Originally published by AxiTrader
Key Takeaway
US stocks rallied in the last 30 minutes of trade Friday to end in the black and keep the Dow's winning streak running to 11 days. That came after a poor lead from Europe which saw the DAX drop 1.2%, the CAC off 0.9%, and the FTSE in London lose 0.4%.
Bonds continued to rally, the US dollar got its mojo back, gold surged, and oil reversed off its recent strength once more.
While Australian traders will be watching the release of Q4 GDP on Wednesday closely the reality is this week it’s really about president Trump, his address to a joint sitting of congress and his tax plan. I get a sense traders want to believe in him – hence the stocks rally – but gold up and rates down suggests there is some fraying at the edges of market ebullience.
What You Need To Know
- S&P 500 +4 (0.15%) 2367 (7.37 am Sydney)
- Dow +11(0.05%) 20,821
- Nasdaq 100 -10 (0.2%) 5,845
- SPI 200 -16 (0.3%) 5,703
- AUDUSD 0.7713 +0.08%
- Gold $1257 +0.65%
- WTI Oil $53.99 -0.99%
International
- The Dow continued its winning streak on Friday extending the run to 11 days of gains. That’s the best such streak since 1987 and although I usually ignore the Dow in preference for the broader S&P 500 it’s a notable achievement. As readers know I believe Trump got lucky in many ways because he came to office at a time when the global data flow was already running in favour of reflation. His election, and the focus on the positive aspects of his policy platform simply gave traders and investors the world over an opportunity to trust the data.
- So it’s worth noting the Citibank G10 economic surprise index was up again last week.
- As noted above European stocks struggled. If it's a good day in Asia today there is every chance they'll recover somewhat tonight and catch up to the US rally. But it depends on the mood of the market as we end the Asian session.
- But for all the new records of the last couple of week's there is tension in markets on Friday German 2 year bonds continued their rally finishing the week at a new record low of -0.95%. That’s a sign, along with the rally in bonds across the globe more broadly, and gold over the past week that the stock market rally is masking a deeper disquiet amongst global investors and traders. US 10s finished at 2.31% after the false breakout a week or so ago while Germany 10s finished at 0.19% and UK 10 year gilts ended the week at 1.15%. Australian 10 years have rallied as well closing the week at 2.74%.
- A good example of what’s going on in this bond rally is the positioning of traders in the market at the moment. So while I usually focus my CFTC analysis on currencies and commodities I noticed in the FT this morning that traders are reducing their shorts in US bonds.
- That makes sense given the bond and gold rally is a real warning that traders are still uncertain and unsure about the current environment. And it’s something US “bond god” Jeff Gundlach says could continue. Reuters quotes Gundlach as saying Friday “There is a stealth flight to safety going on. German bond yields are leading the way down…Gold is rising. Speculators remain massively short bonds and the market is going to squeeze them out." He says US 10’s will keep rallying during this squeeze but stay above 2%. It makes president Trump’s speech this week, tomorrow night, really interesting from a positioning and behavioural standpoint.
- On the political front a senior ally of German Chancellor Angela Merkel said if Donald Trump acts to impose tariffs on imports for the region then “Europe should also impose punitive tariffs on U.S. products," Volker Kauder, parliamentary floor leader of Merkel's conservatives, told the Funke media group”. Oh, and data released Friday showed that last year Germany is now officially China’s biggest trading partner!
- As a counter to the bond and gold rally funds are flowing back to emerging markets.
- So, while I've been writing about the breakdown in correlations and this being an asset/stock pickers market the divergence between bonds, gold and stocks suggests something is up in markets at the moment. A tear or a ruction certainly. The big question is it an indicator of a bigger fragility. Time will tell. It's something I'm watching closely.
Australia
- It was a tough week for the ASX with the physical index falling another 46 points Friday, 0.8%, to end the week at 5738. That’s almost 100 points, 95, lower than the recent high and futures traders have market prices down even further with the March SPI 200 contract finishing off another 16 points, 0.3%, on Saturday morning when they closed for the week.
- I watch and report on fundamental drivers of markets but I’m guided by price action when it comes to my actual trading. So to this end both the reversal of the physical index off the top of the current wide uptrend channel is instructive was the inability of the SPI 200 to break up and through the 5789 resistance even though the physical market made a marginal new high a week or so back. You can see the frustration in of SPI traders in the final big red down bar from last Friday.
- In SPI terms support is at 5681 (38.2% of the Jan/Feb rally and then 5652. My daily technical system is short, and I took my long stock position off the Friday before last. Expectation and ebullience as president Trump addresses congress this week and unveils his tax plan could easily reverse the local market's recent weakness if it reignites the next leg of the S&P rally. We’ll know this week.
- For the moment though my recent theme that a large chunk of the good news is baked into the cake for local markets – perhaps this Trumponomics rally globally – remains as the price action in the miners showed even with stellar results last week. It’s not necessarily terminal and doesn’t mean a market crash necessarily. But markets pause and consolidate either in time – sideways market – or in price – things like a garden variety pullback to the 38.2% retracement level. It seems we might be in one of those consolidation periods.
- Looking ahead on the week the release of GDP for Q4 2016 and the partials that feed into it in these next three days are the highlights for the week. Today we get the release of business indicators, including company profits, while tomorrow we get the quarterly balance of payments data which will give us the all important net exports component of GDP.
- Forecasts are still a little fluid but at present the market is currently expecting a pretty healthy bounce back to 0.7% growth which would leave YoY GDP growth at 1.9%.
Forex
- The US dollar got a little of its mojo back on Friday night with the Euro reversing of its current daily downtrend and USDJPY finding support below 112. In DXY terms the US dollar managed to finish above 101 making it three weeks of gains for the DXY.
- Looking specifically at the euro the chart tells the story. A test and rejection of the current downtrend suggests that – for the moment at least – the euro bears still have the whip hand. Alternatively, if you favour just following the price action as I do, traders are clearly watching the parameters of the current down trend.
- For the record EURUSD is at 1.0564, USD/JPY is at 112.12, and GBP USD is at 1.2476 at around 6.25 am Sydney this morning.
- On the Aussie it wasn’t a terrible week. But is was another week of failure to hold levels above 77 cents. At the very least that will remind the bulls to be cautious above that level. For me, it reminds me that while the positives continue to accrue to the Aussie dollar in the current environment it has never really been able to avoid the tractor beam of fear when it engulfs markets. So while the data is still printing better than expected globally, and while stocks markets remain elevated, the bond and gold rally are a hand brake on the Aussies rally. So a pause/pullback looks likely for the AUD/USD and on the crosses this week. That’s certainly how the charts look anyway.
Commodities
- Crude dipped again as it continues to trade within this range. CFTC data showed Friday that the big punters are still increasing their longs in crude. It’s a strong sign they believe in OPEC’s ability to effect prices. But on the other hand there are consistent stories about a lack of demand growth in the US for gasoline and still high stock piles.
- Data released Friday showed compliance is looking good on both sides of the OPEC, non-OPEC production cut. But there is also growing disquiet in the reports I read and interviews I hear and see on radio and financial TV about the ultimate effectiveness of the freeze.
- So while I’m not a bear and continue to have a focus on the range until it breaks. There is a little disquiet entering the market – at least in the commentary space if not positioning. And as you can see in the Tweet below from Bloomberg's chief oil correspondent shale oil is coming back. Anyway WTI finished at $53.99 while Brent ended the week at $55.99.
- Gold is roaring. It’s at $1256 this morning and increasingly looking like the bulls have the market and a run above $1270 is possible.
- Copper bounced back a little Friday. It’s at $2.68.
Today's key data and events (all times AEDT)
- Australia - Company Gross Operating Profits (QoQ) (Q4) (11.30am);
- New Zealand - Visitor Arrivals (YoY) (Jan) (8.45am);
- China - Nil
- Japan - Nil
- Germany - Nil
- EU - Private loans (YoY) (Jan), M3 Money Supply (3m) (Jan), M3 Money Supply (YoY) (Jan) (8pm); Economic Sentiment Indicator (Feb), Business Climate (Feb), Industrial Confidence (Feb), Consumer Confidence (Feb), Services Sentiment (Feb) (9pm)
- UK - Nil
- Canada - Nil
- US - Durable Goods Orders (Jan), Durable Goods Orders ex Transportation (Jan) (12.30am); Pending Home Sales (YoY) (Jan), Pending Home Sales (MoM) (Jan) (2am); Dallas Fed Manufacturing Business Index (Feb) (2.30am); 3-Month Bill Auction, 6-Month Bill Auction (3.30am)
Have a great day's trading.