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Tax Cuts Boost Stocks And The US Dollar

Published 05/12/2017, 09:01 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Market Summary

Monday morning Asia got it right yesterday with the early morning strength in the US dollar, increase in yields, and bid in stocks all finding resonance across European and importantly US markets overnight.

So it’s been a good 24 hours for most stock markets. But not here in Australia or on the Nasdaq, where sector rotation has seen prices slip. The Dow Jones Industrial Average and S&P 500 rose. US markets were sceptical that tax reform would get though. And while it still hasn’t, the odds are much higher now, so the stocks that stand to benefit the most are now back in favour.

Equally though the presence and escalation of the Russia probe now that Michael Flynn is cooperating and the President is on a Tweetstorm did have a restaining impact on the market's moves.

So as I write with 25 minutes of trade to go the S&P 500 is up 0.16% at 2,646. The Dow has risen 0.47% to 24343, and the Nasdaq is down 0.86% at 6,283. European bourses had a very positive day as they played catch up from Friday’s moves. But the rally globally has found little resonance here at home.

After an underwhelming performance yesterday the SPI is now down 18 points this morning pointing to a weak open and tough trade today.

On forex markets it was a day of almost universal US dollar strength although most currencies are off their lows against the US dollar. Euro is at 1.1857 down 0.27%. The pound is around flat even with the disappointment of the failure to reach a Brexit agreement last night – GBP/USD is at 1.3473. The yen is off its lows with USD/JPY at 112.60 and the commodity bloc is mostly weaker. The Aussie dollar is down about 0.2% at 0.7595, the kiwi has lost about half a percent and is at 0.6846 while the Canadian dollar held in okay – especially given oils 1.5% fall. USD/CAD is at 1.2699.

And speaking of oil, WTI is off 1.56% to $57.45 while Brent is 2% to $62.45. Reports are it's about shale oil. But I think its as simple as all the good news being priced in now. Gold is still trapped and sits at $1275. Copper went nowhere and is at $3.0650.

On the day the RBA will in many respects play second fiddle to retail sales for October which will dominate here in Australia today. Caixin non-manufacturing and composite PMI’s out of China will be important as will the global series of these releases. Retail sales in the EU is also important as is US trade, ISM services and the dairy auction.

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

International

  • Data in the US was solid again overnight. US factory orders were down 0.1% in October which was much better than the -0.4% print which had been expected. Also last night durable goods orders for Oct were revised higher, to -0.8% from -1.1%.
  • This is important folks, the US economic surprise index is at 65.3 and with the EU version of same at 69.3 there is a clear chance that for the first time in six months or so US data is going to start to print better than European data. That will loom large in traders minds especially when you have the stimulatory impact of the tax cuts coming down the pipe. Yes I expect the conference to be able to reconcile the House and Senate tax bills.
  • To see where that rubber hits the road, Reuters reports that a poll of fixed income folk before the Senate passed its tax bill already had 3 rate hikes from the Fed next year as a base case. Likely that may be a little higher now after passage of the bill. Certainly rates rose from Friday’s Flynn induced rally. But linger concerns and uncertainty about Robert Mueller’s Russia probe has kept a lid on rates for the moment.
  • It would be difficult for the Fed to avoid the economic impact of the tax cuts at next week’s meeting, decision, dot plot and press conference now that they are very close to becoming law. So, the big discussion going forward – but still yet to really emerge – is the impact of the tax cuts on the Fed and then on long bonds. There has been much hand wringing about the flattening yield curve in the US recently. But it is not actually flat, it has simply been flattening – that’s very different if we are talking about recession as some are. A close of 10's above recent – and last week’s – highs above 2.45% would be an interesting event and one that could set the pigeons running across global markets.
  • No deal was able to be met on Brexit during the meeting between Theresa May and Jean Claude Juncker overnight. One outstanding issue continues to be the border issue in Ireland with May’s DUP partners apparently not yet satisfied with what the PM had agreed with the EU – seriously the PM went to a meeting without getting agreement with her parliamentary partner. Juncker was, however, upbeat about the prospects of a deal get done before next week’s EU meeting to nut out the next step forward.
  • Ireland is happy with the wording, so much now depends on the DUP whose leader the FT reports said “We have been very clear: Northern Ireland must leave the EU on the same terms as the rest of the UK and we will not accept any form of regulatory divergence which separates Northern Ireland economically or politically from the rest of the UK”. Crucially though the FT also says DUP leader Arlene Foster said “attacked the Irish government ‘for clearly seeking to unilaterally change’ Northern Ireland’s 1998 Good Friday peace agreement”. That looks like a possible sticking point if that view is more than just a negotiating position.
  • BoJ Governor Kuroda went out of his way to suggest recent comments about the impact of monetary policy and need for change were just a conversation yesterday. He said that current policy prescriptions remain appropriate. So I may have overread recent musing from the BoJ. Although it seems to me that the BoJ will in 2018 emerge from some of its emergency measures and among them will be letting Japanese 10 year yields rise.
  • GEOPOLITICS: The pivot of Yemen’s former president Saleh away from the Iranian-backed Hiuthi rebels and back toward Saudi forces didn’t last long with the former president reportedly killed overnight. I highlight this as it continues the confrontation between Iran and Saudi Arabia for control of the region. And don’t forget the war games on the Korean peninsula continue this week. Markets haven’t been fazed by Kim jong-Un’s rocket launches and threats so there is no reason to assume this week will be any different. But we still need to know its going on and that Russia and China are watching closely as well.
  • Venezuelan President Maduro pretty much ensured that regulators around the globe – and especially the US – look to crackdown on (Bitcoin's) seemingly anonymous status. I say that because in saying his nation is going to launch a virtual currency to combat what he sees as a financial blockaded of the nation he is likely to run afoul of US law enforcement agencies and give them an incentive to look more closely at who and what is happening in crypto markets. It’s already started with the British looking at cryptos from an anti-money laundering and no doubt terrorism financing angle. A sideshow to the rapid price rise. But interesting nonetheless. Oh, and we get the launch of the CBOE bitcoin future on Dec 10 with the CME launching a week later.

Australia

  • Yesterday’s data in Australia on company profits, wages, and inventories – not to mention job ads at a 6-year high – points to a solid print when we get the Q3 GDP release on Wednesday. That’s positive and suggests governor Lowe and the RBA might be on the right track about growth. That is, growth will be strong with an area of concern around households. But strong nonetheless. With a period of peak pessimism last week for the Aussie it may be turning the corner – or at least resting in its downtrend.
  • Looking at the governors statement this afternoon I wouldn’t expect too much deviation from what we have seen recently. The RBA has had ample chances in the past month to let the market know what it thinks so it would be one heck of a surprise if something new popped up. Perhaps he could mention the recent drift in the Aussie dollar? Overall though the governor and his board are likely happy that the economy is evolving as they expected.
  • Looking at stocks now and despite the strength of US S&P 500 futures in overnight trade Monday - they were up 16.5 points for a gain of 0.6% - the local market found the going heavy with the big banks the major drag and miners doing well.

Chart
ASX 200 v S&P 500 Daily over 2 years (Source: Reuters eikon)

  • Of course there are some very good reasons why the S&P/ASX 200 should lag the move in US markets. Not least of which is the fact that we just aren't in the US and our stocks will not benefit from tax cuts. Equally thee massive underperformance of a couple of months back has been more than remedied. But improved risk appetite in global stock markets is positive for the ASX200 even if it lags.
  • Interesting though. Yesterday’s price action was an inside day of Friday's range which was an inside day of Thursday's range - so the technical might be rolling over for the ASX. Certainly the SPI is lower this morning and the charts suggest it’s at least headed toward the bottom of the recent range – around 5944.

Chart
Forex

  • The US dollar is almost universally stronger this morning after yesterday’s Asia Monday rally gained traction as the day wore on and as traders bet that the passage of thee Senate tax bill has materially increased the probability of US tax cuts and the stimulatory impact that will have on the US economy. That’s not to say the usual dollar bears aren’t lurking with most currencies weaker but off their lows against the US dollar over the past 24 hours.
  • Certainly the dovish minutes from the last meeting and Janet Yellen’s dovish chat with Mervyn King recently hurt the US dollar and but the bulls – like me – on the back foot. But, as I discussed in the fixed income section above the fed will have no real choice but to no address the stimulatory impact of tax cuts on the economy and on its expectations for policy when it meets next week. Up until now Fed speakers and chair Yellen have avoided commenting I think so as to stay out of the politics of the tax debate. But the debate is close to being settled with only the House and Senate bills to be conferenced and reconciled. I know that is not an easy task and the Republicans are often their own most aggressive opposition. But Congressional leadership will be keen to both deliver on promises and get something done, get a win, before they start thinking about next years 2018 election cycle.
  • So stimulus is coming, with an employment market that is tight, and an economy that is strong. Late cycle stimulus is exactly the sort that would normally worry central bankers. We’ll see what the Fed says next week but the dovishness of the last minutes may give way to a caution about the lack of inflation and focus on economic strength. That should support the dollar.
  • Deep breath. In the meantime though when it comes to the euro it’s still the case that a break of either side of the recent range – 1.1800/1.1960 – is needed to get the single currency moving. Data will be important. For the yen the situation is less clear. The global growth backdrop, the rally in stocks, and the lift in risk appetite would normally support USD/JPY. But the Yen fought back last night. Perhaps it’s the case that USD/JPY is just mired in the 2017 range for the moment.
  • Sterling, of course, is hostage to these Brexit negotiations. A breakdown would be catastrophic for the bulls. But we have to take Jean Claude Juncker at his word when he says they are not far from a deal. Certainly that seems to be what Sterling traders have done given the pound is one of the only currencies to have made gains against the US dollar overnight. We can see a clear top now in GBP/USD.

Chart

  • The three main commodity bloc currencies are lower this morning. But only the kiwi has lost material ground and is down 0.5% at 0.6847. The Aussie is just below 76 cents and the Canadian dollar is just 0.1% weaker against the US dollar with USD/CAD at 1.2697. That’s actually a solid performance from the Canadian dollar given its surge Friday night after that solid jobs data and last nights fall in crude prices.
  • For the Aussie at 0.7598 its mid-range for what hasn’t been a reasonably narrow band over the past 24 hours of 0.7579 and 0.7613. That suggest to me that my theory we have reached peak pessimism for the Aussie at the moment and it can grind out gains on the crosses and possibly against the US dollar is a strong chance of gaining traction.

Commodities

  • Oil was lower as traders worry that shale oil will rejoice at the latest OPEC/Russia deal. That’s the headlines anyway. Personally looking at the price action and the inability late last week to take out recent highs my suggestion would be something different and a little simpler. All the good news was, or is, priced in and so oil – when I look at the charts – has a downward bias. At least while it’s below those recent highs.

Chart

  • Gold is still trapped and copper is going nowhere at the moment.

Have a great day.

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