Originally published by AxiTrader
Market Summary (8am)
Stocks across the globe are stronger again as this early 2008 rally continues with gusto.
As I write all sectors of the S&P 500 are higher save for utilities, which is off just 0.02%, with the gains being led by a 1% gain in financials and basic materials with tech a relative laggard with just a 0.5% gain. I throw that in as an example of how broad based this rally is in terms of sectors at the moment.
And it’s broad based in terms of geographical participation as well.
While the Dow topped 25,000 with a 0.62% gain, the S&P 500 had another 0.4% gain to 2,725, and the Nasdaq 100 rose 0.2% all of Europe and most of Asia (save for Korea) also made very decent gains over the past 24 hours.
That means SPI traders are again betting we’ll see the ASX join the fray. Yesterday’s top at 6101 and reversal was disappointing. But the markets is likely to open higher this morning…and then we’ll see.
On other markets it’s again the story of a weaker US dollar as the fact its data is solid and improving is lost on traders focussed on expectations that EU strength will drive the ECB to chase the Fed, and that synchronised global growth will in fact drag most central banks along the tightening path.
So this morning we have the euro at 1.2067 after running to just below the 2017 high. The pound is higher as well at 1.3547 while – as has become the norm recently – the yen is marching to its own beat and is actually weaker with USD/JPY at 112.78. With a weaker US dollar and surging risk appetite the Aussie and kiwi are higher again with AUD/USD at 0.7858 while the kiwi is at 0.7152 up a very solid 0.87% to lead the G10 pack this morning.
US dollar weakness is again helping gold, which is at $1321 now up 0.63%. Crude is higher again on a big draw in EIA inventories of 7.419 million barrels and residual concerns over Iran. That’s sees WTI at $62.04, +0.67%, while Brent is 0.37% to $68.09. Interestingly amid all this excitement in stocks and a weaker dollar copper, aluminium, zinc, tin, and nickel are all a little lower this week. Copper actually surged at one point overnight but has fallen back and is up just 0.06%.
With solid EU PMI’s and stronger ADP payrolls and still solid US PMI you’d be forgiven for thinking bonds might rise. But overall nominal long rates remain fairly quiet. US 10's are at 2.45% but the curve has flattened to 49 points as 2’s rose to 1.96%.
On the day there is plenty of data to be released with non-farm payrolls the highlight tonight. Locally we have trade data in Australia. Japanese retail sales will be interesting as will German retail sales and construction PMI tonight. Euro Area PPI and flash inflation for December is also very important as are Canadian trade and employment data.
A big end to this incredible first week of trade.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Synchronised global growth folks. That’s why stocks across the globe have burst out of the blocks in 2018 and are racking up such solid gains. Yes, the US tax cuts are helping. And yes if US markets weren’t rallying perhaps the rest of the globe wouldn’t be as ebullient. But the data already this week in terms of PMI’s for both manufacturing and services suggests economic strength across the globe remains robust. Indeed global manufacturing PMI is at it’s highest level in 7 years. Here’s a pic I grabbed from a Bloomberg story this morning.
- On those PMI’s it was services day yesterday with Australia leading off with a print of 52. But it was the Chinese print of 53.9 – which was a huge leap from the previous month’s 51.8 – that kicked things off. European PMI’s were solid with Germany printing 55.8, France 59.1 and the EA 56.6. UK services PMI was 54.2 and then the US printed 53.7. So pretty good all around and consistent with this positive outlook for global growth.
- Also out on the data front in the past 24 hours was US private, ADP, payrolls which absolutely shot the lights out with a print of 250,000 against expectations of 190,000. That sets up a bumper non-farms in the US tonight. I wonder if that might help the US dollar?
- I know, I know. I sound like a broken record going on about bonds and inflation when no one cares. But they do and the proof is in the US inflation indexed and in break even rates markets. The forces of inflation are stirring as producers prices rise and margin get squeezed a little. Wages are the eky for markets of course and nominal bond yields are quiet with US 10’s still sitting nice and quietly at 2.45% even as the US data continues to print solidly. But this chart from the WSJ Daily Shot column shows “market based inflation expectations have started to rise again”. I’m not spruiking my “Dynamic Duo” post again. But I do have a flea in my ear about inflation and bonds in the year ahead.
- And for the Recessionistas worried about the flattening US yield curve here’s financial conditions in the US right now – YES, EVEN AS THE FED TIGHTENS.
- The FT has an interesting article which says the German debt clock is actually going backwards. No that’s not a typo. Given all the fiscal work that’s been done over recent years debt ini Germany is now running backwards at the rate of €78 a second. Those who have a subscription can read the story here. Of course what’s interesting about this story is the fiscal rectitude of the Germans at a time when the US profligacy has been writ large by the tax cut which will expand US debt by between $1.5 and $2.0 trillion dollars in the next decade. Maybe this is the real reason why the US dollar can’t take a trick. I’m pretty sure it’s one of them.
- Did I tell you or what? Remember recently I wrote I reckoned Trump had upped the rhetoric on North Korea as relations appeared to thaw so he could claim credit. He did that with a tweet overnight. That’s not the point of this para though. The point is that with communications opening up between the North and South and with the US and South Koreans agreeing to defer military exercises till after the upcoming Olympics tensions on the Peninsula seem to eb deescalating.
- And while I’m in the region. It’s worth noting a speech that Chinese president Xi gave to the PLA – all of it – this week. CNBC reports the president urged troops to show the "fighting spirit of fearing neither hardship nor death." Why is this in a market note? Because the elevation of Xi to this supreme position within the Chinese leadership on par with Chairman Mao gives him a chance to reshape China and how it faces the world. That’s what Xi appears to be doing and it will be important for geopolitics, markets, and the global economy in the years ahead
Australia
- What does it take for the ASX200 to participate in the global stock market rally underway as 2018 kicks off. That’s the question traders and investors will be asking themselves this morning after another lacklustre day’s trade yesterday saw the local market give up the ghost and finish the day up just 7 points with the ASX200 closing at 6,077.
- Of course the SPI traders have had a pop and added 30 points overnight on the back of this continued surge in Asian, European, and US markets in the past 24 hours. So we should - initially at least – see the ASX200 physical retest yesterday’s highs around 6101. But that rejection in the physical market of the move above 6100 is important. If the market can close above that level then well and good. But if it fails again today to participate in this global stock surge it will send a big signal about the state of local traders psychology. Surely it should break higher. Here’s the SPI chart, a dangerous candle at a range top. Let’s see what today’s trade brings.
Forex
- What can you say about the US dollar other than it can’t take a trick. Last night’s price action again gave credence to my little behavioural theory that presently the US dollar remains under pressure because it’s data comes out after strong data in Asia and Europe which means its fighting a rear guard action after the traders and algo’s have already bought euros (among others) and sold dollars on the back of strong data in other jurisdictions.
- But there was a great chart in the Wall Street Journal’s Daily shot (one of the most underrated resources in global finance and worth the price of the WSJ subscription I reckon) which showed the point myself – and many others – have been making about what’s driving Euro. It’s expectations of growth even though the spread between US and EU data prints and bond differentials suggest euro should be lower. It’s a cracking chart and sums things up nicely
Source: Bloomberg
- And speaking of euro it’s up at the top of the 2017 range and there is an asymmetric chance of a break it seems to me. I say that because if we get a strong non-farms (which means wages data and hours worked as well as just a straight headline increase) the US dollar should rally. But with traders looking for reasons not to buy the US dollar, the chance of a weaker number, or data within the overall release being read negatively are high. Which could provide the catalyst for the euro to break. All that said, it is looking a little toppy on the charts. But I don’t have a sell signal yet so I’m not going to pre-empt a down move even though the last three days candles are interesting.
Click on me I'll expand
- I’ve run out of time. But where euro goes will set the tone for forex markets more broadly.
Commodities
- Cold weather in the US, continued continued concerns around Iran, and another massive draw in US crude oil supplies. No wonder oil is higher again this morning. Indeed this chart I picked up from a Bloomberg News story highlights the relationship between rising prices and the fall in inventories very succinctly.
- In WTI terms, oil is closing in on a level I’d targeted some time ago ($62.55) as a target and possible resistance. But when you zoom out a longer term weekly view it’s clear both that oil is in a strong uptrend and that there is still substantial upside on a medium term basis.
- When it comes to WTI and the place the US will hold in the global market it’s clear that the level of production and exports continues to rise. And with that in mind it is worth noting that CNBC reported overnight that Martin Fraenkel, president at S&P Global Platts said “The U.S. is emerging as, not only a military and economic superpower, but as an energy superpower”. He says that by 2020 the US will be one of the “top 10 oil exporters in the world”. This could be very important for not only the global oil order but for geopolitics as well.Something to watch in the quarters and years ahead.
- I got a sell signal in copper yesterday and I’m now short. Uncomfortably so I might say given the ebullience in global markets and the weaker US dollar. At one point overnight things were looking ugly for the trade but copper this morning is back down near my entry level. We’ll see how things evolve in the days ahead. $3.21 is the fast moving average and $3.17 is the 38.2% retracement level of the recent strong surge.
Click on me I'll expand
Have a great day's trading.