Stocks Surge Again As Bonds Rally Off New Highs

Originally published by AxiTrader h2 Market Summary (6.43 am)/h2

Stocks bounced, the US dollar retained a back foot stance, and the fact that US 10-year bonds traded over 2.9% for the first time in 4 years seemed to matter not to either asset class overnight.

So it is this morning that we find ourselves, traders, and investors all with a continuation of Friday’s late afternoon reversal and much anticipation about Wednesday’s release of US CPI data. It’s been a long time since the release of the CPI in the US has taken on this much prominence. But traders are on tenterhooks to see if the wages data really was the canary in the inflation mine – or not as may be the case.

So as I write Europe’s bourses have ended with gains above 1% on all the major markets I watch saver for Milan where the FTSE MIB which rose 0.77%. Across the Atlantic with a little over an hour to go before the close in New York stocks are boldly in the green with the Dow up 2.26%, S&P 500 up 1.26%, and the Nasdaq 1.84% higher. Can we melt into the close?

As a result the SPI is betting on a solid rally today having added 44 points now to yesterday’s close.

On forex markets the US dollar is on the back foot again after so many pairs bounced off important support levels Friday. In US Dollar Index terms the US dollasr is at 90.19 – it still needs to take out 91. Euro is back up at 1.2283, USD/JPY is hanging in at 108.65 while the Aussie is at 0.7842 while the kiwi is at 0.7246 and the Canadian dollar is at 1.2600 in USD/CAD terms.

On commodity markets oil has jumped despite OPEC again upgrading its forecast for non-OPEC production in its monthly outlook. Global growth has also seen it increase demand. That, and the US dollar's dip, has seen WTI rise 0.86% and Brent 0.41% with both prices currently siting at $59.71 and $63.05 respectively. Gold is also higher on the back of the weaker US dollar and is trading at $1324 while copper has bounced close to 2% to $3.0765 – still relatively weak by recent standards.

And in US bond markets he 10's are at 2.86%, the 2's are down a couple at 2.08% and the curve is at 78. Recession anyone? Ahem :S

On the day today we get a window into developed market inflation with the release of Korean export and import prices as well as Japanese PPI. Tonight we get UK inflation data in the form of PPI, RPI and the overall inflation rate. Otherwise its fairly quiet. And of course my favourite monthly release here in Australia – the NAB business survey – is out.

• US vice-President Mike Pence has said the US could talk with North Korea. Détente is alive an well at the Winter Olympics it seems. Good news.

• We got more bones on President Trump's budget plan for 2019 overnight and it is a very stimulatory outlook for the economy with money for infrastructure and opioid abuse among other things. Key here is that the White House – and others – are now upping the outlook for the economy. 2018 growth was upgraded to 3% from the White House’s previous 2.4% outlook. It is then looking at 3.2% for 2019 and 3.1% in 2020. On the inflation side of the ledger the forecast is for 2.1% in 2018 – down from 2.3% - with 2% in 2019 and 2.2% in 2020. Unemployment is also expected to improve to 3.9% this year and then 3.7% and 3.8% in the out years. All big drops. No wonder White House budget office boss Mick Mulvaney said there is a chance of a yield “spike” on the back of these forecasts and the associated increase in deficits and thus borrowing by the US Treasury.

• Ray Dalio, founder of Bridgewater – the world’s biggest hedge fund - released his latest thoughts on markets and the economy last night. He says his view on where the US is in the cycle has changed in the past 10 days and specifically that the chances of the US economy overheating are growing in this “late-cycle” stage. You can read the full post here. But the key takeaway of what he says has to do with the Fed and US bond rates. Dalio wrote (my emphasis), “recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was. These reports understandably led to the reactions in bonds, which affected stocks as they did. Then on Friday, we heard the announced budget deal that will produce both more fiscal stimulation and more T-bond selling by the Treasury, which is more bearish for bonds. And soon ahead, we will hear about a big (and needed) infrastructure plan and the larger deficits and more Treasury bond selling that will be needed to fund them. In other words, there is a whole lot of hitting the gas into capacity constraints that will lead to nominal rate rises driven by the markets. The Fed’s reactions to them and the amount of real (inflation-adjusted) rate rises that will result will be very important, so we will be monitoring this closely.

• It’s why the near term outlook so heavily hinges on tomorrow night’s inflation data. Like the wages numbers in the January payrolls release a couple of Friday’s back this will only be one month’s number. But if it seems to confirm what wages suggest there is every chance we see 3% on the 10’s and a reinvigoration of bets the Fed is getting behind the curve with all this stimulus. Of course, the opposite is also true. Low inflation could hammer the dollar and see bonds bid. That would help the stock market recovery.

• Interestingly, on this front, a NY Fed survey of workers shows they are expecting the biggest wage rises in years. At 2.73% consumers are expecting the biggest lift in wages since the survey started a few years back in 2013. Worth noting is that it’s clearly following the rise in hourly earnings and is a volatile series.

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• I’ve mentioned in the past how the worm has turned for the big tech giants. Two things happened overnight to confirm that. First a German court found that Facebook's (NASDAQ:FB) use of personal data is illegal because it did not adequately secure the informed consent of users. The other thing was that Unilever (LON:ULVR), one of the worlds biggest advertisers, has threatened Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL) with pulling its ads unless they clean up their platforms to ensure kids are protected and they do not create social division. Excellent activism for society but also interesting challenges for the platform giants.

• The Bank of England is sending some mixed signals. Over the weekend chief economist, Andrew Haldane said there is no rush to raise rates. That good based on some Visa data released overnight which showed UK consumer spending is in the doldrums. But then overnight BoE MPC member Gertjan Vileghe said a further rise was needed on the back of the global increase. Also on the hustings was MPC member McCafferty who said an accelerated pace of rate rises might be necessary.

• The WTO released its guesstimate of global trade overnight in its quarterly outlook and says that its index continues to suggest above-trend growth. “The recovery of 2017 seems to be extending into the first quarter of 2018 at least, based on things like strong export orders, strong air freight and container shipping and other indicators. So it seems like there hasn’t been any slackening of momentum,” WTO economist Coleman Nee told Reuters.

• Bounce. That’s what the local market is expecting this morning after another solid night on US markets has allowed SPI traders to shake off the little disquiet of the Banking Royal Commision yesterday and bet on a solid rise of 39 points when trade kicks off today. At 5,780/85 the SPI is right back at important resistance as it recovers from last week’s lows. That level represents the 38.2% retracement of last week’s fall and roughly the top of that 3-4 month trading range the ASX/SPI traded in last year. A break would be positive if it happens today or in the days ahead. It could augur well for a run toward 5,890. Here’s the chart.

• The NAB business survey is out. We’ll be looking to see the continuation of what is some very solid business conditions, confidence, trading, profitability, and hiring.

• The battle for the US dollar is not yet over and there remains clear sentiment in forex markets that its attractions are still lacking. Indeed even though Ewald Nowotny again accused the US of leaning on the US dollar overnight ING was out with a report saying the euro is not yet strong and that Mario Draghi and his colleagues aren’t overly worried that it will derail their inflation target attainment. I agree with that take at the moment. The trouble is – and why Nowotny is leading the charge in calling out the US – that if the ECB continues on its path to end QE and then eventual increases in interest rates they are likely want to do so with as little upward pressure on the Euro as possible. ING makes the point that there is too much focus on the EURUSD and that the Euro TWI has not moved in the same manner. That’s correct. The high correlation between the euro and yuan among others does tell the story of a broad-based US dollar decline rather than just a surge in the euro. But the ECB, and other central banks are wary of unfettered US dollar weakness.

• But the price action since Friday’s stocks turnaround tells us that traders are on balance less bearish than they were, but still hold a bit of a jaundiced view of the US dollar. That, and the fact that euro bounce off 1.22, USD/JPY rejected a range break (that sounds counter-intuitive I know because it means the US dollar is stronger but its indicative of support/resistance holding in forex at present), and the Aussie – among others – reversed near important Fibo support, has all combined to see the US dollar still unable to break up and through 91 in DXY terms. So all I can credibly say about the US dollar right now is that it has had a pause in its down trend. It may still have further to fall.

• The release of CPI data tomorrow night in the US hasn’t been this important for forex markets in years.

• Today’s forex chart of the day, as a result, has to be euro. It’s rejected a high but bounced from important Fibo support. That sets up important levels. While the 38.2% level of the recent rally – with a bit of tolerance for the importance of round numbers – holds firm at 1.22 euro could drift back toward recent highs. If it breaks then the target would be 1.2090/1.2120.

• OPEC increased its expectations for competitor growth in supply for the second month in a row. In its monthly outlook the cartel said non-OPEC supply growth is expected to grow 1.4 million bpd in 2018 which is a big lift of 250,000 bpd from last month. “The steady oil price recovery since summer 2017 and renewed interest in growth opportunities has led to oil majors catching up in terms of exploration activity this year, both in the shale industry and offshore deep water,” OPEC said. But it wasn’t all bad news for the bulls with OPEC saying demand for crude is still rising and Q4 demand will be 700,000 higher than the same period last year.

• So this morning with the US dollar lower, markets in a more ebullient mood, and the above oil prices are higher. WTI has put on 1.03% now (6.13am) while Brent is up half a percent. Both prices are off thier highs for the day however and as such are still not out of the woods when it comes to the recent bearish price action. Friday night’s lows are now critical to the outlook. In WTI terms a break of $58.05 would open a deeper move. It has to break first though. Here’s the chart:

Have a great day's trading.

Written By: Axi