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US Dollar Recovers As Stock Rally Stalls

Published 09/01/2018, 09:25 am
Updated 06/07/2021, 05:05 pm
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Originally published by AxiTrader

Market Summary

Gee Whiz, the S&P 500 is only up 0.15% today.

So the narrative in the press and on the business channels feeling positively downbeat after the excitement of last week’s surge. But that shift in narrative seems to reflect a level of caution which last week’s surge created.

Earnings season kicks off on Friday so that’s going to be important as is PPI and CPI later this week. For the moment though the stock market rally remains intact with Asian and European markets higher and while the Dow is flat the S&P is still in the black and the Nasdaq is up 0.35% this morning.

But there is some nervousness in the narrative – something to watch and something I have spent a lot of time on in today’s Musings.

The impact of all of the above is that the SPI is 5 points higher overnight but off the highs of yesterday and looking a little tenuous this morning. It needs to hold above the low of the past 24 hours to avoid a biggish dip.

On forex markets traders had their second chance in as many days to belt the US dollar and buy the Euro after EZ sentiment hit the highest since 2000. But again they demurred and the Euro is actually substantially off Friday night’s highs having lost another 0.53% overnight to sit at 1.1963 this morning. That US dollar strength was key theme across forex markets. The Yen and Pound fought back and are largely unchanged at 113.02 anad 1.3564 respectively. The Aussie dollar is off 0.3% at 0.7840 while the Canadian dollar is a little weaker with USDCAD at 1.2413 while the Kiwi bucked the trend and is at 0.7178.

On commodity markets coppers drift continued before it recovered to sit at $3.2265 this morning. Gold is largely unchanged at $1319, and oil is up about 0.4% in WTI terms at $61.72.

On rates US 10's are up a smidge at 2.48% as we head toward the PPI and CPI reads Thursday and Friday while the 2-10 curve is at 52 points.

Data today is largely second tier with ANZ job ads and building approvals in Australia. Japanese consumer confidence before German trade and EU unemployment tonight. In the US it’s NFIB confidence and JOLTS.

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

International

  • Eurozone economic sentiment shot the lights out in December data released by the European Commission overnight showed. Sentiment hit 116.0 in December from 114.6 the previous month – a handy beat over expectations of 114.8 by participants in the Reuters survey. The print of 116 was the highest since May 2000 when it hit 119.0. The business cycle indicator hit its highest level since the survey started in 1985 of 1.66 from 1.49 in November. Interestingly, in a wrinkle for Euro bulls and the ECB, the survey also showed consumer inflation expectations fell during the month. Something I forgot to note yesterday was that Friday saw the release of EU wide inflation data which printed 1.4% in December down from 1.5% the previous month with the core inflation rate at just 0.9%.
  • Even though the ECB is a single mandate – inflation – central bank that hasn’t stopped interest rate traders start to price in a move higher in EU rates in 2019. Rate hikes are different to the end of QE. We’ll see in time how things evolve.
  • ON US STOCKS: Yesterday I wrote that with the market surge last week and the positivity around the outlook for the US and global economy there is a fair chance all the good news gets prices into the market. News via Bloomberg overnight, however, suggests that is happening at a fast pace already. “The S&P 500 Index’s best week in 13 months propelled it within half a percent of surpassing roughly a quarter of strategists’ price targets for 2018,” Bloomberg said. And the speed of the move in the past week/s has driven global markets into overbought levels based on the 14 day RSI another Bloomy article reports. The rally is of course based on what looks like solid fundamentals so all told there is no threat to the rally yet. YET.
  • Anyway, here’s the RSI chart:

Chart
Source: Bloomberg.com

  • And while we are talking about US markets earning season kicks off this week so it is worth noting that Business Insider reports that FactSet data shows “For the fourth quarter of last year, Wall Street analysts made the smallest cuts to their estimates of any quarter since 2010”. That’s a high hurdle rate. And probably one companies can best. I sense the focus will be on guidance for the year ahead and under the new tax rules.

Chart
Source: Business Insider

  • And finally while I’m on US stocks. Regular readers will recall that I had been writing in late 2017 that I sensed that strategists and investors were trying to ride this next leg of the US rally all the while trying to say it will probably peter out. The best example of that so far has been Jeremy Grantham’s quarterly note released January 3 and which I read yesterday that essentially says we are in a last big meltup phase of the bull market but then it will collapse. He thinks the S&P 500 could run for 21 months and hit either 3400 or 3700 before falling 50%. A rally and a crash. Hold on folks.

Chart
Source: GMO quarterly Newsletter

  • Here is an interesting one which ties a couple of themes I write about together neatly. Bloomberg reports the tightness in the US labour market are making it hard for shale oil producers to get fracking crews. That speaks to both the ability of US shale to ramp up materially or quickly at present, highlights the tightness of the labour market, and thus suggests upward pressure on wages - at least in this sector of the economy. This tightness has implications for both oil prices in the year ahead as well as wage pressures.
  • The Fed’s discussion with itself – in public – continued overnight with Atlanta Fed president Raphael Bostic saying that he’d want to see inflation higher in order to justify 3 or 4 rate hikes in 2018. He’s worried consumer inflation expectations – or belief in the the Fed’s ability to get it back to 2% - have slipped and said “this possibility is one factor that might argue for being somewhat more patient in raising rates”.

Australia

  • A reasonable day on the local market yesterday with the ASX 200 finishing the day up 8 points at 6130. But the day ahead looks a little more problematic with SPI traders adding just 5 points at the moment. That’s important because even though the performance of Asian, European, and US markets was still positive this rally in the ASX is at a macro level a reaction to the positive price action and backdrop provided by US and global market rallies. So after such a strong surge last week, and even with the S&P up 0.2%, there is a chance that some disappointment the rally didn’t continue with last week’s gusto.
  • Looking at the SPI chart now we see a down day and I’d suggest if the SPI trades below the low of yesterday at 6072 (its at 6086 now) then we could see a deeper retracement.

Chart
Click on me, I'll expand

  • Amazon (NASDAQ:AMZN) was not the grinch that stole Christmas from Australian retailers research from Deutsche Bank (DE:DBKGn) shows. The AFR reports this morning that retail sales over the holiday period were “solid” and that “this was not the terrible Christmas it was looking like it could have been back in November and while it is still very early days, Amazon's soft launch suggests it could take far longer than most thought to have an impact…None of the retailers were spoke to noticed any impact from Amazon and commented that the launch seemed rushed”.
  • This week’s retail sales are for November so they won’t show the December and January sales. But they are going to be very important because the one clear risk to the Australian economy continues to be the slide in housing prices, low wages growth and the impact of that combination on households and their consumption.
  • And if you want a window into how a property market correction gets really messy then look no further than this article in the AFR yesterday. The synopsis is that members of a property club are not happy that APRA’s clampdown on interest-only loans means that banks are converting them to principle and interest loans. The impact is that borrowers – property speculators – have to actually start paying back some of the loan’s principle not just service the debt. That’s a material increase in the actual dollar value of repayments which some investors can’t afford. The founder of the property club said, “we're advising our members to get themselves into conflict with their bank, to say they can't afford principal and interest repayments without ending up in financial stress. Most of the time, the bank will acquiesce”. APRA may not like that and may take an interest. Some investors will need to sell. Which is how this can get very messy in the year/years ahead.

Forex

  • For the second trading day in a row Euro traders did not take the bit between the teeth after data again gave them an excuse to get busy. Of course, I’m talking about the Eurozone economic sentiment data which hit the highest level since 2000. So, while yesterday I was cautious of getting trapped by the type of Friday/Monday USD head fake we saw in late 2017 it’s fair to say the US dollar is trying to find a base. PPI and CPI this week are going to be very important for the dollar in a structural sense.
  • But for the moment its about price action and the inability of the Euro to break up and through the 2017 highs last week. The impact of that is not necessarily selling but buyers back off a bit which is how we get the preconditions for this pullback. Figuring out where it might end is problematic but what I tend to is default to Fibonacci levels. In the first instance that’s the “garden variety” 38.2% retracement level of any move. Of course, there is some art in deciding exactly where the move started. But again I tend to use the most obvious and recent pulse on the dailies or 4 hour charts as a guide.
  • Looking at the Euro then this morning the good news for the bulls is that it has found support at the 38.2% retracement level of the from 1.1740ish to last week’s high. A break of 1.1955 then would open the way to the 50% level at 1.1948 and then the 61.8% level at 1.1874. Here’s the 4 hour chart showing the levels.

Chart
Click on me, I'll expand

  • Elsewhere USDJPY had an aborted attempt to break above the recent downtrend overnight, in what was an indecisive day’s trade. GBP found support on a dip at the top of the old uptrend channel – perfectly so. Here’s the USDJPY chart:

Chart
Click on me, I'll expand

  • For the commodity bloc USDCAD was higher on the back of the stronger USD even though the Bank of Canada’s quarterly business survey showed widespread positive sentiment with companies lifting investment and hiring plans. That has to feed into the Bank’s deliberations on monetary policy at its January 17 meeting and the chances of a rate hike are high. But UDCAD is still up 0.15% at 1.2425. The Kiwi resisted but the Aussie dollar has drifted as bids dried up a little yesterday after another failed attempt to take out the 61.8% retracement level of the 81/75 selloff over the past week. The Aussie is now slipping below the uptrend line from 75 cents which highlights the risk to the outlook. Using the same approach as I’ve articulated above for the Euro gives the Aussie a target of 0.7732 if this pullback picks up speed.

Commodities

  • OPEC sources confirmed overnight that the cartel will not rush to increase production in the wake of any supply disruptions from Iran or Venezuela should they occur and be deemed short term. Otherwise, there is little change to the outlook at the moment. Prices are still looking a little toppy. But I don’t have a sell signal yet.
  • It’s a similar story for gold, but copper continues to drift. I have a target for this move in the 1.1700/1.18 region.

Have a great day's trading.

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