Originally published by AxiTrader
Market Summary
A 1.2% rally Friday to close out the week saw the S&P 500 hit another new record at 2,372 and finish the week 2.3% higher. No doubt that strength in the S&P and associated 0.85% rise in the Dow Jones Industrial Average and 1.54% lift in the Nasdaq 100 Friday were a result of this very solid earnings season. But money appears to continue to rush from the sidelines and into stocks.
A weaker US dollar is certainly helping US stocks. But it has restrained gains in Europe a little as the stronger euro acts as a relative handbrake on the continents bourses. While the FTSE was up 0.65% after better than expected GDP data stocks in Frankfurt were more circumspect with the DAX rising just 0.31%.
Asia had a good day Friday and this combination of all of the above sets up what could be a very solid day on the ASX to kick off the week. With SPI futures above the 6,000/05 region and the ASX 200 physical market already closing last Thursday at 6,050 the outlook is positive for a 50 point or more rally today.
Of course, there is some danger to stocks in the global bond market sell-off. It’s real. But it hasn’t accelerated much yet with 10 year US treasuries stuck in this break out region. At 2.66% though – even after US Q4 GDP data disappointed with a 2.4% print Friday – the 10’s are on the cusp of a monthly break of the 30-year bull market trendline. In no small measure, the growth of consumption and the GDP deflator in Friday’s GDP is a warning to bondholders that inflationary pressures are rising in the US.
On forex markets, it was a volatile few days to end the week. First Treasury Secretary Mnuchin seemed to cheer a weaker dollar which saw the US dollar fall heavily before a rearguard action of Mnuchin and Commerce Secretary Wilbur Ross combined with President Trump saying the dollar will get stronger because the US economy is so strong saw the worst part of the gains eroded. But as the week slid toward its end comments in Davos from BoJ governor Kuroda that Japan was nearing its inflation target saw pressure anew.
The wash up is the US dollar is still weak. Euro sits at 1.2423 this morning, the pound is at 1.4150, and the yen is at 108.67. Only the yen is still at its peak with the euro and GBP a little off last week’s highs. The Aussie is at 0.8105 after trading a little above the 2017 high Friday as it peaked around 0.8135. The kiwi is at 0.7342 and the Canadian dollar is at 1.2304 in USDCAD terms.
On commodity markets, the weaker US dollar helped lift prices. Oil hit 3-year highs with WTI at $66.14 and Brent closing the week at $70.52. Gold is at $1349.
A big week of data and events kicks off quietly here at home today with just HIA new home sales. US personal consumption and the related PCE price index are out in the US on an otherwise fairly barren 24 hours.
But this week also includes a raft of global PMI’s, the Fed meeting, US non-farm payrolls, EU GDP and inflation, not to mention the NAB business survey and our own Q4 CPI here at home. It should be a good week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Q4 GDP growth was out on Friday and the print of 2.6% annualised growth was a big miss from expectations of 3%. But there were some signs of underlying strength given it was net exports which was the handbrake on overall growth. Consumer spending grew at a 3.8% rate in Q4 which was the fastest pace of growth since Q4 as households ran down their savings rate. Some in the US have worried about this and the fact that it is unsustainable now the savings rate has dipped to 2.6% from 3.3% the quarter before. But if I put on my behavioural hat and combine this number with the consumer confidence data from the US I’d have to say that this little data point fairly screams confidence in the economic outlook and in the jobs market. Also worth noting is that core PCE prices (the Fed’s preferred measure) increased from 1.3% to 1.9% easily eclipsing the 1.6% forecast. So on balance, this is still a pretty solid result for US GDP. Certainly it did not meet expectations but the underlying tone was one of strength.
- Also out Friday in the US were durable goods which surged 2.9% in December against expectations of a 0.8% increase. Ex transport is was a more circumspect 0.6% which was a small beat over 0.5% expectations.
- The UK economy did a little better than expected in Q4 with growth printing 0.5% for the quarter and 1.5% as the year on year rate. That beat expectations by just 0.1%. But a beat is a beat.
- And while I’m still on the UK, President Trump said he’d be more aggressive in Brexit negotiations than PM May. While at the other end of the spectrum EU commissioner for Economic and monetary union Pierre Moscovici said the door is still open if the UK would like to reverse its decision to leave the EU.
- Here’s a quick look at comments about (Fed’s preferred measure the potential for the US Administration trying to talk down the dollar:
- Japanese Finance Minister Taro Aso says major nations agreed not to target FX levels – Reuters
- ECB Warns against a global currency war - Reuters
- ECB’s Villeroy says the bank must monitor the exchange rate’s impact on policy – Reuters again (all from my iPhone app folks. Amazing).
- Treasury Secretary Mnuchin says he is not trying to move the dollar – CNBC
- And the AFR’s Washington correspondent John Kehoe says Mnuchin is inept and has the training wheels on – you can read it here.
- And while I’m talking about forex markets, it is worth noting that traders are still skittish, materially overreacting to comments from BoJ governor Kuroda about Japan heading toward it’s 2% inflation target. Kuroda said, “So there are many factors which made achieving the 2 percent inflation target or price stability target so difficult and time consuming…But I think we are finally close to the target”. As context data Friday showed Japan’s core inflation rate rose an unchanged 0.9%. So there is still plenty of wood to chop. Interesting though that USD/JPY is back near the range lows though.
- IG Metall is doing something in Germany it seems out train drivers can’t do here in Australia. They are calling for a massive strike in support of their own 6% pay increase. The union is calling for a walkout by industrial workers across the nation next week.
Australia
- Can we do it. Can the physical market really put on 30 points, perhaps more, when trade resumes this morning? My sense is that the S&P/ASX 200 should have a solid day given the lead from Wall Street and European markets and the likelihood that Asia too will have another good day ahead. It’s not often our market gets a 1.2% rise in the S&P to follow and now that the SPI futures are back above 6005 and the physical ended last Thursday at 6050 the technical outlook has brightened somewhat.
- Indeed a run toward 6,045 seems a reasonable expectation for the SPI on the charts and that would suggest and ASX200 can make its way back to 6100 for the physical market. Of course, a failure to capitalise on the ebullience in global stocks would be a telling sign for the outlook for the local market. But I’d be very surprised if that’s what we see today. Here’s the SPI chart.
- We get the latest NAB survey tomorrow which is always a month highlight for me. I expect that to again show a solid economy. But before we get that I thought it worth mentioning an article in the AFR this morning which suggests the worm is turning for Australian wages. The article quotes Access Economics Chris Richardson and independent economist Saul Eslake with Richardson noting “the preconditions are in place to pay workers more money”. Eslake highlights that after a poor run between 2012 and 2016 where real net national disposable income per head declined it is now rising faster than real gross domestic product per capita.
Forex
- It was a volatile week for forex markets with the US dollar coming under heavy selling pressure as the combination of negative momentum, tariff impositions, and Treasury Secretary Mnuchin’s comments on the benefits of a weaker dollar all coalesced into what might have been the pessimistic crescendo of dollar bearishness needed for it to bottom.
- It’s too early to tell just yet with the reaction – dollar selling - to comments at Davos from BoJ Kuroda that Japan was on the way to reaching its 2% inflation target show the US dollar bears still have plenty of fight in them. That the low in the US Dollar Index last week was in the 88.30/60 region I had identified as support – for a number of reasons including Fibonacci support and projections – is a sign that perhaps the pulse lower is nearing its nadir.
- Quite frankly though it is too early to tell just yet and with such a big week of data ahead the jury is still out. But what is worth discussing is whether or not last week’s words were a change in policy from the administration. My view is that Mnuchin was admitting the obvious that the US benefits from a weaker dollar and that this fits the mercantilist narrative around the Trump administration. The fact that Mnuchin, Commerce Secretary Wilbur Ross, and the president himself sought to clarify and reiterate the benefits of a strong US dollar doesn’t change the fact that traders get a sense the Administration isn’t that fussed about forex markets as the dollar slides. Indeed the President’s own words hang heavy over the debate as this graphic from Reuters suggests.
- Looking ahead then it was clear in comments from the ECB and BoJ/Japanese Ministry of Finance that the US partners weren’t so keen on what Mnuchin had to say last week. Equally with the US Treasury funding task about to take a material step up in size to fund the deficit and with the Fed withdrawing from the market its clear the US itself would most likely be pleased if the US dollar can find support and stabilise sometime soon. Technically is last week’s lows break another 2 big figures look possible for the DXY. That would put its in the mid to low 86 region.
- Today’s Forex chart of the day is USD/JPY. It’s back toward the bottom of the more than 12-month range. 107.30ish is the 2017 low and if that breaks USD'JPY could head toward 100 in time. But this is a solid range and I’m respecting it unless or until it breaks.
Commodities
- Oil closed the week strongly with CFTC data again showing the speculative community continues to build its long position. That is a risk going forward if demand data, inventory levels, or increased supply hit traders unaware. But like many markets the US dollar weakness remains one of the key drivers of prices. Interestingly though as well last week Saudi Oil minister al-Falih said that the IEA in Paris has overhyped the US shale boom. That continues OPEC’s battle with the IEA over the balance of supply and demand in oil markets and thus the outlook for same – and crucially prices. Al-falih also said the Saudi-Russian oil alliance will last for decades.
- Looking at WTI and Brent gives a subtly different outlook. The former seems to be still looking to push new highs while presently Brent is more circumspect. Still in an uptrend certainly but testing and retesting the line. Here’s Brent, something to watch perhaps.
Have a great day's trading.