Another Good Night For Risk

Originally published by AxiTrader h2 Key Takeaway/h2

In another good night for risk appetite US stock markets are staging a broad based rally with every sector of the S&P 500 higher this morning. Naturally the result is new record highs for the three big US indexes with the S&P gapping higher from the open.

Continental European stocks were also higher as well, but HSBC Holdings (LON:HSBA) PLC's (NYSE:HSBC) 62% fall in profit dragged on the FTSE into the red at the close of play against a 1%+ gain for the DAX.

That stocks are rising when the US dollar is stronger after Fed speakers seem to increase the chance that the March FOMC meeting is live isn’t exactly remarkable given the Fed is reacting to a stronger economy. But it is causing some disquiet. And I’m watching the overhead resistance in the S&P 500 I’ve been highlighting recently.

On forex markets while the US dollar is stronger like the S&P it’s off its highs. The Australian dollar is again one of the better performers in the G10 with a fall of just 0.1% as the rally in stocks and risk appetite and global backdrop supports the bulls.

Elsewhere gold fell and then bounced back again to be largely unchanged while the squeeze in oil markets continued and copper and base metals rallied.

• S&P 500 +14 (0.6%) 2365 (7.47 am Sydney)
• Dow +118 (0.6%) 20,739
• Nasdaq 100 +23 (0.4%) 5,862
• SPI 200 +29 (0.5%) 5,768
• AUDUSD 0.7681 -0.08%
• Gold $1235 -0.2%
• WTI Oil $54.06 +1.24%

• With a little more than 10 minutes before the close of play the big three indexes are on track for new record high closes.

• Worth noting is that while stocks continue to rally. But the S&P 500 is approaching what might be an important resistance level in the 2375/80 region. The hypothesis is that what was previously the bottom of the uptrend could now become resistance, or the top, on the current uptrend. That’s what happened in the 2011-2015 rally as I wrote last week.

• Naturally that doesn’t mean I’m uber-bearish just that we might be getting close to a level where the S&P, and hence other global markets, run into some selling and will then pullback. I’m early on this as my system hasn’t generated a sell signal, and certainly with Donald Trump addressing lawmakers on the 28th ebullience is likely to remain high. But I see a risk, and a possible level to lighten longs against, and so I’ve flagged it. Here’s the chart:

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• Notwithstanding Minneapolis Fed president (voter this year) Neel Kashkari’s entreaty overnight that the labour market has still got room to run the overriding message we are getting from the Fed recently is that rates are going to rise and march might even be live. Regular readers will recall my out of consensus view from last year for 4 rate hikes this year. So I’m watching the rhetoric from the Fed very closely as it seems like they are trying to reposition expectations about the “liveness” (yes, I know it’s not a word but English is a living breathing language J). To that end Loretta Mester’s comments Monday about how strong the US economy was were echoed by Philadelphia Fed President Patrick Harker who said that he was likely to support a rate hike when the Fed next meets on March 14 and 15.

• The Mexicans are positioning before any NAFTA renegotiations. Mexican Economy Minister Ildefonso Guajardo said in Toronto that Nothing in the new NAFTA should be a step backward. We will definitely not include any type of trade management measures, like quotas, or open the Pandora's box of tariffs. That will be disastrous in any process moving forward”.

• But strangely - given Guajardo is girding for a fight with Washington - that hasn't hurt the peso which is back at 20 and looking very strong. That's it best level against the US dollar since the week of the US presidential election.

• French 10 year bonds are higher again this morning as another poll showed that Marine Le Pen is closing the gap on Emmanuel Macron and Francois Fillion in the race to the Elysee Palace. Probably more importantly though FIllon has regained a lead over Macron which may signal the heat has gone out of the family favours scandal surrounding Fillon. Either way markets are still worried about Le Pen with the French-German 10 year spread rising to a new 4 year high of 76 points.

• Speaking of German bonds, something weird is going on in the 2 year part of the curve with rates falling to a new record low of -0.86%. reports say it’s technical factors. But it’s also likely reflective of a bit of a safety bid for German bonds while this election season with the Dutch and French elections gets out of the way.

• BUT HERE’S A BRIGHT SPOT FOR EUROPE – French, German, and EU wide PMI’s shot the lights out last night with solid increases on average. It’s another challenge to the ECB’s determination to keep pumping money into the EU economy and, if it persists, suggests to me that a change will need to be made – or at least discussed – mid-year.

• Also in Europe. The mess that is another Greek bailout negotiation continues. No one seems to care – at least not in markets – but Greece is again battling Germany, the IMF and the Euro group. Overnight Greek government spokesman Dimitris Tzanakopoulos told the press that “We expect the German finance ministry to back down on its irrational demand for primary surplus levels of 3.5 percent over a 10 year period, and adopt a constructive stance to allow the easing of Greece's debt over the medium term”.

• US PMI's were weaker last night with the Markit preliminary readings printing lower than the previous month. That seems to have slid under the radar for traders though. But my read is that this is just a bull market and traders and investors are only interested in the good news. And last night that was unexpectedly good news from retailers and higher energy prices. Anyway....moving on.

• China signalled yesterday that it will give reserves relief to banks that lend to the weaker, cash starved sectors of the economy. That’s the carrot, while the stick has been threatened to those banks that authorities believes failed to implement undertakings previously agreed to channel money into these sectors.

• Bank of England governor Mark Carney took a bit of a pasting before a parliamentary committee last night when he was asked to justify his rate settings and the recent move in the bank's estimation of the not inflationary rate of unemployment. The background is that the BoE lower that rate which means it has more room (estimated) before it needs to raise rates. It's clearly a fudge. But the fact lawmakers are calling him out on it is remarkable.

• GDP tonight is going to be important in this discussion and debate.