The Worm Turned Again - US Stocks Record Highs

Originally published by AxiTrader

Quick Recap

The volatility in sentiment as traders lurch from excitement to concern about Donald Trump and his policies continued overnight.

This time is was a positive take on the outlook which was helped stocks rally. While Dow 20,000 still hasn’t happened the S&P looks to have made a very marginal new record high based on my charts. This sets up another solid day for local traders on the ASX.

In forex markets, the US dollar is still under a little pressure – but it hasn’t cracked yet. That can’t be said for Yen bulls who exited, stage left, once USDJPY found support for the second week in a row around 112.50/60. The Aussie dollar failed at 76 cents – today’s CPI will be important.

On commodity markets gold cant yet breach $1219/20 resistance, but oil was a little higher on chat OPEC’s plan is working (that’s today’s theme) while copper, and base metals, ripped higher.

What You Need To Know

International

• Stocks in the US are higher this morning after positive leads from Europe and moves higher in materials, energy, financials, and tech stocks. The S&P 500 is all the way back at 2280, up 15 points. The index hit a new intraday record high at 2281.25, marginally better than the high so far this month, but the close was a record. The Dow Jones Industrial Average is up 0.57% to 19912 and the Nasdaq 100 is 0.86% higher.

• US bond rates are a little higher again. That followed a move higher in European yields after some solid data. US 10 Year T-Note are yielding 2.467% - unwinding the previous day's rally.

• The UK Supreme Court ruled against the government on Brexit. That means that prime minister May must get the parliament to vote before she can trigger Article 50. But the court also ruled that May did not need to seek the approval of the devolved houses in Scotland, Wales, or Northern Ireland. Unsurprisingly Nicola Sturgeon – the Scottish first minister – said it’s time for another independence referendum.

• There was a raft of PMI’s out in the past 24 hours which painted a pretty solid picture for the global economy. Japan was better than expected, France looked healthy, Germany undershot a little, and the EU wide gauge was pretty solid. In the US the manufacturing PMI was up again to 55.1.

• In other data from the US - existing home sales fell 2.8% in December. But it seems that as much from lack of supply as any other reason. So it’s not a bad sign necessarily. The Richmond Fed index rose to a 10 month high supporting the PMI reading which was up near its high of the past 2 years.

• China has been warned by the head of the big global index maker MSCI – under which trillions of dollars of investors money and mandates are managed – that the chances of adding Chinese shares into the companies indexes have fallen because of capital controls. MSCI CEO Henry Fernandez said “It's going to be hard for the MSCI to put the A shares into the index because we will not be doing a good service to our clients” if China continues to restrict capital flows out of the country.

• Also on China – It seems the march toward an inevitable face off between it and the US in the South China Sea continued with China asserting it has “irrefutable” sovereignty over disputed islands. That comes after Donald Trump’s Whiter House spokesman said on Monday “It's a question of if those islands are in fact in international waters and not part of China proper, then yeah, we're going to make sure that we defend international territories from being taken over by one country”.

• And finally in an unexpected move after it lower the RRR for 5 big banks China’s central bank lifted on its medium-term lending facility (MLF) yesterday. The 6-month and 1-year rates went up by 0.1% respectively to 2.95% and 3.1%. The PBOC said this move was made to “maintain basic stability in the banking system”.

Australia

• The ASX 200 had a better than expected day of gains as a strong rally in basic materials and a reversal higher in healthcare stocks coupled with the rally in the industrial sector to drive the overall 200 index up 42 points. While not exact, that largely reversed the losses we saw on the index during Monday’s awful day of trade.

• Clearly Donald Trump signing an order to withdraw the United States from the TPP had little impact on sentiment. But that said there seems to be some momentum for the remaining members to still move toward some sort of deal.

• The weaker US dollar helped metals and iron ore rally during Asian trade yesterday. Iron ore in particular was sharply higher after recent weakness reversed. That helped BHP Billiton Ltd (AX:BHP), Rio Tinto Ltd (AX:RIO), and Fortescue Metals Group Ltd (AX:FMG) rally2.6%, 3.25% and, a stonking, 5.8% respectively during the Australian trading day. Bluescope Steel Ltd (AX:BSL) ripped higher as well after giving a profit upgrade on the back of stronger steel prices.

• Want a 10% return from Australian stocks? BAML reckons you just might be able to get it with the bank saying yesterday an earnings bonanza is going to drive the S&P/ASX 200 to 6100 by the end of 2017. My personal target is 5950 at the moment. But if that break medium term the outlook brightens significantly.

• Looking at shorter time frames though while the index hasn’t fallen yet to the 5500/30 region I had pencilled in it has found some support at the old resistance level of 5600. A break would naturally kick the index lower. But while it stays above that level the bargain hunting could continue.

• Overnight the SPI 200 has rallied as futures traders followed the European and US stock market rallies higher. The March futures contract is up 37 points suggesting another good day ahead and around 0.7% lift at the open.

• Today we get the release of Australian CPI for Q4. There is no way to understate how big a number this is for Australian markets. You’ll recall that inflation collapsed to just 1% year on year – and in a headline sense – during the Q2 2016 after the unexpected dip to 1.3% in the first quarter of the year. That was one of the reasons the RBA cut twice in May and August, taking the RBA’s cash rate to a low of 1.5%.

• The pundits expect a headline increase of 0.7% for Q4 taking the yoy rate to 1.7%. The trimmed mean is expected to rise by 0.5% leaving a yoy rate at 1.7%. Should inflation materially undershoot there is some chance traders may start to price in another rate cut from the RBA. That would be a reasonable assumption given the little softening we’ve seen in the Australian economy over the past 3-6 months.

• I’d be very surprised to see a low inflation print however.

Forex

• I agree with Goldman Sachs (NYSE:GS) chief economist Jan Hatzius that after this period of adjustment in the US dollar the Buck will eventually get stronger again once the Fed increases its rate of monetary tightening. Naturally that won’t be until it sees evidence that the current economic trajectory plus Trumponomics means it needs to hike rates faster than the market expects.

• In the mean time the buck fell into the support zone after new Treasury Secretary Steven Mnuchin said that an “excessively strong” US dollar may be a negative for the economy. You know what Mr Watson used to say to Sherlock don’t you. Throw in positioning and we get a chance that if the 99.50 level breaks all heck could break loose for the US dollar. It has to break first though.

• Indeed USD/JPY found support near last week’s lows in the 112.50/60 region before leaping back to 113.73 where it sits this morning. I've written a separate look at USD/JPY.

• Euro is sitting at 1.0733, and the pound has held onto 1.25 after a tough night which included a run back to test the break out of the one-month downtrend with a low of 1.2415/20. It’s at 1.2511 as I write.

• The commodity is being led by the Canadian dollar with a gain of 0.7% as USDCAD fell to 1.3148. The Aussie failed above 76 cents yesterday and is back at 0.7581 as I write this morning while the Kiwi is at 0.7248.

• In emerging currencies the Yuan is hanging tough with the CNH at 6.82 and CNY at 6.8555. The Mexican peso is down a smidge with USDMXN at 21.4387 – worth noting economy minister Ildefonso Guajardo said Mexico may leave NAFTA if the renegotiations lead to a dud deal. Interestingly though that statement also implies Mexico is open to negotiations.

Commodities

• Crude Oil is up again this morning with Nymex crude up 0.89% to $53.22 as traders await the latest API weekly stock data. That rally follows two separate reports that suggest stocks are falling. Reuters reports that Saudi oil output and exports have dropped sharply this month to around 9.9 million bpd from 10.47 million bpd in December.

• An OPEC source told Reuters “Saudi Arabia has a strong position, it wants 100 percent compliance. It wants to put pressure on other countries to also commit.” Separately a report by Berstein Energy said oil inventories dropped 24 million bpd in the final quarter of 2016. The biggest drop since Q4 2013.

• I’m still watching the trendline from November and still wondering if the recent high above $55 can really be bested before a pullback given current positioning.

• Gold still can’t get up and through the $1219/20 region we’ve been watching. It tried, the high was $1219.50ish according to my Reuters terminal. But it’s just backed off a little to $1210 this morning.

• Copper ripped higher and is up at $2.70 a pound in what was a strong base metals rally ignited from Chinese buying yesterday.

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

• Australia - Nil
• New Zealand - Nil
• China - Nil
• Japan - Imports (YoY) (Dec), Exports (YoY) (Dec), Adjusted Merchandise Trade Balance (Dec), Merchandise Trade Balance Total (Dec), Corporate Service Price (YoY) (Nov) (10.50am)
• Germany - IFO - Business Climate (Jan), IFO - Current Assessment (Jan), IFO - Expectations (Jan) 98pm); 30-y Bond Auction (n/a)
• EU - Nil
• UK - CBI Industrial Trends Survey - Orders (MoM) (Jan) (10pm)
• Canada - Nil
• US - API Weekly Crude Oil Stock (8.30am); MBA Mortgage Applications (Jan 20) (11pm); Housing Price Index (MoM) (Nov) (1am); EIA Crude Oil Stocks change (Jan 20) (2.30am); 5-Year Note Auction (5am)

Have a great day's trading.