Originally published by AxiTrader
Market Summary (7.39 am)
The Dow is still above 26,000 but the S&P 500 sits either side of 2,800 as stocks give a tiny bit of yesterday’s surge back and global bond rates rise. In particular US 10-year Treasury rates have risen to 2.62% amid what has been higher rates across the globe.
One of the catalysts for the move appears to be the potential for the shutdown of the US government but equally there is more signs the global economy is reflating with the Atlanta Fed again increasing it’s guesstimate for Q4 growth to 3.4% and ECB member Benoit Couere saying the Eurozone is no longer in recovery but in expansion.
As I write, with a little under 20 minutes of trade left the S&P 500 is down 0.03% at 2,801. The Dow Jones Industrial Average is off 0.35% at 26,026, and the Nasdaq 100 is up 0.1% to 6,816. In Germany the DAX played catch up to the previous night’s move on US markets gaining 0.74% but the FTSE in London lost about a third of a percent.
Here at home after a solid employment report but lacklustre day on the S&P/ASX 200, SPI traders have added around 15 points overnight to 5,970. For the outlook to turn though prices need to best 6,000.
On forex markets the Aussie dollar was strangely weak after the very solid employment data yesterday. But it found support around now what’s the past 3 days lows and has risen overnight on the back of the weaker US dollar. It’s at 0.7993 this morning up 0.3%. Elsewhere chat of the shutdown and more progress on Brexit has helped the euro (1.2233) and British pound (1.3881) rally about 0.4%. USD/JPY is back near 111 at 11.09 but the Canadian dollar missed out on the moves as traders fret a little about NAFTA.
On commodity markets there was a bigger than expected draw in US crude inventories but also a lift in US production, and OPEC report that supply outside the group will increase in the year ahead. So oil prices are fairly flat with WTI at $63.99 and Brent at $68.98. Copper is a little higher at $3.20 a pound while gold is at $1,326 – largely unchanged.
On the day ahead we get the NZ business PMI, Eura Area trade, and oil market report from the Paris based IEA and British retail sales. In the US it’s Michigan consumer sentiment and inflation expectations.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Bonds are higher across the globe. In Europe, in the UK, In Australia, and of course in the US. It’s the big risk to markets many of us have identified for 2018 and so far as stocks in the US surge and belief in the global reflation – or at least growth – story grows bond rates are drifting higher. Looking at the US specifically it is worth noting that 10-year rates are now closing in on very important resistance. The 2.64/65% region was a double top in 2017 and while it is worth respecting this level, unless or until it breaks, a move above here would go some way to confirming the end of this 30-year bull market in bonds. I’d want to see a month end above that level, a couple in fact, and a move to 2.8% would really confirm the outlook has changed. For the moment though the best I can say is that we are at very important resistance. Here’s the chart.
- I genuinely believe that we’ll get more trickledown from the US tax cuts than many believe. The latest news that Apple (NASDAQ:AAPL) is going to bring its cash pile home is another example of how the tax cut can actually end up with cash circulating through the US economy and getting spent. Interestingly though an FT article last night suggests that Apple’s repatriation may actually cause a few ructions in the corporate bond market as it withdraws from the market to pay out or invest some of it cash pile. Alexandra Scaggs writes “About $153bn of its portfolio was invested in corporate bonds at the end of September, a greater amount than the bonds issued by all investment-grade tech companies in 2017, which totaled $150bn. That means some extra space in US companies’ capital structures that could end up dispersed among a broader group of fixed-income investors”. In other words, like the Fed withdrawing as the marginal buyer in bonds so too may Apple withdraw from the corporate market. Both effectively put upward pressure on bond rates and downward pressure on bond prices. Oh, and President Trump is pretty excited about Apple bringing the cash home calling it a “huge win for the US”.
- New York Fed President Bill Dudley might be on his way out but he’s not stopped working. Overnight he’s floated the idea of changing the Fed’s approach to its inflation targeting regime. You can read what he thinks here in the FT. But, for what it’s worth, could I recommend that all inflation-targeting central banks take an approach like the RBA and have a band of acceptable outcomes and then exercise tolerance around that band when it over and undershoots. I think the RBA’s track record speaks for itself!!!!! (And don’t start sending me emails about housing. That’s APRA’s mandate.)
- Chinese growth released yesterday was pretty solid with Q4 GDP up 6.8% yoy after a Q4 growth rate of 1.6%. That is a very solid result for the year compared to what many thought China might print at the beginning of 2017. Sure, you can question the data, but my sense is and Chinese authorities say, there is less fudging now. But, there is not denying the economy is doing well even as authorities are trying to rebalance the economy. It’s not without risks going forward and one thing that worries me is that the frowns have turned upside down when it comes to China by such an extent that any hiccup would be unexpected and thus magnified. That’s probably an issue for another time. And given the global backdrop, China is likely to flow with the tide of global growth.
- But it is worth noting that other data out yesterday for China was interesting. Retail sales printed a solid 9.4% but it was a little lower than the 10.1% expected and lower than the last print of 10.2%. Industrial production was better than expected at 6.2%, while investment likewise printed a decent 7.2%.
- We all need to keep an eye on politics this weekend. Of course, the big one traders are now watching is the US shutdown which Goldman Sachs (NYSE:GS) said overnight is now a 35% chance. But there is every chance that Germany delivers an unexpected outcome when Angela Merkel’s putative coalition member the SPD holds it’s conference. The conventional wisdom is the SPD has nowhere to go and so must go into coalition with Merkel to form a government. But there is a potential wrinkle in this narrative insofar as the leader of the youth wing of the SPD is firmly against the coalition. Reuters reported overnight that Kevin Kuehnert, “ a fresh-faced, hoodie-wearing 28-year-old is an unlikely threat to the leader of Germany's Social Democrats (SPD)”. Kuehnert said “To keep returning to a grand coalition out of fear that everything else is even worse really diminishes the SPD in the long run,” adding “I am very optimistic that on Sunday, we have a real chance of winning the vote,” against the grand coalition blueprint announced a couple of week’s back. This might be important for the euro when trade kicks off next week.
Australia
You will have read the many positive takes on yesterday’s very solid employment data. Not only did it confirm that in the two months to end 2017 the Australian economy (on a seasonally adjusted basis) is estimated to have created close to 100,000 jobs but that over the course of the full year that number is a stonkingly strong 400,000 odd jobs.
Superb news and the single best salve to all the worries many of us hold about the outlook for households, consumption and the headwinds they face.
But according to my mate David Flanagan at Curve Securities in Sydney (disclaimer David and I worked together) there might be a really solid signal in the fall in under-utilised workers which suggest Australians might finally be in for some decent wages gains.
Flano says, “If we take a look at the underemployment ratio of employed persons graph it against an inverted wage cost index chart, we can see the two move in the same direction. The wage cost index has around a six month lag when it comes to movement in the underemployment ratio. The positive sign is that over the past six months, the underemployment ratio has started to edge lower. While it is still early days, it is certainly a positive sign for wages over the months ahead”. Check out the chart.
Now it’s not saying wages are about to explode. But it does suggest the strength of the Australian economy and the jobs it’s creating is changing the outlook for wages. That’s good for households.
- To stocks and the Aussie dollar now. On the latter it found good support exactly where it should have yesterday. 0.7935/40 was an important bottom over three days now. That the Aussie fell after such storing employment numbers suggests some folks focussed on the unemployment increase rather than the overall picture the data painted. New buyers dried up but support came in and the Aussie is higher again this morning and back at 0.7991 on the back – largely – of the weaker US dollar overnight. Key here is that the uptrend for AUD/USD is still intact when measured both by trendlines, moving averages, and price action. But, the last 2 days price action is a warning. I’ll write more in my AUD/USD specific piece later this morning.
- In ASX200 and SPI200 terms after another day of disappointment on the physical market yesterday, where the local market again underperformed the lead from US markets with a 1 point fall, SPI traders have added 18 points overnight. As I wrote yesterday the SPI needs to get back up, and hold, above 5,977 and then close above 6,000/05 to turn this slightly negative outlook at the moment.
Forex
- There are still plenty of buy euro sell US dollar recommendations I’m seeing on the screens and reading from the major global trading houses. It’s a consistent theme as traders and investors focus not on the strength of the US economy but rather on the change in policy that looms in Europe and indeed in Japan. Clearly, when it comes to Europe there is a debate among policymakers about how to communicate the need to change. That’s because Benoit Coeure’s characterization last night of European growth not as a recovery but expansion is spot on. On that basis – as I have been writing often for the past year – the time for emergency monetary measures is past. The ECB knows thata and the market knows that.
- But the ECB also would like, as would any central bank, that its changed policy not be accompanied by a surge in its currency which multiplies the impact of the withdrawal of emergency measures or tightening of policy. Of course it’s not often that this wish is granted in the initial phase of the policy shift (although worth noting the BoC three hikes in might have actually pulled off a “dovish hike”). That’s because humans – and traders are mostly human, even algo’s are programmed by humans – feel changes not levels.
- That doesn’t mean the ECB has to take it lying down. So my sense is that in next week communication strategy after the ECB governing council meeting there will be quite a bit of jawboning to try to temper the impact of the changing policy framework in Europe on the EUR/USD.
- Looking at price action for the euro there is also every chance we have seen an interim top. But a break of the past 24 hours low would be needed to confirm – otherwise it’s onward and upward. That low, by the way, is 1.2164. euro is currently trading 1.2227.
Commodities
- It’s hard not to be bullish oil at the moment. The global economy is growing suggesting that demand will continue to increase. OPEC has been steadfast in its agreed goals to constrict supply until global inventory levels fall back to their target level. Indeed OPEC is over complying with it’s own production cut targets. And of course, US shale oil seems to have got religion about the need to make an actual return to investors not just produces barrel after barrel of oil. So, as I say, it’s hard not to be bullish oil.
- But I wonder if, as prices stall here near range tops and after such a solid rally recently, it’s time for a pullback and consolidation. As readers know I’m fond of quoting Tom DeMark’s suggestion that bull markets don’t end because the sellers take control they end because there is a lack of buying (new buyers). So with record longs already in the market, I wonder where that fresh buying, or the positions to accommodate them, can come from right now.
- Looking at Brent then there is a clear level below which a decent pullback could eventuate. That level, the one I’m watching is $69.35.
Have a great day's trading.