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Something Is Happening In Bond Markets

By Axi (Greg McKenna)Market OverviewJan 03, 2018 09:55
au.investing.com/analysis/us-and-asian-stocks-surge-as-bond-rates-rise-200197114
Something Is Happening In Bond Markets
By Axi (Greg McKenna)   |  Jan 03, 2018 09:55
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Originally published by AxiTrader

Welcome to my daily Markets Musings.

Back to full service today.

Feedback always welcome

Greg

Market Summary (6.44am)

US markets have kicked off 2018 with a bang.

The Nasdaq is up 1.65%, the S&P 500 is up 0.63%, and the Dow is up 0.24%. Clearly those numbers tell the story of tech strength but its interesting that the lead sector in the S&P 500 with 2 hours of trade left is energy which is up 1.46% - despite oil dipping back from the days highs and now into the red with WTI and Brent off 0.05% and 0.42% respectively.

Europe’s stocks were lower – it seems they aren’t applauding the euro's strength. But Asia kicked 2018 off with a bang after the solid print from China’s Caixin manufacturing PMI which was released yesterday. That didn’t help our market locally with the ASX200 finishing down 4 points at 6061. But it is worth noting that the close was 30 points off the low and SPI traders have added 6 points overnight.

On currency markets it was a simple process of rinse and repeat as the US dollar came under heavy selling pressure once again. It did mount a fight back after solid EU manufacturing PMI’s was countered with US manufacturing strength. But it is generally weaker across the board . Euro is at 1.2043, Sterling ripped higher and is at 1.3592 and USD/JPY down at 112.33. ON the commodity bloc the Aussie and Canadian dollar are both up around 0.3% at 0.7827 and USD/CAD at 1.2503. The kiwi is at 0.7104.

Global bond markets are on the rise as we kick off the year. US 10's are up at 2.47%, 2's are at 1.92% while EU area bond rates rose as well. German 10's are up at 0.465%, UK 10-year Gilts are at 1.288% and French 10's are at 0.8225%. Watch this space folks!

On commodity markets oil shot higher on the protests in Iran and the cheerleading from outside the country with traders worrying of supply disruptions and quite frankly just more political risk for oil at the moment. But prices pulled back from those highs as I noted above. Gold is another 1% higher at $1214 an ounce but copper is a bit lower at $3.28 a pound.

On the day today we have API crude inventories in late New York before a quite day in our region. Tonight it’s German jobs and unemployment data and in the US we get the mortgage applications, ISM manufacturing and the FOMC minutes.

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

International

  • The trend is your friend until the end when it bends. That’s my version of a quote attributed to legendary trend following trader Ed Seykota. And it is applicable to what we saw in markets overnight with US stocks surging again and the US dollar coming under pressure. But it is also applicable to my disruptive theme for 2018 which is that bond rates will rise in the US and other places and threaten to break not only its own 30 year down trend but the uptrend in stocks and downtrend in the US dollar. Something to watch.
  • Also something to watch is what’s going on in Iran with these protests. 2017 was the year when markets shrugged off many catalysts which increased uncertainty and – in the past – would normally have caused some sort of sustained market reaction. Oil markets pretty much did the same again overnight with the early rally which took prices to new highs fading such that WTI and Brent are in the red for the day. But it is worth highlighting that the Israeli Prime Minister and US President (and UN ambassador) are cheer leading the protests. Already Iran’s supreme leader Ayatollah Ali Khamenei said: “In recent days, enemies of Iran used different tools including cash, weapons, politics and intelligence apparatus to create troubles for the Islamic Republic.” So battle lines are being drawn. Why am I gibbering about this in a markets note? Because of the impact on supply that could result from this. Because of the potential escalation of tensions in the Middle East given “enemies of Iran” likely includes the Saudi’s in Ali Khamenei’s eyes. So we need to watch what happens because geopolitical risk is genuinely a factor once more in global oil markets.
  • Yesterday’s manufacturing PMI data was very interesting. While China, the US, Canada, and Europe were all solid South Korea, Malaysia, and Indonesia slipped back below 50. Naturally the bigger economies dominate. But I wondered when I was writing my thematic pice for 2018 whether the optimism about growth I, and the market, holds is too sanguine. Time will tell. Here’s the key releases from yesterday.

Table
Table

Source: FXStreet

  • Yesterday I highlighted the conciliatory tone from North Korea so it’s worth noting the South said it was open to talks and even President Trump sounded conciliatory. Sanctions appear to be working he thinks.

Image
Image

Source: Twitter Screenshot

  • Influential ECB policy maker Ewald Nowotny said overnight there is a bubble in stocks. He said money is flowing into EU stocks and that US stocks are very heated. Why did he do this? Because he also said the end of ECB QE is “within sight”. That’s a warning folks. The punchbowl is going to be taken away this year and for the first year in many neither the Fed nor ECB, and perhaps even the BoJ, will be injecting free cash into the global monetary system. It’s a risk that I strongly believe is under appreciated and underpriced in markets at the moment.
  • AND, Byron Wien is out with his annual “10 surprises” for the year ahead. He’s often wrong but there are quite a few on his list I either agree with or have great sympathy with. You can have a look at what he thinks here.

Australia

  • House prices in Australia are drifting. Data released yesterday by Core Logic showed that prices in Sydney fell 0.9% in December which took the rate of growth in the city for the year back to just 3.1%, a significant discount to Melbourne’s 8.9% price growth through 2017. Neither of these outcomes is terrible. So those who are wringing their hands about the impact on consumers are overplaying their hand. At least for the moment. More important is the fall in Sydney prices of 2.1% and Tim Lawless, Core Logic’s head of research belief prices will fall another 5-10%. That may impact on consumers in Sydney and certainly if that weakness becomes a trend it could impact economy wide. The numbers below – via the AFR story Something to watch.

Table
Table

Source: AFR

  • Australian Manufacturing is still relatively strong according to the AiGroup’s December PMI reading. While yesterday’s print of 56.2 was below the previous month’s reading of 57.3 the result is still comfortably above the 50 expansion-contraction level. To be exact the reading means that Australian manufacturing is still expanding just not as fast as it was in November. Good news for the economy.
  • Yesterday’s performance on the ASX was a little disappointing considering the surge we saw across Asian stock markets. Sure, the S&P/ASX 200 bounced 30 points from its low at 6035 to finish the day at 6061, down 4 points. But the fact the local market couldn’t catch the tailwind of Asia’s positivity is something to watch. But not fret about, it’s just the first day of the year’s trade after all. Looking at the SPI 200, like the ASX200 physical market, we see a long tailed candle as prices recovered from the lows. And overnight traders have added 5 points as global miners had another good day and as US stocks have opened the year with a bang. Last week’s high at 6,052 is the level to watch in the next few days. The SPI is at 6,028 as I write.

Chart
Chart

Forex

  • I have a theory about the US dollar and why it can’t take a trick. It’s a theory based on trader behaviour and algo’s. Essentially my theory seeks to explain why regardless of the strength of the US economy at the moment the buck is on the back foot and the euro, among others, keeps grinding higher. The US dollar was strong in early 2017 when it looked like the US economy and the Fed were well out ahead of the pack. That changed with the surprising strength of the euro economy, and the French election which delivered centrist Emmanuel Macron power and took away the existential threat to the EU project. So from April/May last year euro has surged.
  • And now it remains strong because, my theory suggests, EU data remains strong and crucially is released before US data on any given day. That gives the algo’s and investors an incentive to buy euro’s and then it’s up to the US dollar and US dollar bulls to fight a rear-guard action once strong US data is released. That’s exactly what happened last night with EU manufacturing PMI data, a euro surge, and then US factory data and a US fightback. That price action overnight is what crystallised my thought process. It means the essential ingredient to a change in trend for EUR/USD – and the US dollar in general – needs to be EU data disappointment or a material uplift in US dataflow. Just a theory and a fairly simple one. But I think it fits. Here’s EUR/USD 4 hour. 1.2022 looks like an important level, with 1.1995 reasonably big short term too.

Chart
Chart

  • When it comes to other currencies the US dollar weakness is a big factor in the rallies we are seeing. Sterling is surging again and has gained 0.68% to sit just below 1.36. It’s looking really strong at the moment on the daily charts, even if a little overcooked on the 4 hours. The high in September at 1.3659 seems to be the tractor beam dragging the bulls ever closer. A break would suggest a run toward 1.3850/1.3900.

Commodities

  • Copper might be turning. At least that’s what my charts suggest. You’ll recall last week’s highs took copper to some very important technical levels in taking out both the recent high and also hitting the 50% retracement level of the 2011-2016 selloff. It hasn’t fallen too far yet but the set up is such that if it trades down and through $3.24 a deeper move toward $3.18. A break could see $3.13, perhaps even $3.09. How copper plays out is going to be instructive. Indeed the Aussie’s outperformance to copper over the past 24 hours is for me a warning on Aussie.

Chart
Chart

  • Gold is honing in on the $1320 level I’ve been watching. I’ll see how it looks around there.

Have a great day's trading.

Something Is Happening In Bond Markets
 

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