Originally published by AxiTrader
Market Summary
Rinse. Repeat.
That’s the story of markets Friday as US stocks kept climbing, US bond rates rose, and the US dollar remained under pressure.
At the close, the Dow was up 0.21% to 26,071 while the S&P 500 was up 0.43% to 2,810. The Nasdaq 100 was up 0.34% and the broader Russell 2000 rose a stonkingly solid 1.34%. It’s boom time for US stocks as money rushes from the sidelines and into the market.
That rally on Wall Street found its corollary on ALL, yes ALL, major markets Friday except the ASX.
Europe and Asia were a sea of green with solid gains being recorded across the board. The DAX was 1.155 higher, the CAC rose 0.58% and the FTSE was up 0.39%. In Singapore the STI rose 0.82%, the Shanghai Composite was 0.41% and the S&P/ASX 200 did what it does and underperformed with a tiny 9 point loss. Futures traders reckon the local market will play a bit of catch up though today and have added 30 points as they bet on a half a percent gain in trade today.
On forex markets, the US dollar remains under pressure still but it’s not exactly making fresh lows. This morning the combination of political news out of Germany (SPD vote to continue to talk on a grand coalition) and the US (government shutdown) has the US dollar a little on the back foot again this morning. But not fresh lows. Euro is up 0.4% to 1.2267, the pound is ripping at 1.3891, the yen is at 110.65 in USDJPY terms and the Aussie is up a little at 0.7 997. Early Asia, oftentimes this is just a head fake so we’ll see.
On bond markets, the bear market continues. The curve is back at 59 points so I guess we can stop wringing our hands about a recession. And US 10's are at 2.64%.
On commodity markets, Oil drifted into week’s end with WTI and Brent at $63.37 and $68.61 respectively. That was despite a reduced rig count recorded by Baker Hughes. Gold is sitting at $1331 and Dr Copper provides a warning for all the extended bulls in other markets as it continues to drift despite positive fundamentals. It’s at $3.18 a pound.
It’s a quiet start to a week which includes important BoJ and ECB meetings. On the day ahead we need to watch out for the next Senate vote on the US shutdown later today in Asia. Before that, we get the Japanese Tankan and tonight the Chicago Fed National activity index.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The grand coalition in Germany can be negotiated after the moderates in the SPD won a narrow victory at the conference held over the weekend.
- The US government shutdown on Friday night after the two parties couldn’t agree on a way to break the deadlock over DACA and HICS. The Senate will vote again late this afternoon – early early US time – but the political strategists I read suggest this is the Democrats only leverage at present so unless the Republicans give a little ground we could be in for a longer than expected shutdown. Maybe they will so President Trump can get to Davos as planned.
- The combination of the two have seen the euro rally and the US dollar under a little pressure this morning. But it is early Asia.
- Brexit is softening and softening materially it seems. That’s the clear takeaway from the moves and pronouncements from key EU leaders in the past week. Nigel Farage and his cohort will be furious. Over the weekend the Confederation of British Industry joined the calls for a soft Brexit saying the UK needs to stay in some form of customs union with the EU going forward. And, and, and French President Macron said the UK CAN have a bespoke deal with the EU after Brexit.
- S&P has materially upgraded earnings estimates for US companies. For me this is the big story of the day and week. Something I picked reading John Mauldin’s weekly. John says that Howard Silverblatt, S&P’s chief economist, “revised 2017 earnings down by a few dollars to $110 as S&P analysts realized that companies are going to have to take write-downs for their deferred tax losses. But… Howard is expecting earnings to grow from $110 to $138 in 2018. That $28 jump in earnings represents about 25% earnings growth. If it actually materializes, the S&P 500 is going to be on a royal tear upwards”. Indeed!
Australia
- Data released so far this year suggests the economy here in Australia entered the year in fine fettle. But this morning the release of the Commonwealth Bank Of Australia's (AX:CBA) BSI indicator of flow through its vast merchant network in Australia suggests that momentum remains intact with a slight wrinkle. The CBA reports that “Economy-wide spending grew slightly above the decade-average pace in December. The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.4 percent in trend terms in December, just above the 0.3 percent decade-average pace. The annual trend growth in sales eased from 6.4 percent to 6.1 percent but this is still above the decade-average pace of 4.1 percent”. That’s good BUT the seasonally adjusted number fell for the first time in five months printing -0.4%. The data the market focusses on is seasonally adjusted when it is released by the ABS. So we might need to watch retail sales when they are released for December next month.
- Looking at the market and it was another disappointing day on the ASX with a fall of 8 points. SPI traders have had a shot at a better start to the week after another good day on Wall Street but we’ll see I guess. When I look at the price action in the ASX200 and SPI the former looks like it is still biased lower perhaps to the 5,950 region where the SPI was Friday before Friday night’s 30 point rally back to 5980. Can the physical market open at and then hold the SPI’s 30 point gain? Hard to know. But while the physical holds 5,989 the chances are that like the SPI it might map out a support zone. Here’s the SPI chart – as long as 5935 holds we are in base building mode. Next support is 5926 and if that breaks 5,867 is the next target.
- The Aussie dollar made a marginal new high for this run Friday trading up to 0.8032 before pulling back to the current level back at 80 cents. It needs an overall weaker US dollar environment to continue to gain at the moment. I say that because copper is still sliding and my favourite coincident indicator of money flow towards risk/growth assets – the ratio of metals and mining shares to the overall market – actually slipped a little last week as money flowed toward the FAANGS and other sectors. Is this the top? Short term maybe. Medium term I doubt it. We’ll see over the week and I’m watching the 0.7935 region which was support last week as the key level short term.
Forex
- The Israeli central bank says it’s been watching every transaction and noticed there has been a lot of computer based momentum trading which has pushed the Shekel out of line with fundamentals. It’s been intervening as a result and will continue to do so it said.
- I raise that this morning as we wait for the BoJ tomorrow afternoon and the ECB on Thursday. Both banks will be sensitive to the recent moves in their currencies and the chance that any signal of changed policy may accelerate the “momentum” plays in forex markets and particularly the continued collapse in the US dollar which not only undermines the inflation goals of these two central banks but gives the US and its companies a comparative advantage in global trade for goods and services. So I’m expecting some push back from governor Kuroda and president Draghi. That’s particularly because there is a lot of “momentum” in the recent moves which central bankers may feel doesn’t reflect fundamentals.
- Indeed with the charts looking the way they do these two meetings and what Kuroda and Draghi have to say could provide either the inflection or extension points for the US dollar selloff. What they say, assuming they say anything and do push back against recent JPY and EUR strength, and how the market takes any pronouncements is going to be critical to the medium-term outlook. I feel like we may have had the pessimistic crescendo in the past week and then again as the week kicks off this week as the US government shuts down and sentiment toward the buck is so negative.
- 1.2175 is the key short-term level for the euro. It’s the 38.2% retracement level of this last leg higher for the single currency and I think the critical level for gauging whether the US dollar is turning. Should prices fall down, through, and close a day below here then we’ll have a clue the worm has turned. That would, in turn, suggest a move back towards the September 2017 high, and now 38.2% retracement level of the rally since November, which comes in at 1.2090ish. Euro is up, US dollar down, this morning. But here’s the chart – gold looks similar.
- And to put this move in the US dollar in context here’s a cracking chart I picked up via Reuters. The US dollar is having it’s worst losing streak since 2015. That in itself doesn’t mean anything. But it’s context around the chance of a pullback in the buck.
Commodities
- The discussion around oil and specifically increases in US production saw oil prices dip for the first time in 4 last week as a very long speculative market appears to have bought itself to a standstill. That the fact the fall in the Baker Hughes rig count countered the IEA’s report that US production will soon ramp up, exceed 10 million bod and challenge Russia yet had no impact on prices could be a sign the rally is tiring. Another sign could be that Saturday - after meeting his Russian counterpart - the Saudi Oil minister said OPEC is committed to managing production beyond 2018. If things are tightening the way we hear they are and see in the inventories then I wonder why he needs to again be talking 12 months out. In currency markets, it would be called jawboning. It reminds me of a line in Hamlet, “The Lady (Saudi Oil Minister in this case) doth protest too much, methinks”. Just saying.
- Oh and on that front, the IEA says the US can topple Saudi Arabia and Russia as the world’s top oil producer. Neil Atkinson, the head of the IEA’s oil industry and markets division, told CNBC, “What we are trying to understand is the responsiveness of the U.S. shale producers. And because of the dynamism of the industry, the innovation and the vast number of players in that space…to some extent, we are in unchartered waters”.
- For the moment though the oil rally has paused with both Brent and WTI down more than 1.5% last week. Positioning is still acutely long and this the risk of a dip back toward the 38.2% retracement of this rally at $61.50, in WTI terms, have increased materially. The similar, 38.2%, level in Brent is $66.80.
- Gold looks like it might be topping out as well with prices spending the week below Monday’s high with Wednesday a sharp reversal and rejection off that high. Friday was a mild upday with XAUUSD finishing at $1331.46. Only a break above $1345 would turn the outlook.
- Copper hit its target Friday night and has now satisfied the 38.2% retracement level of the big rally in late 2017. It could be an indicator of the price action we may see in Oil – perhaps even forex markets – where ostensibly the outlook remains positive but prices still drift under the weight of short term moves which got ahead of themselves. A close below $3.1770 would suggest a move to $3.13 and then $3.09. Here’s the chart – it’s a classic example of why patience is often needed with my system.
Have a great day's trading.