Originally published by AxiTrader
Key Takeaway
The US jobs data was strong enough to see stocks rip higher but also contained some signs that the labour market may be looser than thought. That left bond bears in their gave and undermined the US dollar a little.
Of course the universe is long the dollar - so it's a reasonable question to ask who's left to buy. We'll get to find out this week.
Commodity markets Friday had a shocker as the PBOC increased rates a little and Chinese traders celebrated their new year holiday's by selling with gusto. Gold and oil bucked the trend however and remain firm.
What You Need To Know
International
- US stocks had a cracking night Friday after the Goldilocks result of a strong non-farm payrolls but fairly quiet wage growth. The S&P failed to make a new all-time high. But it did close at a new weekly closing high record of 2297.42. That was rise of 0.72% on the day. The Dow was back above 20,000, and the Nasdaq 100 rose half a percent.
- US 10's closed at 2.47% highlighting that while stocks liked the 227,000 lift in non farm payrolls but not bothered by the 0.1% lift in average hourly earnings. Services in the US were strong as well with the Markit PMI printing 55.6 while the Ism non-manufacturing printed 56.5.
- Two Fed speakers gave differing views on the outlook for Interest rates. Chicago’s Charles Evans said the Fed can afford to be patient while San Francisco’s John Williams was more hawkish saying the Fed should not wait around because of stimulus uncertainty.
- Donald Trump is not all wrong.
- That’s the message in his policy platform if a cold hard analysis is actually conducted with rancor or partisanship. That doesn’t mean he’s right either. But it’s why the arguments against him are more vitriolic that reasoned. Now plenty of readers will probably be throwing something at their monitors reading those words but if one thing is clear it is that global capitalism has been failing your average developed world citizen in the past decade or two as companies and their managers reaped a bigger share of the reward.
- Again as I’ve said before this is not a political note. But I consider myself a behavioural economics and finance guy so I have to understand the argument, how it’s framed, and then watch the reactions to see how that will then impact on markets and economic activity. Which is where things get interesting. Over the weekend German Finance Minister Wolfgang Schaeuble said the Euro’s rate is too weak for Germany. Schaeuble said:
- “The euro exchange rate is, strictly speaking, too low for the German economy's competitive position. When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany's export surplus. I promised then not to publicly criticise this (policy) course. But then I don't want to be criticised for the consequences of this policy”
- Now he was trying to defend against Peter Navarro’s comments last week. But it proves Trump is not all wrong and it also opens the door to a weaker dollar and stronger euro. That has implications for forex naturally BUT also stocks – on both sides of the Atlantic.
- Donald Trump signed Executive Orders looking at rolling back Dodd-Frank banking regulations as well as some financial planning rules on Friday.
- France’s presidential election is looking like a close run thing. As Francois Fillon fights for his political life, and Emmanuel Macron remains an unknown quantity far-right candidate Marine Le Pen is filling the vacuum. Over the weekend Le Pen launched her campaign with the now familiar cry to end globalisation. “The divide is not between the left and right anymore but between patriots and globalists!” she said.
- Again, you don’t have to be a supporter of Le Pen to see the impact on markets and economics. Le Pen added “Past leaders chose deregulated globalisation. They said it would be a happy one, it turned out to be atrocious. Financial globalisation and Islamist globalisation are helping each other out ... Those two ideologies want to bring France to its knees." Based on her platform if Le Pen wins, its still an if but a vacuum has opened, the euro project is at risk – a big one.
- China raised rates 0.1% on Friday causing more of a funk than such a small move should have.
Australia
- It should be a better day for the ASX today after US markets solid performance on Friday night. SPI futures are up 24 points, reversing the fall from Friday’s atrocious price action where the bulls completely lost their nerve before capitulating and leaving the market to close at 5621, down 23.
- The big question will be whether the local market can pace the US rally or rather will lag at the end of the day. Given it was financials leading the charge after president Trump asked for a review of Dodd-Frank it might be hard for the big banks here to follow suit given current prices. Certainly Trump is signalling less regulation for the big banks, and financial planners, in the US but that does not necessarily translate to less regulation for banking globally. Although I would add Basel IV is looking shaky which might help the big 4 somewhat.
- Anyway it should be a good day. But the Aussie stock market still has plenty of overhead resistance in the mid 5670’s and then of course last week’s high.
- The monthly inflation data is out today. I love this index as it is a good indicator of the overall CPI. December’s big number was a bit of a surprise so I’ll be interested to see what January shows. I’m pretty sure the RBA will be too.
- Retail sales for December are also out this morning. The market is looking for a rise of 0.3%. This data will be interesting to see how consumers saw Christmas and what and where they spent.
Forex
- The US dollar remained under pressure as it ended the week and the risk is that it breaks wide open at some point in the week/s ahead. I say that because the bounce from support hasn’t really happened in US dollar index, USDJPY, Euro and even Aussie dollar terms.
- Looking at the US Dollar Index first we can see the dollar sits at 99.73. That’s of last week’s lows but the DXY has now fallen for six week’s in a row. Of course that’s not surprising given the comments last week from both president Trump and his top trade guy that the US dollar was too strong. Clearly there is a big risk this administration walks away from the “strong dollar” mantra of the past two decades. Of course given the volatility in the USD/JPY, Euro and other currenices in that time it’s only lip service – but it has been an important policy plank.
- So Trump’s comments, taken with those of German finance minister Wolfgang Schaeuble over the weekend suggest to me that the big long positions in the US dollar, and associated shorts in others such as the yen, are at huge risk of being turned.
- Looking elsewhere in forex land if the US dollar is at risk of a break lower then that means the yen, the euro, the Australian dollar, and of course the Mexican peso which has surged recently, could all surge. As with everything macro forex related recently the Yen is the canary in the coal mine at the moment. Last week’s lows near 112, like gold, satisfy the 38.2% retracement of the big Trump rally. A break could, I think will when I look at my charts, open the way to the 109.50/110 region. 112 has to break first of course. But given the BoJ offered to buy "unlimited amounts" of bonds after rates rose Friday the fact the Yen strengthened from levels above 113 is instructive of the balance in the market right now.
- For the euro, as we articulated in our paper Friday, the outlook is toward 1.10 at the moment. But concerns about the stability and longevity of the euro project in this election season could see euro lag any yen move should it come.
- For the Aussie the bulls still have the Con. Yes the AUDUSD failed at 77 cents again last week. That’s a redux of 2016’s 8 or so failures above that level. Naturally that will haunt the bulls. So while the focus in the next few days will be the RBA and it’s decision on interest rates the Aussie will get a lift if the US dollar starts to fall. I write more on this week’s outlook in my AUD/USD specific piece later this morning.
- Emerging market currencies are doing well. The yuan found some support from the PBOC’s move Friday but it’s the Mexican peso which has surged most recently. It’s an interesting move and one that seems to reflect some optimism that the economy can withstand Trump’s policies – perhaps because the peso is so week.
Commodities
- Crude oil is hanging tough with CFTC data released Friday night in the US showing that the big speculators increased their net longs in WTI to a new record. That’s helped Nymex crude finish the week at $53.83 while Brent closed at $56.81. Part of the buying seems to be concerns around the Iran/US face off but equally reports suggest US traders are betting that WTI could raise in prices if there is a “border adjustment tax” placed on foreign crude. In the end it’s help crude stay bid.
- Baker Hughes reported the US oil rig count was up again on Friday.
- Gold couldn’t have finished ata more interesting juncture Friday. The close at $1219.80 was right on the important 38.2% retracement of the move from the 2016 high back down to the December/January low. With uncertainty surrounding the Trump presidency back on traders radar and possible confrontation with Iran back on the agenda it’s no surprise gold has found buyers once more.
- It’s not exactly the weekly close I was looking for – I was hopeful of a break above $1220 - but the outlook is now turning toward the 50% level near $1250, and the 138.2% projection of the recent upmove and retracement. That’s the $1247/57 region.
- Copper broke lower Friday night in what was a perfect little breakdown from the wedge pattern I’d been talking about recently in my notes and daily videos. In one sense that’s a little weird when BHP has sought mediation at the Escondida copper mine. But the primary catalyst for the move – besides the technical break – was the poor price action out of China on their first day back from New Year celebrations.
- Naturally the PBOC’s little rate hike didn’t help. But the metals selling seemed somewhat out of proportion to that. Either way copper broke down and closed at $2.6095 a pound – even as CFTC data shows big longs in US markets. $2.59/60 looks like an important near term level of support.
Today's key data and events (all times AEDT)
- Australia - TD Securities Inflation (MoM) (Jan), TD Securities Inflation (YoY) (Jan) (11am); ANZ Job Advertisements (Jan), Retail Sales s.a. (MoM) (Dec) (11.30am)
- New Zealand - Waitangi Day (24h)
- China - Foreign Exchange Reserves (MoM) (Jan) (12pm)
- Japan - Labor Cash Earnings (YoY) (Dec) (11am)
- Germany - Factory Orders n.s.a. (YoY) (Dec), Factory Orders s.a. (MoM) (Dec) (6pm)
- EU - Sentix Investor Confidence (Feb) (8.30pm)
- UK - Nil
- Canada - Nil
- US - Labor Market Conditions Index (Jan) (2am)
Have a great day's trading.