Originally published by AxiTrader
Quick Recap
Sometimes, and in so many ways, markets feel like Topsy Turvy Land in Enid Blyton’s Magic of the Faraway Tree. So some might wonder why when Fed chair Janet Yellen says rates in the US will be increased “relatively soon”, which almost guarantees a December hike, stocks rise. You’d be forgiven for scratching your head.
But she also highlighted that traders are expecting Trump’s policies to be expansionary which underlined the reasons for the Trump rally in stocks and the US dollar and why U.S. 10-Year are back up at 2.29%.
So the wash up is risk is on, the US dollar is stronger again and the hiatus in those moves we saw yesterday is done.
What You Need To Know
International
- Janet Yellen’s comments along with the data from the US overnight has the S&P 500 up 8 points and the Nasdaq 100 up 31 while the Dow is fairly flat. All the action in is Macro markets.
- Yellen said rates will rise “relatively soon” BUT her comments about the impact of Trumponomics was possibly the key to the overnight moves. Yellen said “markets are anticipating...a fiscal package that involves a net expansionary stance of policy and that in a context of an economy that is operating reasonably close to maximum employment with inflation heading back to 2 percent. She also suggested that the market might be right and Trumponomics focus on "policies that would improve...long run growth and productivity
- US headline consumer prices rose the most in six months during October according to data released overnight with the CPI up 0.4% while the yoy rate sits at 1.6% which is the highest rate since October 2014. Core CPI was less frothy up just 0.1% but the yoy rate is srtill above 2% at 2.2%.
- Also out last night was the jobless claims data which fell to 235,000 another 43 year low.
- The WASH UP, and maybe why stocks aren’t afraid of a December Fed rate hike, is that the economy looks like it is already in reasonable shape even before Trumponomics kicks growth into a higher gear. Last night the Atlanta Fed GDPNow guesstimate of Q4 growth was upgraded from 2.9% to 3.6%. BOOM.
- And on Trumponomics VP-elect Mike Pence went to Capitol Hill to tell GOP lawmakers to get ready to work with the administration to get a large amount of legislation through congress when Trump hits the ground running in 2017. This is both important and interesting because it DOES suggest that Trump is going to put many of his policies into practice. Pence also said his new boss will roll back a lot of Obama’s “Executive Orders”.
- The BoJ did it’s first bond buying program to keep rates at 0% yesterday as the true value of their policy now becomes apparent. See forex section below for more.
- So all those Brexit will kill the economy folks – not so much it seems. Last night’s release of retail sales for October surged 1.9% versus expectations of a 0.4% increase. That’s driven the yoy rate of growth to a ridiculous 7.4%. Okay I know Brexit hasn’t even started to happen but it seems that business and commentators have a much more jaundice view than the population. Something to watch naturally but so far Britain is doing okay and GBP liked the number.
- French PM Manuel Valls said Germany and France need to lead Europe in terms of growth and employment or the EU is at risk of collapse. Good luck with that.
- China’s rail freight volume grew at the fastest rate in 3 years data for the month of October showed yesterday. Economic growth anyone?
Australia
- If you are a stock which benefits from a falling Australian dollar then today is your day to shine. With the Aussie at 0.7410 this morning and with the prospect of further falls in the offing traders might look around at business with significant offshore operations.
- But the futures traders aren’t too excited overall with the December SPI only marked up 10 points to 5350. If the SPI can take out 5370 however we really could end the week in a very strong position as it would be a break of short term resistance and let the market slip back into the 2016 uptrend.
- The miners did okay overnight, US financials are leading the push higher on the S&P 500 which suggests that the two big sectors of the market will have a good day. But the reality is that much of the action in this market is under the surface at a sectoral and company level. So we’ll see how things wash up to end the week. Surely it’s time for a run higher.
- Looking at yesterday’s data and there is a clear slowdown continuing in Australia’s employment market. Why the participation rate has fallen again is hard to fathom, but leaving that aside the overall and continued slowing in trend employment growth is the one black spot on an otherwise positive economic outllok. And of course the terrible news for WA is that employment has gone backwards for almost 2 full years now with the run at 22 months.
Forex
- The US dollar is on the march again this morning sweeping all before it. The Euro is below the trend line which stretches back to 1999 and 105 seems to have a tractor beam on it. Yen is getting pollaxed at 109.84 and the Aussie has collapsed again and is at 0.7410 this morning.
- WHY? Too Easy. The policy divergence folks were betting on a year ago between the Fed and the rest of the developed world, the divergence that never came, does now seem to be about to crystalise with a Fed hike in December and the prospect of more in 2017 as Donald Trump’s policies impact on higher US growth at atime when, as Yellen said last night, the economy is already close to full employment.
- So the US dollar, in index terms is also up and out of the 18 month range top and could run hard.
- The BoJ did it’s first bond buying program to keep rates at 0% yesterday as the true value of their policy now becomes apparent. The back offered to but unlimited amounts of bonds are a number of points on the curve to keep Japanese rates hovering near zero. Make no mistake this is the most important thing that happened in global markets in the past 24 hours. What the BoJ did when it changed policy some months ago abandoning the money base target and taking on this plan to keep rates low was to me a bold and brilliant move to break the paradigm for the bank by offering to credibly irresponsible in keeping rates low in reflation. Naturally at the time most traders and investors were focussed on the weak Japanese economy and low inflation. But this policy works best and is most effective at weakening the Yen in a reflationary environment – the one that higher oil prices were pointing to and the one that Trumponomics looks certain to help create if policy becomes action. So it’s no surprise the Yen is getting hammered again and is near 1.10. That was kind of the point. USDJPY will go higher under these conditions the market seems to be betting. I agree.
- The Euro, amongst others, is getting hammered as well as the US dollar sweeps all before it. Last night ECB member Yves Mersch said its important to roll back emergency stimulus as soon as possible. That sounds kind of aggressive and Euro supportive. But he was careful to add that “I believe that (talking about exiting stimulus) is probably still premature, given the fragility of the European growth path” he said adding the Fed was “very careful in normalising policy”. In layman’s terms it means ECB QE will remain which again highlights US monetary policy is about to diverge from Europe, Japan and probably all of the developed and developing world.
- Now it's broken the monthly uptrend 105 seems likely.
- Euro is getting creamed by the pound as well as traders unwind much of their fear of Brexit – at least against the single currency.
- Bringing it back home 0.7330 seems a chance now for the Aussie.
Commodities
- The Saudis are out again supporting the notion that OPEC is going to get an Crude Oil deal done at this month’s meeting. Speaking on state television Saudi oil minister Khalid al-Falih said OPEC needs to reach a deal at the bottom end of the target range. “reaching (a decision) to activate that ceiling of 32.5 million barrels per day (bpd) will speed up the (market) recovery and will benefit producers and consumers” he said.
- He also noted that he’s still “optimistic that the consensus reached in Algeria for capping production will translate, God willing, into caps on states' levels and fair and balanced cuts among countries”. That’s something the Algerian oil minister reiterated telling Reuters that “There is strong consensus among OPEC producers for a freeze”. I remain of the view the fiscal imperatives of the OPEC and non-OPEC countries current finances mean some sort of deal is likely to be done.
- But the market doesn’t yet share my conviction as the price action and the past two candlesticks show. Actions speak louder than words and so far OPEC is only good at the words bit.
- Gold is off on the back of the stonger US dollar. My thoughts yesterday it needed another down leg to confirm support are coming through and while I continue to believe gold will look good in 2017 in the very near terms it looks like traders want to test the $1180/1200 support zone.
- Shanghai metals were higher yesterday and overnight Copper reversed the weakness we saw in Asia. It’s only up marginally at $2.48 a pound and still looks like some sort of consolidation is still needed but the price action of the past 24 hours could embolden a few buyers.
Today's key data and events (all times AEDT)
- Australia - Nil
- New Zealand - Producer Price Index - Output (QoQ) (Q3), Producer Price Index - Input (QoQ) (Q3) (8.45am)
- China - House Price Index (Oct) (12.30pm)
- Japan - Nil
- Germany - Producer Price Index (YoY) (Oct), Producer Price Index (MoM) (Oct) (6pm)
- EU - Current Account s.a (Sep), Current Account n.s.a (Sep) (8pm)
- UK - Nil
- Canada - Bank of Canada Consumer Price Index Core (YoY) (Oct), Bank of Canada Consumer Price Index Core (MoM) (Oct), Consumer Price Index (YoY) (Oct), Consumer Price Index - Core (MoM) (Oct), Consumer Price Index (MoM) (Oct) (12.30am)
- US - CB Leading Indicator (MoM) (Oct) (2am); Kansas Fed manufacturing activity (Nov) (3am); Baker Hughes US Oil Rig Count (5am)
Have a great day's trading