Originally published by AxiTrader
Market Summary
Riddle me this. Why are US and global stock markets so excited about US tax cuts but US bonds and the US dollar so nonplussed.
Clearly part of the answer is that forex and bond traders don’t enjoy the specific benefits that many American companies, and thus there shareholders, will enjoy from the reduction in the tax rate. The other part of the answer is that the macro traders in forex and bonds still don’t believe the hype.
It’s going to be a big story in 2018 – whether the divergence persists or whether it is reconciled.
And it was the story of last night’s trade as stocks in the US made solid gains once again, the US dollar drifted lower and bonds were mixed. So, as I write at 7.11 am AEDT with a little less than an hour to go the S&P 500 is up 0.62% to 2692, the Dow is up 0.62% and the Nasdaq 100 is 0.80% higher at 6,518.
The positivity around US tax cuts was supportive of global stocks with all the major indexes I watch in Europe higher. The DAX, CAC, and FTSEMIB were all up more than 1%. In London the FTSE was up a more subdued 0.6%.
Naturally that positivity, and the associated rallies in Asia’s bourses yesterday helped the ASX lift – closing with a gain of 0.7% - and overnight SPI traders have added another 27 points suggesting the ASX200 will make another half a percent gain in trade today.
On forex markets, the US dollar is under pressure. US dollar strength Friday’s, weakness Monday’s is kind of de-riguer for forex markets recently. It’s a manifestation of the reality that the Buck can’t take a trick at the moment. Anyway it's down 0.3% again the euro which is at 1.1789. It’s lost half a percent on the ever-excitable sterling with GBPUSD at 1.3391 but the yen is fairly calm at 112.46.
The Australian dollar is also higher up 0.35% at 0.7671 with the 200 day moving average 20 points away. The Kiwi is back above 70 cents at 0.7005 and the Canadian dollar had a calm night with USD/CAD sitting at 1.2862.
On commodity markets the US dollar weakness has seen gold move up and through resistance at $1260 and it sits at $1261.51 this morning. Copper is marginally higher at $3.1145 but oil is lower as the debate about 2018’s supply and demand balance continues. WTI is down 0.66% at $56.92 and Brent dipped 0.22% to $63.09.
On the day ahead we get kiwi business confidence and the RBA minutes in our time zone and then IFO in Germany tonight. In the US its building permits and housing starts. Kiwi traders might take note of the global dairy auction as well.
Here's What I Picked Up (with a little more detail and a few charts)
International
- There isn’t a lot of international macro news this morning but a few points worth noting.
- The Minneapolis Fed president Neel Kashkari strikes me as giving way to much credence to the yield curve as an indicator on what the Fed is or should do. Kashkari has dissented three times and in a blog post overnight again set out why. His comments that the US jobs market may be nowhere near full employment because of all the sidelined workers who may come back – and crucially who are constraining wages rises – is to a certain extent reasonable. But when he says “now a new concern is emerging: In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession” he is giving primacy to the market. If that’s the case then central bankers should stop saying Bitcoin is a risk or a bubble.
- Crucially though Kashkari yield curve comments reflect a reasonably popular view that the yield curve is always right and that a recession is being signalled and is coming. That’s impacting asset prices all over the globe. It will change, and change quickly, if inflation surprises in the year ahead. But it is interesting how US growth is being poo pooed and European celebrated in markets at the moment. This is a truly Trump effect I think.
- Here’s what my favourite non-me strategist just tweeted about Kashkari.
- We’ll get the vote on the House tax bill Tuesday.
- Something to keep an eye on. Reuters reports that the ECB says one large eurozone bank is short of capital. It’s only one of 119 and the ECB didn’t name the bank. So I don’t want to overplay things. Interesting though after all these years and with all that the ECB has done to ease the way for EU banks.
Australia
- It’s going to be a good day on the ASX today and we might be running the risk – or the shorts anyway – of getting caught in an end-of-year FOMO rally. I say that because we had a solid rally yesterday – yes Santa Elliott of the ANZ helped – and the preconditons for a continuation of this rally in terms of positive metals prices, a solid investor mood globally, and stocks rallying around the world have all combined to see the SPI break up and through its range overnight. Quite decisively so. Given yesterday’s close at 6038 the 30 points added overnight suggest that the ASX 200 physical can take out the recent highs at 6050 and kick higher today.
- Looking at the SPI breakout as a possible lead suggests a run toward 6165/70 based on the width of the recent range while the Fibo projection can suggest 6200.
- By now you’ve read a lot about the MYEFO update from Treasurer Morrison. For mine it is an incremental improvement in the budget position which is nonetheless a positive but not a market moving event. The forecasts were a little shy of what the RBA is expecting so there is still room for some positive politics next May when the Treasurer releases his 2018/19 budget. For the moment though no point quibbling – Merry Christmas Treasurer.
- More interesting for me yesterday was the new motor vehicle sales data. I still find it remarkable that Australia buys close to 100,000 new cars every month and I find it even more remarkable that yesterday’s data showed a record 12 months sales number of 1.138 million. Amazing. But the percentage of sales that are passenger and SUV’s of the total vehicle sales is in a clear down trend even though the absolute number has plateaued. I’m watching this as an indicator of where Australian households are. Think of it as my real world confirmation or denial indicator of what consumers are saying about their sentiment and concerns. Anyway here’s the chart.
Forex
- I don’t want to overegg the whole US dollar can’t take a trick story but gee whiz the reversal that started in Asia yesterday and continued overnight again suggests that traders just don’t buy into any story that suggests US dollar strength. Not the actual growth level, not the fact the Fed is so far ahead of the ECB or BoJ when it comes to monetary policy, not what the Fed says it is going to do, and not that the tax plan could add an additional impetus to growth. No forex traders are focused it seems on the fact that Europe is growing strongly, that Theresa May has had some encouraging conversations about trade, and the fact that with synchronised growth the world is growing not just the US and that means other central banks will follow the Fed – eventually.
- That’s the rhetorical view that supports the recent price action and it makes sense. Just take a minute to think about what you read in the press about Europe and the US. The former is mostly positive these days and the latter is mostly negative. Growth in the US is seen as not trustworthy, the bond curve had folks running around worrying about a recession. Have no doubt another recession will come – eventually – to the US and the world. Not yet though. But the fact the market has this bias is an important input into the trading equation. Something to understand now and something to watch for a change. Because if change does come we will be at the start of one heck of a US dollar rally.
- Of the charts in forex today it’s GBP/USD which is again the most interesting. Volatility within an overall downtrend continues. Sterling held 1.33 yesterday and in doing so also held my fast moving average. It’s a break of both these levels which I need to see to kick GBP, and my short, lower.
Commodities
- So for three days now I have read the same reason for oil going up and down in the commentaries which frame my research. That is the pipeline outage and the debate over whether the IEA in Paris or OPEC is right about the supply and demand imbalance next year. Only time can tell on that debate but as we head into 2018 two things will be worth watchinig. The first is exactly what the production response from US producers is – so we need to watch inventories and increasingly US weekly production numbers. The second is to watch what happens in Venezuela. The failed state is still a big producer. So what happens with its aging infrastructure and production capacity is going to be important.
- For the moment though the headlines are kind of right the battle between the bears and the bulls has prices wedged. Here’s WTI which had the bigger move overnight as we head toward rollover to the next contract tonight.
- Gold is trying to break higher and is sitting at $1261.66 as I write. Naturally gold never made it down to $1223 and has reversed in recent days as the US dollar has weakened and as the outlook (and my system) turned. The latter suggests gold may make further gains.
Have a great day's trading.