Stocks Rally, Bonds And The US Dollar Dip After Trump's Inauguration

Originally published by AxiTrader

Quick Recap

Donald Trump gave an impassioned speech to make America great again. While the speech was thematic, rather than setting out specific policies, it was clear that many of the core tenets of candidate Trump’s policy platform have made it through to his presidency and will be implemented.

To that end Trump delivered on known knowns which allowed stocks in the US to rally into the close, bonds pull back from their yield highs, and the US dollar pulled back a little toward the support zone we were watching last week.

But moves are not universal as we move out of the post-crisis central bank world into one dominated by Donald Trump and the retreat of globalisation. That’s seeing correlation’s break down from what had become normal. That may be uncomfortable for some. But for traders it opens up a worls of possibilities.

What You Need To Know

International

• US stocks closed in the black on Friday on what was apparently a rare positive mood to great the inauguration of a US president. The ABC has this morning been saying that's the first time in 50 years a rally has occurred after the president was sworn in. I have no way of knowing right now but Trump's speech certainly did sound like he'll make plans policy.

• So in the end the Dow was up around half a per cent to end at 19827, the Nasdaq 100 finished up 0.3% and the S&P 500 rose 0.33% to 2271.

• US 10s finished at 2.45% after trading to 2.51%.

On Trump

• Everyone should read Donald Trump’s inauguration speech – it’s a very good one. And yes I know its uncomfortable reading for foreigners, and many Americans, because he talks about protecting America, and putting America first. And I certainly know that if you turn this speech into a scorecard then Donald Trump has given himself a herculean task if he is to be judged a success. But you get a sense real change to Washington and the US economy is coming. That’s important for stocks, bonds, and the US dollar.

• For many this will be uncomfortable. But change is always uncomfortable. And for all his flaws you can see in the policy platform Donald Trump brings with him, and in the people he has populated his cabinet with that he intends to at least try to change and improve the US economy.

• But the problem for traders now is that Trump brings with him uncertainty. That’s different from risk because we can hedge risk. But risk brings with it a chance to work out the probabilities. Uncertainty is something different. We know there are risks but we don’t know their probability. Trump is the very epitome of Donald Rumsfeld’s well known – and widely misunderstood - quote.

• Rumsfeld said back in 2002:
• “Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones”.

• Welcome to a world of unknown unknowns – we’ll all be watching President Trump’s Twitter feed very closely.

• JP Morgan boss Jamie Dimon summed up the new administration very neatly in Davos last week. Dimon who took a long term and optimistic view about the US and global situation said Trump has surrounded himself with some very good people – that’s something I believe is the strongest signal the changes will be positive for the US economy and perhaps less radical than many fear. Specially Dimon noted the Cabinet members were “knowledgeable and smart and they have been around the world. And hopefully when we go from one-liners — forget the one-liners and tweets — to serious policy, maybe we’ll do the things that help America grow better and help the average American”.

• UK prime minister Theresa May will be the first world leader to visit the new president this week.

Elsewhere

• Foxconn is thinking of opening a $7 billion display making factory in the US. But the head of the giant Chinese electronics maker said he is worried about growing protectionism.

• Chinese press said nothing can stop the nation's military drills. This is a clear flash point chance in the year ahead.

• On Friday China’s data dump was solid with GDP beating with a 6.8% print. Yes I know lots of folks want to say the Chinese data is all made up. And certainly there is some evidence that things are not always as they seem. But the key is that China has not weakened the way many thought it would last year. As I write often and economy of this size growing at these rates is unprecended. And so while many like to say that Chinese growth is the slowest in 26 years I like to counter that with my own headline. “Chinese growth continues its remarkable run”.

• Speaking of China – and germane to the funding and liquidity issues in its banking system at the moment – the PBOC cut the RRR for 5 big banks to release cash into the economy before the holidays.

• Maybe I’m wrong about the UK after Brexit. We’ll get a chance to know when we see Q4 GDP later this week. But on Friday the retails sales for December collapsed 1.9% against expectations of a fall of just 0.1%. It didn’t hurt the pound though.

• And don't forget the UK High Court will rule on whether Theresa May has to get the parliament to vote on Brexit BEFORE she triggers article 30 tomorrow night. That could help what is looking like a a coiled spering rally coming for Sterling.

• John Williams from the San Francisco said the Fed will need to raise rates before the economy gets away from it. He’s not a voter this year but this reinforces the message we are hearing from Yellen and her colleagues.

Australia

• The S&P/ASX 200 lost another 37 points on Friday closing at 5654, down 0.66%. The market looks set for a better open this morning with a 27 point lift in the March futures. basic materials was the leading sector in the US which helps one of our biggest sectors.

• The banks were under heavy pressure Friday on the back of broker downgrades and the big question is today whether the better tone in the US can trun them higher again or whether the challenges they face, and the big rallies from the late 2016 lows, will remain a weight on the market. That's an important question for traders given the Big 4 account for around 25% of the ASX 200 market capitalisation.

• When I look at the SPI 200 chart it still looks like it is under pressure. It would take a move above 5672 - short term downtrend - to turn the outlook.

Chart

Forex

• The US dollar is back under 101 as traders figure out whether they want to retest 100 or whether the period of weakness is behind us. My sense is we’ll get another test of the important 99.50/100 support zone in the dollar - which will either confirm or deny a break lower – in the week ahead.

Chart

• Looking at the open in early Asian trade Monday euro is back above 1.07 at 1.0710, USDJPY is at 114.10, the AUDUSD is at 0.7557, the Kiwi is at 0.7154 and the GBPUSD is back up near 1.24 sitting at 1.2372.

• It’s a big week for markets broadly but forex traders in particular. We get the raft of flash PMI reports this week, German Ifo, UK Q4 GDP, Australian CPI, and the first read of US Q4 GDP.

• Coming off a very strong 3.5% Q3 GDP expectations are for growth of 2.1% for Q4. That’s not super strong and expectations may be on the low side given the current Atlanta and New York Fed indicators of US growth using their respective GDPNowcasts. They sit at 2.8% for Atlanta and 2.1% for New York’s measure. Not super strong if New York is right. But that is still a good base onto which Trumponics can then be overlaid.

• On that basis – and important to the US dollar going forward – it is worth noting what Janet Yellen said Friday. The Fed chair said “I think that allowing the economy to run markedly and persistently “hot” would be risky and unwise" Yellen said at Stanford on Friday. That won’t stop the US dollar from falling if that is the test the market wants to make of support. But in the long run interest rate differentials and policy divergence matters for currency markets.

• That’s something BoJ governor Kuroda reiterated again Friday when he was subtly suggesting that the Yen needs to weaken further.

• I've had a look at the US dollar under President Trump this morning.

Commodities

• Friday I posted a piece asking if crude needed to break lower in order to clear the decks and rally again. Traders and OPEC have done their darndest to answer that question in the negative after the price of oil ran around 2% higher.

• Specifically the compliance meeting of OPEC and non-OPEC members was held over the weekend and traders were listening to comments made by the Saudis about just how high compliance already was. Over the weekend the ministerial meeting said that around 1.5 million of the 1.8 million barrels that was agreed to be cut has been withdrawn from supply.

• Saudi energy minister al-Falih said “Despite demand usually being lower in the first quarter in winter, the actions taken by the Kingdom and many other countries has impacted the market in a tangible way and we have seen the impact in spot prices”. The Kuwaiti’s said they won’t accept anything other than 100% compliance and the minister’s said collectively they are not worried about US shale.

Chart

• A weaker US dollar and perhaps an inauguration speech which almost guarantees an increased level of uncertainty helped gold bounce back above $1200 and it is sitting at $1209 this morning.

• Copper is mapping out a range at the oment and finished the week at $2.617 a pound.

Today's key data and events (all times AEDT)

• Australia - Nil
• New Zealand - Nil
• China - CB Leading Economic Index (Dec) (1am)
• Japan - All Industry Activity Index (MoM) (Nov) (3.30pm)
• Germany - German Buba Monthly Report (10pm)
• EU - Consumer Confidence (Jan) (2am)
• UK - Nil
• Canada - Wholesale Sales (MoM) (Nov) (12.30am)
• US - 3-Month Bill Auction, 6-Month Bill Auction (3.30am)

Have a great day's trading.