Oil And Stocks Surge - Risk Is On

Originally published by AxiTrader h2 Quick Recap/h2

A very interesting night for oil, the S&P 500, the US dollar and Trump’s transition team.

Maybe I'm wrong about this stock market rally and the S&P 500 has to rally to 2220 or more before it looks ridiculous.

• It could be time to wack off my head and put on a pumpkin when it comes to this rally in US stocks. Last night the Dow Jones Industrial Average set another record high but this time the S&P 500 and Nasdaq 100 joined the run higher. At 2180 the S&P 500 is just 8 points away from a new all time high. Sure it was driven in no small part by the surge in oil prices but maybe S&P needs a blow off top before it really factors in too much about the benefits of a Trump presidency. Where's that level? 2220/25 maybe?.

• That's because last nights move was a good sign for the market given U.S. 10-Year are at 2.22% and the US dollar is stronger. But as I noted it’s energy which is the big driver of the move – not something to do with the Trump presidency.

• How tensions within president-elect Trump’s transition team get resolved will give a very clear window into the type of administration that he leads when he takes office in January. Of note are reports that his son in law Jared Kushner is trying to purge Chris Christie and any folks close to him from the team. That’s because Christie was the man who prosecuted Kushner’s billionaire dad back a decade or so ago. I know it sounds like an internecine sideshow but it will be important on signalling to the outside world – and I think to markets – the tone a Trump presidency might take.

• US retail sales were up 0.8% in October with September’s data revised from 0.6% to 1%. This reinforces the Fed will hike rates in December as it shows a strong US consumer sector.

• That said, Fed governor Daniel Tarullo said overnight that the Fed needs to monitor Donald Trumps policies, and the amount of tightening in financial conditions already, when setting policy. Higher rates and a stronger dollar have already tightened conditions in the US in the wake of a Trump presidency.

• UK inflation was lower than expected in October with a 0.2% print and a 0.9% yoy rate. But lest you think the fears of Brexit inflation are overdone BoE governor Mark Carney said that “the pass-through from a 20 percent fall in the trade-weighted level of sterling is going to come”

• Keep an eye on Italy folks. Yesterday at Business Insider I wrote that Eclectica hedge fund founder Hugh Hendry has bet that the EU will break up. Italy is the next shoe to drop on one leg of his trade (spread between Italian and German bonds) and the December 4 referendum is key to this. News overnight is that Italian Prime Minister Matteo Renzi is still behind in all the polls for the constitutional referendum.

• The fallout from Narendra Modi’s crack down on the black rupee market continues in India. Now the government is going to mark people who convert their cash with indelible ink so they can’t keep coming back.

• A 20 point loss on the S&P/ASX 200 yesterday again could have been worse for the local market after a late rally showed for the second day in a row that there are buyers at the lows. Now both days have been down days but the underlying support does suggest some level of residual buying in the market.

• How that plays out today is going to be interesting though with divergent moves across the globe overnight.

• Energy and gold sector stocks should do much better on the day today after moves in the underlying assets overnight. Crude Oil is up 4% and gold is back in the $1225 region. But global miners had a shocker with BHP Billiton Ltd (AX:BHP) shares down 4.6% in London while Rio Tinto Ltd (AX:RIO) shares dipped 4.5%. Glencore PLC (LON:GLEN) and Anglo American PLC (LON:AAL) were also under pressure in London trade while US financial stocks are on the back foot this morning as the (currently) worst performing sector in the S&P 500.

• In SPI terms the market is still sitting just below this old uptrend line its been trying to break back inside of for the past 4 or 5 days. If it can and then break 5370 it could gallop higher quickly.

• Looking back on the RBA minutes and then on governor Lowes speech overnight it is clear the bank and he are pretty happy with where the economy sits right now. But the banks minutes did highlight uncertainty around the Australian labour markets actually underlying strength and that uncertainty could be important given the RBA also noted the potential impact on consumption from highly indebted households. In many respects it’s a black cloud on a blue sky – but one worth watching.

• Today we’ll be watching new motor vehicles and the wage price index.

• The US dollar is still sitting at 100 just below very important long term resistance. Before I get to the technical outlook it is worth talking about the atmospherics which favour the US dollar in the days and weeks ahead. Trumponomics suggest more fiscal stimulus, suggesting higher nominal growth, suggesting higher inflation, suggesting higher Fed funds, and bond markets have already move to a certain extent to factor some of these factors into prices with the 10 year hitting 2.3% Monday and sits at 2.22% this morning. All of this drive policy and economic divergence between countries and currencies.

• But the big question for traders is whether they want to take the US dollar to new year highs right now – even before Trump actually becomes president or implements his plans. Here’s the chart from my Reuters Eikon.

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• Viewed in that light, and with the Euro having trendline support which sits at 1.0650/60 the US dollar may be closer to a pause rather than a break out. Speaking of the majors Euro is largely unchanged at 1.0734 after a wild night where the US dollar was initially on the back foot but rescued by those amazingly strong US retail sales data mentioned above. The yen is still under pressure at 108.88 this morning while sterling is at 1.2450, down around 0.2% - it did have a bit of a gallop above 1.25 earlier this morning after Sky tweeted that a judge said Brexit could be delayed by two years