Originally published by AxiTrader
Market Summary
This is a big deal, folks.
The overnight release of plans for major tax cuts to the corporate and personal tax rates, as well as an outline of a reduced rate to bring profits held overseas back to the United States is one of the major moves markets were looking for when the Trumponomics rally kicked off so many months ago.
So we’ve seen stocks, bond rates, and the US dollar all higher overnight. And there is every chance that these trends, particularly bonds and the US dollar’s recovery, become a big talking point for markets and have asset allocation impacts in cross asset markets for weeks and months to come.
That’s the big deal. The US dollar has been weak and US long bonds relatively low because US data was weak and traders were betting the Fed wouldn’t follow up on its forecast rate rises. But in the space of two days we’ve now had confirmation Janet Yellen is going to keep hiking rates and president Trump’s “Gang of 6” have delivered a tax plan that might get through.
That makes the US the focal point again. And it changes the narrative in financial markets.
That’s a big deal too.
So this morning we have the S&P 500 up 0.4% to 2,507, the Dow Jones Industrial Average up 0.25%, and the Nasdaq 100 is screaming higher up 1.15%. Interestingly the broader Russell 2000 (AX:IRU) is up a stonkingly strong 1.94% - amazing. The corollary of these moves are higher bonds rates - stronger durable goods helped this move – with the 2-year Treasury at 1.48% which is another new post-2008 high. US 10-year Treasury rates have risen 7 points to 2.31% and that has also pressured bond rates across the globe higher.
Another big deal because there is every chance US bond rates keep rising in the current environment.
And we’ve seen the continuation of the US dollar’s recovery with the US Dollar Index up half a percent to 93.4. That’s seen the euro dip back below 1.1750, the pound fall below 1.34, USD/JPY is at 112.80, the Canadian dollar was hammered – thanks to a dovish BoC governor, and the Aussie dollar is back at 0.7850.
Naturally with all of the above gold has fallen out of favour and dropped $9, 0.72%, t0 $1284, while copper was flat and WTI was a little higher after the unexpected inventory draw, but Brent collapsed.
Here's What I Picked Up (with a little more detail and a few charts)
International
- President Trump’s tax plan is out. And the highlights are a reduction in the top tax rate to 35% for individuals (although Congress is free to increase that for the very wealthy), and a corporate tax rate of 20% - Scott Morrison take note. And a one-time tax for profits/assets which are held by corporate America overseas to avoid US tax. The tax plan will consider them repatriated. Business insider has a really good break up of the changes which you can read here. But the key for me is that if this can pass the Congress it’s a positive for the President and for the economy.
- And speaking of positive for the economy last night’s release of durable goods orders for August were stronger than expected with core capital goods up a solid 0.9% while the overall number printed a 1.7% increase for the month.
- Also strong last night was UK retail sales data for September released by the CBI overnight. Retail sales balance jumped to +42 from -10 in August, the highest in two years. Seriously, BOOM. Sterling rallied initially but was overrun by a stronger US dollar.
- Also, Also strong, German exporters are not worried by the strong Euro Ifo reported overnight.
- BoC governor Poloz caught a few traders by surprise overnight delivering a somewhat dovish take on the outlook for rates. He echoed recent comments from the bank that it will be watching the moves in the Canadian dollar closely and highlighted that “Monetary policy will be particularly data-dependent in these circumstances and, as always, we could still be surprised in either direction…We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and center”. That’s code for we don’t want a strong Canadian dollar and we’ll delay hikes I reckon.
- Also on central bankers the RBNZ delivered its OCR decision this morning keeping rates at 1.75% saying it will keep monetary policy “accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly”. On the New Zealand dollar it said “The trade-weighted exchange rate has eased slightly since the August Statement. A lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth”. Another central bank which is clearly sick of the weak US dollar. They’ll get their wish for a stronger dollar it seems.
- And just as I was about to hit publish comments from BoE chief economist Andrew Haldane that rate rises are a good news story hit the headlines. Of course he is right as the retail sales data from the CBI overnight suggests. Rate rises in the UK, the end of QE in Europe, and rate rises in the US are all part of the story that 10 years on from the GFC the global economy has healed and is growing again. Specifically for the UK rate rises mean the emergency measures the BoE put in place are no longer necessary. That's a good thing.
- Could we end up with a civil war in Iraq? That’s the real chance after parliament said the armed forces should go and take the Kurdish oil fields in Kirkuk after the referendum for independence for the Kurds received 93% of the vote. We already know the Turkish President is not happy and has threatened to turn off the Kurds oil “tap”. Something to watch geopolitically and for oil traders as the market tightens up.
Australia
- The S&P/ASX 200 dodged its worst close since February yesterday as it recovered to close down 7 at 5664. SPI traders overnight might have it right for a change today given the leads from the US. They’ve added 22 points to where prices were yesterday afternoon. That would take prices on the physical market – assuming that’s what we see on the open – to a test of this pretty steep little down trend we’ve seen on the ASX lately.
- If the market is going to break then today is the day. If not then that is a powerful signal that it’s not just global investors who aren’t keen on Australian stocks. It’s time to break higher, surely.
ASX200 Daily (Source:Investing.com)
- How long can global investors ignore Australian stocks? That’s the question that local traders might be asking after the AFR reported on a BAML survey yesterday showing that global players are most underweight Australia, and particularly Australian financial stocks, of any of the bourses in our region.
Country Allocation (Source: AFR.com)
Forex
- The US dollar recovery continues and a simple – garden variety – 38.2% retracement of the big fall from the Trumponomics euphoria high seems a reasonable bet as I highlighted in my Forex Today column yesterday. That was a simple technical call. But it’s one that is supported by the changed narrative around the US dollar that is evident in the price action and which I also discussed in yesterday’s forex piece.
USD Index - DXY (Source:Investing.com)
- We’ll see how the US dollar looks when it get to my target of 95.85/96.00 as to whether a bigger recovery from recent lows is in the offing. But it’s worth noting the combination of tax cuts and a hawkish Janet Yellen only needs a little stronger data – say durable goods last night – to push sharply higher. In the immediate term 93.80/94.15 is a big area of possible resistance as well.
- I’ll cover the specifics for each currency pair in my forex today piece a little later this morning. But, suffice to say a stronger US dollar will reverse some of the powerful trends that pushed euro, Canadian dollar, and Aussie dollar to multi-year highs recently. It’s likely to push USD/JPY back to the 114/114.50 region which is the range high for the year, and the pound is biased back toward the very low 1.30’s.
- For the Aussie dollar it reinforces that it is under downward pressure. Certainly, the positive global backdrop which is attendant to the trend to higher rates in the US and across the globe will continue to support. But an undeniably large part of the run to 0.8124 was the weakness of the US dollar. Last night’s low around 0.7836 was spot on important Fibonacci support traders watch – the 38.2% retracement level. So the easy move is done. But the downside still beckons as the US dollar recovers. I retain my expectation of a move toward 0.7750 with a high probability the fall could extend to 0.7650 under current circumstance.
Commodities
- The debate about the outlook for oil continues. As it stands this morning WTI is up 0.35% to $52.06 while Brent dipped 1.28% to $57.69 after its surge earlier in the week. Readers – and viewers of my daily markets today video – know that I believe the trend toward a recognition the market was tightening got interrupted by Hurricanes Harvey and Irma. But as the price action over the past week has shown that change in narrative, and its attendant impact on prices, has re-emerged. This week has been interesting in that vane because we heard from a BP (LON:BP) presenter the market might have turned the corner and then overnight I picked up more commentators with a bullish bent.
- The FT reported “Ben Luckock, co-head of group market risk at Trafigura, said the oil market was turning a corner and a belief by some market players that prices would remain within a tight $40 to $60 a barrel range would not play out. “We are nearing the end of ‘lower for longer’,” Mr Luckock said in a presentation to the annual Asia-Pacific petroleum conference on Tuesday. “This theory may have had its best days.”
- While CNBC highlighted that Jodie Gunzberg, head of commodity and real asset indices at S&P Dow Jones Indices said “The fundamentals are changing and the market is rebalancing”. She added rather bullishly “When we look at the index data, we can see the price could move even as high as $80 to $85 (a barrel). Not immediately, but with their structural backwardation and shortages in the market, you just can't replenish it overnight”.
- Throw in a Turkish threat to turn of the Tap supply 500,000 barrels of Kurdish oil each day, and the inventory draws – not builds – in the US this week and maybe WTI is poised to break higher and Brent will find strong support on its current pullback. Short term Brent needs to hold $56.98/99 to avoid a pullback toward the 38.2% retracement at $55.83.
- Gold has broken down below support and looks like its targeting $1261 after it was engulfed in the perfect storm of an improvement in risk appetite, higher bond rates, and a stronger US dollar.
Have a great day's trading.