Originally published by AxiTrader
Market Summary (7.40am)
US stocks are surging again and that lift in investor risk appetite seems to be helping the Australian and kiwi dollars, which usually do well when risk appetite is on the rise.
The strength of these two currencies saw the Aussie rise to 0.8022 and the kiwi bolt to 0.7331 just a couple of hours ago, as they outpaced the euro, yen and Canadian dollar even after the BoC hiked rates – somewhat dovishly it must be said. But the US dollar has made a post-Beige Book stand and the Aussie and kiwi are back at 0.7996 and 0.7293 respectively. That, in turn, has knocked the euro lower by 0.35% on the day and it sits at 1.2217 while the yen is above 111. The pound surged 1% at one point as a softer Brexit seems to be a real possibility given EU – Juncker – entreaties. But it’s given up half that gain and is at 1.3859 at present.
Worth noting it was the first night where EU policy-makers more forcefully highlighted concerns on the euro’s recent sharp rise.
Back to stocks now, and the surge in US markets again reinforced that this is a market to either be long or square in. Those interesting candlesticks I mentioned yesterday have been washed away in a tide of buying as the S&P 500 is up 0.97% lift to 2,803. The Dow is up 1.29% to 26,127, while the Nasdaq 100 is up 1.08% to 6,809. All records.
While the Aussie has reacted to the investors ebullience the bond markets have only just roused themselves. The US 2-year rate is at 2.04%, the US 10-year sits at 2.57% and the curve is close to recent lows at 53 points this morning.
On commodity markets, oil has risen a little with small gains of around 0.2% for WTI and Brent which sit at $63.85 and $69.26 respectively. Gold was fairly quiet earlier but has lost $12 an ounce since 6 am and sits at $1328. Copper has lost about 0.9% to $3.17 amid what’s been a poor day for base metals with red across the board. That’s curious given the commodity currency moves. As is the lack of real action in bonds.
Looking at the day ahead the Reuters survey says economists are looking for a 9,000 increase in Australian employment with the unemployment rate steady at 5.4% when the data is released at 11.30 AEDT this morning. This evening we get the release of Chinese Q4 GDP along with the triple treat of investment, retail sales, and industrial production. In the US its building permits, housing sales, and the Philly Fed index.
Here's What I Picked Up (with a little more detail and a few charts)
International
- There was nothing in the Fed’s Beige Book this morning to dissuade me that they are on track to hike at least the three times the dot plot suggested at the December meeting. It was more of the story of growth, labour market tightness, and mild inflation. One thing I did note however was that the Fed said “"Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country”.
- ECB officials were on the hustings last night warning about the pace of the recent euro appreciation. ECB vice-president Constacio reiterated that monetary policy will continue to be “very accommodating” while at the same time saying that the sudden movements of the euro didn’t reflect fundamentals. He said “as it is known, we don't target the exchange rate. But I am concerned about sudden movements which don't reflect changes in fundamentals. Looking at fundamentals, inflation declined slightly in December…we are not changing the path of our monetary policy. With the decision to halve our monthly bond purchases we have adapted our monetary policy to the new economic context and consequently to the higher inflation ahead. But this does not mean that monetary policy will not remain very accommodative for a long time. We see no inflation risks. We should not choke off growth too soon". This is very BoJ in its outlook. The trouble for the ECB though is that it’s clear in EU growth numbers that the time for emergency measures has well past. So QE must end and negative interest rates shouldn’t be too far behind. But Europe still has an unemployment problem in some countries and will want rates and the exchange rate as accommodative as possible for as long as possible to combat that.
- This fits with comments the previous night from Villeroy who said that the rising Euro could impact the ECB’s ability to get inflation back toward its target. Specifically he noted “The only question is how long it will take to meet our target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices”. Oil’s rise will be an offset. But it’s clear the appreciation of the euro could be a topic of conversation at the ECB meeting next week.
- I have some sympathy with ANZ chief economist Richard Yetsenga’s view that all the good news might be baked into the cake when it comes to the global economy. He has written an opinion piece in the AFR this morning and while his conclusion looks down the road I sense he’s right in where traders and investors heads will be later this year. “Let's welcome the global recovery and take advantage of it. But the chances of further improvement are low. More likely is a growing recognition that this is about as good as it gets. This will put structural policy challenges around issues such as the state of government budgets, housing affordability and the most appropriate role for monetary policy firmly back into the spotlight” he said.
- Bitcoin and the crypto universe came under pressure again overnight and the price of Bitcoin found support in the zone it should have (with a little tolerance for Bitcoin vol). Bitcoin made a low just below the 61.8% retracement of the big surge that began in September last year and ended with (BTC/USD's) all-time high in December. It’s still looking wobbly. But the fall that was precipitated by the break of an important trendline and the subsequent support at Fibonacci levels tells us at least in a world where valuation is difficult, technicals are still a good guide and being used by traders.
- The BoC hiked rates as expected last night but did it in a dovish manner highlighting the uncertainty around NAFTA, what will happen and when it might happen. “Although their investment intentions indicate plans to boost spending, respondents to the Business Outlook Survey are increasingly concerned about the ongoing NAFTA negotiations and rising protectionism more generally,” the bank said. It also highlighted that the new US tax cuts might actually drag investment from Canada to its southern neighbour. “Firms may decide to redirect some of their planned investment spending from Canada to the United States to benefit from the lower corporate taxes,” the bank also said.
- European, specifically German, politics is worth watching over the weekend. Overnight German Chancellor Angela Merkel said she is not interfering but expects her prospective grand-coalition partners in the SPD to “take a responsible decision” as to whether or not they do join with her in forming government when the SPD meets at the weekend congress.
Australia
- So it wasn’t such a great day to suggest the Aussie dollar was levitating yesterday. That’s the headline I used in my AUD/USD specific piece. Thankfully I also said "the uptrend is still intact so I won't over egg it". But the reason I wanted to kick of with the AUD/USD this morning is that the initial lift over the past 24 hours the Aussie gained was from the very solid Westpac-MI Consumer Sentiment index released yesterday.
- It was a solid result of 105.1. But for me the really big news in prospect from a behavioural point of view and a positive for consumption and spending was the fall in the unemployment expectations sub-index to 122.8 from 127.6 in December and 142.7 a year ago. Taken together with the motor vehicle sales data and recent retail sales the picture of an economy entering 2018 in solid shape is almost complete. That has implications for discussions around the RBA and moves on interest rates.
- Of course today’s employment data is going to be very important in that regard as well. I see a 9,000 consensus estimate for the release on my Reuters but the range is pretty wide with Westpac seeing the chance of a fall and another forecaster looking for a 40,000 increase.
- Looking at the SPI now and the candlestick is reflective of an end to the recent selling. It doesn’t mean the questions over valuations in the local market are now past, but simply reflects that relative valuations are important as well. That means the salve for local selling is the global – US at least – rally in stocks. It’s something I highlighted as necessary requirement for the recovery when chatting with Nadine Blayney and Henry Jennings on Sky yesterday. The 4-hour charts have turned and suggest a run back toward 6,000/6,005 as a straight forward Fibonacci retracement.
Forex
- We’ve seen a bit of a rotation overnight as the euro and yen have lagged some huge moves in the pound, Aussie, kiwi, and to a lesser extend the Norwegian krone. Indeed if you throw the net more widely you can see that USD/MXN was off about 1% earlier, the USD/COP rate (Columbian peso) is off 0.66% as well. It’s as if traders and investors know that the comments from ECB officials overnight mean the path of least resistance in the euro is not as clear as it was and they went hunting for other pairs.
- But, as is often the case that rotation and the blocking of the path of least resistance for the leader of this anti-US dollar charge has signalled a chance of exhaustion of the move. At least that’s my sense given extended moves technically and the price action in the last 90 minutes since the Beige Book was released. It is a maelstrom at the moment for forex traders. Moves are coming hard and fast and the percentage moves we are seeing in some pairs over the past week or so are stretching the fundamental relationships on which they should rest. But like most markets these days it’s about momentum as much as anything. So in a trading sense we need to wait for exhaustion of these trends, the absence of buyers of local currencies or sellers of the US dollar, before a turn will come. We’ll see. But I sense my system might give me quiet a few sell signals and buy US dollar on a number of pairs when I run them at 9am.
- So some smooth talking from Jean Claude Juncker helped propel the pound sharply higher overnight, as he appeared to not only suggest that the UK could come back after they leave but equally in the change of tone reflects that a “soft” Brexit is now becoming a high probability. It’s a little embarrassing to get such a move after I wrote yesterday GBP/USD looks the most vulnerable currency out there. But I didn’t get a sell signal so I’m not caught in the maelstrom.
- The NZ dollar is one of the best example of this momentum in forex markets recently. The trend is your friend until it’s not. Or, as Ed Seykota would say, till it bends at the end. It’s all about the path of least resistance.
Commodities
- Oil traders are waiting on the API crude inventory data this morning and then tomorrow’s release of the EIA inventory and production data. Both releases are delayed a day on tehe back of the Martin Luther King holiday this week and both a crucial to the outlook given where prices sit technically. What’s of particular import is the production data. Last week we saw a dip but the chat this week, and from the EIA itself which increased its forecast for production, has been expectations of when the US can hit the magical 10 million barrel a day mark.
- So keep an eye on the data. In the meantime prices are up a little this morning on the back of more chat from OPEC about solidarity and compliance. Kuwaiti Oil Minister Bakheet Al-Rashidi said overnight that discipline among OPEC members will remain high this year and that “there is no plan at all to talk about any exit strategy,” at this weekend’s meeting in Oman. He added, “we are committed until the end of the year, this is the agreement”.
- Looking at the chart it is still a little elevated and I have a sell signal. If last night low gets taken out we could see a deeper decline both in WTI and Brent. Here’s the Brent chart.
- Gold is moving around with the US dollar and has lost a a little ground since the Beige Book was released and the US dollar has recovered a little. It’s down $131 at $1237 and there are signs we may be nearing the pessimistic crescendo for forex and thus peak in gold. Signs, like gold’s price action.
Have a great day's trading.