Australian economy.
- Anyway, looking at the price action yesterday’s candle on the SPI is a positive day to match the negative day previous. That suggests a range is being mapped out. The SPI, the ASX200, would need to break either Wednesday’s highs or Thursday lows to kick to the next level.
Forex
- Forex traders have no love for the US dollar, or more correctly for President Trump I think. I say that because otherwise how can you explain why the story about the White House replacing Secretary of State Rex Tillerson with CIA Director Mike Pompeii saw the US dollar come under selling pressure against the euro again. It really does make no sense - except maybe to the algos.
- Of course I’ve been taking about this fact trades have no love for the US dollar now for a while. But as I’ve also highlighted we have had periods like these in currency markets where traders focus on one side of the cross. EUR/USD seems especially prone to this since it came into existence.
- Anyway, as it is now the charts suggest a round trip to the recent highs for euro. Perhaps only the passage of the tax bill can change that. Perhaps not. It’s clear the positives accruing to the US dollar right now continue to prove ephemeral and short lived. A break of 1.1960 would open up the top side to the highs.
- Sterling is also in the grip of the bulls as traders embrace the good news that the EU and UK are finding ways to make forward progress. It looks biased back toward .... after trading through 1.35 overnight.
- The commodity bloc is still struggling however. The Aussie caught an updraft in the back of the solid CapEx numbers and Chinese PMI data yesterday but that fizzed below 76 cents and the battler is back where it started yesterday and still inside the current downtrend. As I highlighted yesterday and above it’s funny what traders focus on - the Aussie US 2 year bond spread matters a point or four in negative territory but the German US spread at negative more than a percent. Forex, like fashion, has trends and is fickle.
- The kiwi and Canadian dollar are also under pressure. The kiwi got thumped yesterday after much weaker than expected business confidence. It’s at 0.6831 down 0.7% day on day. The Canadian dollar is also struggling with USD/CAD up near 1.29 and recent highs. A break would signal a run toward 1.3200/50 as a Fibonacci projection. Canadian GDP and employment data is out tonight. In the context of where the Canadian dollar is right now that’s a huge event for forex traders.
Commodities
- As discussed above the deal between the Saudis and the Russians is perfect. Both in terms of delivering what the market expected and in settling on a compromise which keeps both nations (and OPEC) happy. We’ll see how inventory levels move in the months ahead. But there is a pretty clear message here that OPEC and Russia think we’ll see more tightening and higher prices. I say that because it seems clear in the concession to re-evaluate where markets have moved to in June next year that OPEC tacitly expects prices to continue to rise and shale oil supply to remain subdued enough not to have knocked them lower.
- We’ll see. For the moment though the charts are interesting and suggest there is some risk that prices actually pullback a little. That’s if the trendlines in WTI and Brent give way and the low of the day before yesterday is taken out. Here’s the WTI chart – I’ve indicated the level I’m watching.
- Gold is still stuck in this $40 range between $1260 and $1300. If the move higher in bonds last night is sustainied – and it is worth noting no sell offs have been so far this year – then gold is likely to break a little lower. For the moment though its in a range.
- Base metals remain under pressure as traders fret about China even though yesterday’s NBS manufacturing PMI and non-manufacturing PMI’s were better than expected. In the case of copper there are also concerns about rising supply which is weighing on prices a little. That said though it did manage to find support and has printed a doji on the charts. We’ll see what the next day brings and whether the down trend will resume of copper might lift a little.
Have a great day's trading.