The Trump Rally In Stocks Is Stalling As Bonds Rocket Higher

Originally published by AxiTrader

Quick Recap

The S&P 500 is spending it’s second day inside the post recovery daily range we saw on Thursday, which again suggests to me my caution about the rally is correct. Yes, the Dow Jones Industrial Average made another new all-time high overnight but it’s only 30 stocks and it’s not the stock market – and it’s drifted lower from the highs.

Why is that? Because traders have discounted Trump's triumph too quickly and the news, data, impetus, for the next leg is days, week’s or probably months away. Throw in a bond market which has sold off aggressively and taken U.S. 10-Year to 2.30% at one point last night.

So we have a rally in stocks and sell off in bonds which are self-defeating in many respects until the hopes of stock players and fears of bond vigilantes are confirmed.

In some respects, it’s a different outlook for the US dollar however because when you throw the Fed into the mix and the divergent policy we’re likely to see between central banks across the globe. That helps the US dollar against the majors and especially in emerging markets which also have to worry about Trump's tariffs in their future.

What You Need To Know

International

• So far we are getting President Trump not Candidate Trump – that’s important here’s why. Whether it was the very strange meeting with president Obama last week at the White House where Trump said “great man” under his voice as the presser ended or whether it was the CBS 60 minutes interview aired in Asian time yesterday, Donald Trump is sounding more concilliatory and more like a president. And his move yesterday to make the RNC boss Reince Priebus his chief of staff goes some way to bridging the gap with the Republican party in Congress and could lead to legislation actually getting passed. President Trump. Who knew?

• Who also knows if it will last? But STRANGELY it threatens the rally in stocks and sell off in bonds because it suggests a tempering of the pace and aggression of the implementation of the policies the markets have reacted to since last Wednesday’s lows.

• Naturally, it doesn’t mean Trump won’t be the economic paradigm shifting infrastructure president that I think he can be. But it does suggest the current moves could be very much cart before the horse type of movements – at least from here and possibly in total.

• Interestingly Larry Kudlow on CNBC said this morning he thinks people are making too much of the infrastructure stuff – you create the jobs and then you lose them.

• Looking at the S&P you can see what I mean about the inside range. If the S&P can’t break higher the risks are a test of the “real” buying – if it’s there.

• US bonds had a big night with the 10’s trading up to 2.30% and the U.S. 2-Year traded to 1.01% before the recovered somewhat to 2.24% in the longer end but the 2 year is still at 1.00% These rates are the clear and present danger to the stock market rally and can act as a handbrake.

• But it’s not just US bonds - Australia 10-Year are at a ridiculous 2.70%. Germany 10-Year are at 0.319%, UK 10-Year at 1.29%, Japanese rates are at -0.16%, and rates in other European markets are rising as well.

• But the rise in yields, and the ebullience around stocks, is putting Emerging Markets (EM) under acute pressure. The rationale is that rising rates in the world’s biggest economy not only bolsters the US dollar putting downward pressure on EM forex rates but it also makes the US a more attractive place for capital. Likewise if trump is the infrastructure guy he says he will be the US economy is likely to have a substantial pickup in nominal GDP which should support stocks – in the medium to long term. That’s another negative for EM. So naturally you end up with capital flows out of these nations and currencies.

Elsewhere

• Yesterday Chinese president Xi had a chat on the phone to Trump with a spokesman telling State TV that Xi said co-operation between the two nations is the only choice. He also said he hoped the US-China relationship retains its current strength.

• Speaking of China, interesting that the State Council issued a crisis plan yesterday on how to deal with local government debt problems.

• And Chinese data yesterday was pretty solid with retail sales, urban investment, and industrial production printing around market expectations.

• Japanese GDP was also a massive beat but that didn’t stop USD/JPY running into my target zone.

• Indian prime minister Narendra Modi kind of apologised for his unilateral action to get rid of the two biggest denomination bank notes last week saying he understands the pain it caused :S

Australia

• Bank stocks going ex-dividend weighed on the local market yesterday and it finished down around 25 points with the S&P/ASX 200 closing at 5345. Taken in that light and with miners (especially of the gold type), and energy stocks down a little yesterday the performance doesn’t look too bad all things considered.

• But overnight futures traders have marketed the market down again with the December SPI 200 off another 17 points at 6.12am Port Stephens time. The ASX is likely to have a downside bias as a result again today.

• That’s unless the RBA minutes show the bank is looking to ease again. I’d be surprised if that happens but I do believe the RBA has a firmer easing bias than the market gives them credit for.

Forex

• Mission accomplished. The US Dollar Index is 100 and trying to break solid overhead resistance as you can see in the chart below from my Reuters Eikon.

• That US dollar strength is reflected all over the forex landscape with the Euro at 1.074 down 1%, USD/JPY at 108.23 – up and through my target, it’s going much higher in the next 3 months, Sterling is lower with GBP/USD at 1.2491 down 0.87%.

• Looking at the Euro specifically it is honing in on really important support. The purple line you can see in the chart below is from lows in the late 1990's, 2001 and 2015. A break would be a huge move.

• But the commodity currencies have actually done okay. The AUD/USD is down just 0.15% at 0.7540,USD/CAD is only up 0.13% at 1.3558 and the Kiwi is at 0.7093.

• Like other markets forex traders are picking winners. Which is why EM forex is lower.

Commodities

• Oil is down again as traders fret that there is no chance OPEC will get a deal done. After the data showing OPEC has increased production buts much of the weight to get a deal done on the Saudis shoulders traders are betting November 30 will come and go again without any concrete agreement. As a result Crude Oil traded down to $42.18 but it’s back at $43.44 now – up slightly on the day.

• My view remains that there is a fiscal imperative to get prices higher so it is worth noting that Saudi Energy Minister Khalid al-Falih again reiterated that that it is imperative for OPEC to crystallise the agreement reached in Algeria recently.

• If the Saudis walk away from this then all bets are off – but while they are making noises I’m sticking with my view that something will get done. Don’t confuse rhetoric with trading though. I’ve been talking about weaker prices for some time now. But last nights candle is looking suspiciously like it could be signalling a bottom. Speculative at this stage Here’s the chart.

• Gold dipped to $1211 overnight but is back at $1220 now. It needs to hold this $1198/1220 region if it is to bounce. I like gold longer term and perhaps short term. Too early yet.

• Copper is at $2.52 a pound looking very messy but up a bit on the back of the Chinese data.

Today's key data and events (all times AEDT)

• Australia - Westpac Leading Index (MoM) (Oct) (10.30am); RBA Meeting's Minutes (11.30am)
• New Zealand - Retail Sales (QoQ) (Q3), Retail Sales ex Autos (QoQ) (Q3) (8.45am)
• China - Nil
• Japan - Nil
• Germany - Gross Domestic Product w.d.a (YoY) (Q3), Gross Domestic Product s.a (QoQ) (Q3), Gross Domestic Product n.s.a (YoY) (Q3) (6pm); ZEW Survey - Economic Sentiment (Nov), ZEW Survey - Current Situation (Nov) (9pm)
• EU - Trade Balance n.s.a. (Sep), Trade Balance s.a. (Sep), Gross Domestic Product s.a. (QoQ) (Q3), Gross Domestic Product s.a. (YoY) (Q3), ZEW Survey - Economic Sentiment (Nov) (9pm)
• UK - Retail Price Index (MoM) (Oct), Retail Price Index (YoY) (Nov), DCLG House Price Index (YoY) (Sep), Producer Price Index - Output (YoY) n.s.a (Oct), PPI Core Output (MoM) n.s.a (Oct), PPI Core Output (YoY) n.s.a (Oct), Producer Price Index - Input (MoM) n.s.a (Oct), Producer Price Index - Output (MoM) n.s.a (Oct), Producer Price Index - Input (YoY) n.s.a (Oct), Consumer Price Index (MoM) (Oct), Core Consumer Price Index (YoY) (Oct), Consumer Price Index (YoY) (Oct) (8.30pm)
• Canada - Nil
• US - NY Empire State Manufacturing Index (Nov), Retail Sales ex Autos (MoM) (Oct), Retail Sales control group (Oct), Retail Sales (MoM) (Oct), Export Price Index (YoY) (Oct), Import Price Index (YoY) (Oct), Export Price Index (MoM) (Oct), Import Price Index (MoM) (Oct) (12.30am); Redbook index (YoY) (Nov 11), Redbook index (MoM) (Nov 11) (12.55am); Business Inventories (Sep) (2am); 4-Week Bill Auction (3.30am)

Have a great day's trading