Originally published by AxiTrader
Market Summary (7.35am)
The FOMO rally in US and global stock continued again overnight.
I say FOMO – fear of missing out – because you have to ask yourself what has changed really in these first six trading days of 2018 that has so materially driven prices higher? For me the rally is starting to feed on itself, or peoples fear of not participating in the upside, despite the fact that I also believe the global growth outlook and the impact of US tax cuts is a positive.
It seems for the moment Jeremy Grantham is right and we are melting up.
That’s left the S&P 500 up another 0.3% to 2,755 this morning. The Dow has gained half a percent to 25412 while the Nasdaq is lagging a little with a 0.13% gain. In Europe it was a sea of green while Asia was mostly positive as well.
That all means SPI 200 traders have added another 18 points overnight to yesterday’s somewhat disappointing 5 point increase.
On forex markets the US dollar and the yen were the standouts. The yen because the BoJ’s reduction in bond purchases saw traders have a mini taper tantrum which saw USD/JPY fall half a percent to 112.55 this morning. The US dollar’s move was as the euro's reversal off the 2017 highs continued and spread more broadly across the forex universe. That means euro, sterling, Aussie and Canadian dollar are all between 0.2% and 0.3% at 1.1930, 1.3532, 0.7823, and 1.2450 (USDCAD) respectively. The kiwi has done better, the Swissie worse.
Worth noting though folks is that bond rates are higher and the US 2-10 curve steeper. Pretty all 10’s are higher with US rates now up at 2.54% while the curve is at 57.4 points.
On commodity markets gold is lower at $1313 on the back of stalled momentum and a stronger US dollar. Copper's drift continues and it’s at $3.22 a pound while oil has shot around 2% higher on the back of expectation of a tight market and a break of the 2015 highs. WTI is at $62.89 now. No wonder bonds are higher.
On the day today we get the NAB business survey here in Australia at 11.30am and then an hour later China releases is very important PPI and CPI data. Tonight it’s UK industrial production and trade along with the NEISR GDP projection. In the US it’s the import and export price index along with wholesale inventories and of course the EIA oil and energy inventory and production data.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Bonds folks. Bonds! It’s only the thin end of what could be a very big and disruptive wedge but longer bond rates are climbing after the BoJ reduced the level of purchases yesterday by ¥10 billion for the 10-25 year part of the curve under it’s yield curve control program. Forex traders noticed straight away with the yen rallying sharply. But the impact has also been felt in 10-year rates across the globe. As I write this morning the US 10-year Treasury rate is at 2.53% up 5 points on yesterday while the German rate is at 0.463% - it’s highest level since the start of Q3 last year. British, French, Italian, and Australian 10’s are all higher. The US 2-10 curve has also risen back to 57.3 points which will ease the fears of the recessionistas. As it stands the move higher aren’t material enough to disrupt the global stock market rally. But they are something to watch if growth in 2018 stays strong and if inflation stirs.
- And on that front. Did you know Germany’s IG Metall union is striking as it seeks a 6% pay rise for the 3.9 million workers it covers? 6%! Of course with the German economy so strong and unemployment at 3.6% unions are in a solid position. But data in the US continues to show the US labour market is tightening and last night EU unemployment data showed a fall to a nine-year low of 8.7% in November. Of course with Germany at 3.6% that means other nations have much higher rates of unemployment – Greece 20.5%, Spain 16.7%, and Italy 11% - but this data is clear that labour markets globally are tightening. In a globalised world this reduction in developed market unemployment is for me a precondition to seeing the Phillips Curve start to work again in individual jurisdictions.
- Looking specifically at US wages then, it’s worth noting that Goldman Sachs (NYSE:GS) chief economist Jan Hatzius told CNBC overnight that when it comes to wages “3 percent (growth) I think is a reasonable expectation over the next 18 months, 3.5 (percent) is probably at the top end of what I think is plausible”. Either rate would be a decent uptick from the current 2.5% rate we saw in non-farms last week. And either would assure the Fed it is on the right track in raising rates and likely assuage the fears of some of the Doves on the FOMC. Indeed, Hatzius said Goldman is expecting the unemployment rate to fall to 3.5%.
- Yesterday the AFR published on Citibank chief economist Willem Buiter’s view that “the air is becoming treacherously thin for global asset markets at the peak of the cycle and investors should cut their exposure before central banks shut off emergency stimulus”.
- I don’t want to overegg the whole “market is on borrowed time” meme in my writing each day because quite frankly my signals are still long so it would be disingenuous to imply that I’m bearish. I’m not. But there are many warning signs that I want to highlight as I have above with Willem Buiter and in yesterday Morning’s Musings. And in that – rich – vein of 'the market might be mad' I offer you another example of investor euphoria that I think is helping drive this Bitcoinesq FOMO rally. Bloomberg reports this morning that Morgan Stanley’s US equity strategists wrote in a report that “we have seen a total reversal with people having a hard time even imagining how the market could decline”. Individual investors are now the most bullish they have been since 2010.
- What’s interesting about this is that even though the S&P 500 returned 15% in 2010 the peak in sentiment was late in the year and followed by a 2.11% increase in 2011. Interesting, not a guarantee.
Just quickly
- China signalled a return to greater flexibility for the yuan by unwinding the use of the counter-cyclical element of the daily calculation put in place when it was fighting capital flows.
- Minneapolis Fed President Neel Kashkari said overnight he favours low rates to help wages and inflation grow.
- Two fund managers who were going to launch Bitcoin ETF’s have pulled the plans for now, citing SEC concerns over pricing and liquidity.
- And on Bitcoin, here’s and interesting take. M&G’s Eric Lonergan says that the rise of Bitcoin is actually a sign that things in the economy are doing well and folks are happy to take on risk. Interesting take. Might not be FOMO at all. Just punting?
- And again on Bitcoin. Jamie Dimon said he regrets he said Bitcoin was a fraud.
- Martin Wolf has a great article in the FT wondering if the strength of the global economy will fix our ailing politics or whether politics will ruin the economy. I’m an optimist. The glass is half full so the economy will win. Wolf hopes for a similar outcome.
Australia
- The building approvals data in Australia yesterday was a sensational beat. Building approvals jumped by 11.7% to 21,055 in November in seasonally adjusted terms. That was well north of economist’s forecasts of a fall of 1%. What was important about this is that the data suggests news of the death of Australian housing construction have been misplaced. Alex Joiner, IFM’s chief economist, summed it up nicely on Twitter saying that the increase was on the back of a “huge uplift in medium density building approvals” which means “the resi construction cycle may have a little left to go after all”. But he also posed an interesting question noting that he doesn’t “know who will be buying” all the properties. We’ll see I guess. And at what price is a related question.
- Today we get the release of the NAB business survey for December. Readers know I see this survey as the most important economic release each month. It helps frame my overall view of the economy because of the breadth and depth of the questions asked. That then feeds into my behavioural calculations on what business AND consumers will do. Last month we saw a bit of a pullback in conditions and confidence which printed +12 and +6 respectively. We’ll see how they print and how the sub0-indexes on trading, profitability, and employment look too.
- To the S&P/ASX 200 now, and yesterday’s rally faded into the close. But again that hasn’t hurt SPI traders who have again added another 19 points to the close. Of course it makes perfect sense that the ASX 200 should be dragged along by the global reflation and growth story. Even if we underperform US and other markets the backdrop is supportive of corporate sales, revenue, and profit. Of course here in Australia we have a concentration issue – which is why we often lag. But looking at the SPI chart this morning while it is at the upper end of the Bollinger Band – and thus a warning prices may be getting ahead of themselves – the outlook remains positive unless or until 6072 gives way on the downside.
Forex
- Forex traders had a mini taper-tantrum yesterday after the BoJ announced it would reduce the amount of bonds it was buying by ¥10 billion under its YCC program. The BoJ has been slowing reducing purchases for some time now with differing responses each time. Yesterday’s move in USD/JPY and the associated yen crosses showed just how much twitchier traders are now we’ve entered 2018 and the prospect of higher bond rates across the globe as a result of strong growth and changes in central bank policy.
- What’s interesting about yesterday’s yen move is that it comes at a time when the euro is stalling and the narrative that forex traders may be too far ahead of the ECB when it comes to the euro is starting to rise to the surface. And that narrative along with the failure of the euro at the 2017 high on Friday and Monday when it had the data to support a push through has seen the euro fall and the US dollar make solid gains across most of the forex universe save for this move in the yen.
- For the second day in a row then the euro’s fall has pulled up at important Fobonacci support. Whereas yesterday morning the stall was at the 38.2% retracement level last night euro found some buyers in front of the 50% retracement level of the recent upmove. The question now is whether the euro will fall to next support around 1.1874 or perhaps even deeper. The 4 hour charts suggest a pause is possible, the dailies suggest further weakness.
- For the commodity bloc the Aussie’s iron ore and building approvals induced support faded overnight under the weight of US dollar buying across the board as well as a reduction in the level of iron ore gains and copper’s continued dip. So the Aussie is off about the same amount as the euro, pound and Canadian dollar as USD/CAD continues to recover. The kiwi though is still relatively well bid and it has only lost 0.1%.
Commodities
- Oil is higher again this morning with WTI bolting through the 2015 high and congestion zone around $62.55. That in itself is important for the outlook over the medium term as it speaks to a range break and shift perhaps to new levels. What’s driven the price action overnight is continued focus on the fact OPEC won’t move quickly to plug any disruptions to supply from either Iran or Venezuela. Equally there is some chat of the reimposition of sanctions on Iran by President Trump.
- So this morning we have WTI up and testing the top of the current channel with Brent not far behind. Each has made gains of 1.85% and 1.4% respectively to sit at $62.87 and $68.73 (off their highs). BUT, interestingly this morning – and with WTI where it is technically in the channel – Reuters reported that Iran’s oil minister said the cartel is not too keen on the rate of this price growth as such gains would encourage more shale production. We’ll see. This morning’s API inventory data and then tonight’s EIA inventory and production data will be important.
- Gold is down as the US dollar has rallied. Unlike the euro, Swissie, Singapore dollar and others I haven’t received a sell signal for gold yet. But a break of last night’s low of $1303 would suggest a move toward $1289.
- Copper continues to drift and technically I retain a target of the 38.2% retracement level of the last up move which comes in around $3.17.
Have a great day's trading.