Originally published by AxiTrader
Market Summary (6.36am)
Stocks in the US and Europe were a little more mixed overnight with some small falls for the Dow and the CAC to counter positivity elsewhere.
As I write the Dow is down just 0.06% and I’d guess will finish back in the green. The S&P 500 is up 0.11%, and the Nasdaq 100 has risen a solid 0.61% as earnings help. That means the local market is set up for another good day with SPI traders having added 11 points to yesterday afternoon’s close.
On forex markets the US dollar has continued to remain under pressure with GBP/USD heading up and through 1.40 at one stage. It’s not far off though, sitting at 1.3987 at the moment. Euro is up 1.2287 after EU consumer confidence hit its highest level in more than 17 years while USD/JPY is lower again at 110.30 despite the BoJ saying it is not changing policy yet. On the commodity bloc the New Zealand dollar is up a quarter of a percent at 0.7346 while the Aussie is down 0.3% as copper and iron ore drift – its at 0.7992 and well off its lows around 0.7957. The Canadian dollar is largely unchanged at 1.2434.
On commodity markets, copper fell right out of bed as inventories surged – it’s down 2.5% at $3.11 a pound. Oil is higher as traders liked the IMF’s global outlook and the Saudi oil minister again highlighted the need for a deal beyond 2018 – WTI is up 1.31% at $64.40. Gold is also higher back at $1339.
US 10's are down a little at 2.62%, the curve is back at 57.5 points and US 2's are around 2.04% after a strong Treasury auction.
On the day today we get Japanese trade, the Nikkei flash PMI for Japan as well as the nations leading and coincident indexes. We also get flash PMI’s for Europe and the UK tonight with the latter also releasing its unemployment data. Flash PMI’s are also out in the US along with home sales.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The big news for me in the past 24 hours is the continued evidence that trickle-down economics might surprise the doomsayers after the recent US tax cuts. JPMorgan Chase & Co (NYSE:JPM) is the latest US corporation to announce that it will spend its tax dividend in the economy via higher wages, bonuses, and investment. Indeed 22,000 employees will be getting an average of a 10% wage rise. 10% folks! While another 4,000 jobs have been announced. Small I know in the context of the giant US economy. But if we aggregate the individual deals – which include big employers like Walmart (NYSE:WMT) – then the stimulatory impact is plain to see. Trickle-down!
- That’s only just pipped the trade war President Trump doesn’t think he started with the tariff on solar and washing machines. South Korea has already said it is looking to reimpose tariffs on US goods while it and China are already protesting. The world is truly becoming more nationalist as the liberal world order breaks down. These kinds of spats will become more common. And no one is beyond the reach for such policies when needs be. Just look at China’s financial system, tariffs on Australian agricultural imports to India just to name two obvious instances. Anyway, I could go on and on about how this can impact long-term asset returns.
- But as Martin Wolf highlights in the FT this morning the elites in Davos need to figure out how to handle this rise of nationalism and the retreat of the post-WWII liberal order. He effectively sides with the rise of nationalism because it reflects a retreat of domestic political cohesion in many nations as the benefits of globalisation are not shared equally across nations. And it is through this channel democracy is imperiled he says. Thus Wolf suggests “Economic life demands political stability. The range of policies — fiscal, monetary and financial — must make the bulk of the population feel their interests count. Otherwise, democratic stability is in peril”. I know that’s very long-term and esoteric for this daily note. But I would urge you to read and think about this article.
- US stocks have been on a tear so far this year, as money gets dragged off the sidelines and put to work. That trend is likely to accelerate according to Bridgewater founder and legendary hedge fund manager Ray Dalio. Dalio told CNBC at Davos, “We are in this Goldilocks period right now. Inflation isn't a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws. Crucially he added, “there is a lot of cash on the sidelines. ... We're going to be inundated with cash. If you're holding cash, you're going to feel pretty stupid”. Melt up! And that has caused BAML analysts to lift their year-end target for the S&P 500 from 2,800 to 3,000 the FT reported overnight.
- But it’s not all rush from cash and buy stocks with gusto. Nobel Economics Laureate Robert likened the current market to a bubble telling CNBC, “People ask 'well what will trigger it (a market correction)?' But it doesn't need a trigger, it's the dynamics of bubbles inherently makes them come to an end eventually”. His hypothesis seems to rest on the global nature of the rally in stocks, “The strong bull market in the US is often attributed to the situation in the US but it's not unique to the US anyway, so it's hard to know what the world story is that's driving markets up at this time, I think it's more subtle than we recognize”.
- And while I’m on this topic, Goldman says risk appetite has hit “extreme” levels. Bloomberg reports the bank’s cross-asset team says their measure of risk appetite is at the highest level since it started the gauge back in 1991. This is the Bitcoin effect folks – FOMO – fear of missing out. I genuinely believe that Bitcoin and other cryptos rise has had a behavioural impact on investors and traders. That is, no matter how good the economy is or how good earnings and growth will be after the tax cut, folks have watched themselves miss out on Bitcoin, Ripple, and other crypto moves and don’t want to let that happen in stocks – something they actually think they understand. Anyway, that takes me back to Goldman who says, “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”. True. But some folks were saying that same thing when the S&P 500 was at 2,000 and 2,300 and…and…
- Which is something Goldman note adding, “While high-risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite”. Alert, but not alarmed, as they say. Anyway here’s the chart.
- This article by Ambrose Evans-Pritchard in the UK Telegraph, via the AFR yesterday, gives an interesting outlook on the possible difficulties of withdrawing from central bank emergency policy and QE. Former BIS chief economist William White things the banks have run a big social experiment with no idea of what the impact of withdrawal will be on markets or the economy. Should regulators really be congratulating themselves that the system is now safer? Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there…Pharmaceutical companies are subject to laws forcing them to test for unintended consequences before they launch a drug, but central banks launched the huge social experiment of QE with carelessly little thought about the side-effects," he said. This time is different. I know they are dangerous words in finance. But this type of experiment is new. The withdrawal of emergency measures may go smoothly but no one really knows. That’s what’s different. We don’t have a reference point.
- There were a few headlines floating around Twitter, via the ForexLive team, saying China is going to join the tax cut, economic growth club.
Australia
- A solid day on the local market with the ASX 200 up a decent 45 points for a 0.75% bounce. That move was a necessary step toward an improved outlook after both the ASX and SPI closed just two points off important support the previous afternoon. It was also a salve for the relentless selling we’ve seen on the Australian market over the past couple of weeks, even as the rest of the region – indeed the globe’s stock markets - shot higher.
- What’s going to be interesting for the market going forward is whether it can simply rise on the back of global markets going forward or whether the valuation metrics which seem to be constraining the market here in Australia hold it back. One possible salve is the Goldman Sachs (NYSE:GS) and Jeff Gundlach idea that commodities are under priced relative to other assets and thus due for a push higher. Karen Maley has a wrap of the thesis, which I have mentioned before, in the AFR this morning. If its right then the outperformance of mining and metals shares on the back of a commodity rally could help the ASX.
- Looking at the SPI chart this morning traders have added another 12 points to yesterday afternoon’s level which sees the SPI at 6,000. That takes it to the 38.2% retracement level of the recent fall and into the zone I’ve highlighted this week – 6,000/6,005 – that the SPI needs to break for the outlook to brighten.
- The Aussie dollar is back near 80 cents again this morning after falling to a low around 0.7957 overnight. That fall came as iron ore and copper came under heavy selling pressure over the past day. Dalian iron ore for May is down 1.23%, the US contract I watch is off a lesser 0.84% for Jan, and copper in the US for March fell 2.63% to $3.11. Not the best backdrop for a commodity currency. But in a forex world dominated by the weakness in the US dollar that matters less right now than it usually would.
Forex
- This is a US dollar move in forex at the moment. I thought that was obvious. But it may not be given the reaction to a tweet I sent yesterday. The team at forex live were covering a piece from Westpac’s excellent head of research Rob Rennie that highlighted the Aussie dollar was overvalued on his fair value metrics with the recent gains largely being driven by a weaker US dollar. True. I thought I’d add to the conversation by highlighting correlations between forex and commodities more broadly at the moment and retweeted ForexLive with the following.
- And the tweet went off. More impressions than I usually get by a factor of 10. That’s something I found curious, which is why I raise it this morning. The correlations I’m talking about above (all 35 days XAU was a typo) are price correlations so directional not percentage. But what they do highlight is the nature of the universal influence the loathing for the US dollar is having on markets right now. Given that loathing and the look of the US Dollar Index (or euro chart if you turn it upside down) this could go further still. But this universality of moves is also a big risk when the US dollar turns at some point. Now, or course, if 2018 has taught us anything already it is that the path of least resistance is for stocks to go higher and the US dollar lower. And certainly, the BoJ didn’t seem to object yesterday. So the trend remains intact.
- But correlations are important. I wasn’t happy when I realised my NZD, XAU, and crude positions were all effectively the same trade. It highlights if we see a turn in the US dollar – maybe soon, or maybe 88.50 in DXY terms – a host of seemingly unconnected markets could all turn at once. That might make things interesting.
- Now for today’s forex chart of the day we can see that euro is poised below the recent range high as traders await the ECB, its statement, and what Mario Draghi says at the press conference tomorrow night my time. Clearly it is in a solid uptrend with some potential – only two touches – overhead resistance around 1.2360 if the high at 1.2322 gives way. Equally obvious is that euro is well supported at the 38.2% of the recent move. IT all suggests the ECB meeting is going to be one which can offer a strong catalyst for euro prices. A break of 1.2322 or 1.2175 would make things interesting. Equally, though we could be seeing a topping pattern. That would be suggested if euro stays inside that range. Then I would look to a copper analog.
- And just quickly on the BoJ and the yen. I was asked by Leanne Jones on Sky this morning to explain the yen’s rally post BoJ even though the bank said it was in no rush to change policy and that the markets view it was tapering was wrong. As readers know earlier this week I suggested maybe the BoJ and ECB might follow the Israeli central banks lead and complain about recent currency moves. That the BoJ did not do that freed the Yen bulls, who had been cautious which let USD/JPY head back above 111, to start buying again. So USD/JPY is back at 110.30 at the recent range lows. 109.72 looks like next support.
Commodities
- Oil is climbing again as traders react to further comments from the Saudi oil minister of an extended deal on production cuts and the upgraded global growth outlook. Last night in Davos Khalid al-Falih told CNBC: "I'm still anxious about the fragility of the market (and) about the potential black swans that may spring in front of us. By and large, we are on our way but we are not there yet". Which explains why he doth protest much. As a result he said “I think there is an acceptance that we need to extend this framework of OPEC and non-OPEC cooperation, in one way or another, beyond the current agreement”. Hence the rally which is lifting WTI back toward the top of this channel and recent highs.
Have a great day's trading.