Trump's Trumped His Own Stock Rally

Originally published by AxiTrader

Key Takeaway

Stocks lower, the VIX higher, bonds a little bid, and the US dollar marginally weaker.

There’s been more noise than light in the past 24 hours as traders wonder if the trump rally has hit it’s first, and material hurdle. That’s hard to tell after just a day.

But uncertainty is never the friend of bull markets so we’ll see how things go in the days ahead.

What You Need To Know

International

• It's all about Donald Trump and his executive order banning travel from seven countries again this morning. Of course the ASX and Japanese markets were off yesterday. That was followed by 1%+ losses across most of Europe and then weakness in the US stock market overnight.

• Earlier this morning the S&P 500 was down more than 20 points – a little less than 1% - but it ended up off just 13 points at 2280. The Dow was down more than 200 points at one stage but managed to close off just 122, 0.6%. The Nasdaq 100 lost 0.8% as tech companies seem to be a little harder hit from the immigration ban while the Russell 2000 (AX:IRU) had another shocker falling 1.34%

• Yesterday I highlighted the forex market open was a sign that traders were worried about the impact of the travel ban on markets. It’s fair to say today that even after a big fall in stocks, a USDJPY rate in the mid-113’s and gold at $1196 that there remains substantial room for a reappraisal of the impacts of a Trump presidency.

• Since November traders across all asset classes have focussed on the upside from Donald Trump’s policies. But there was always darkness lurking just beyond the light. Policies that would add to US growth sat in a mix with those that seek to add costs and uncertainty to business.

• Last night the president made good on another promise. This time on regulations signing an executive order restricting the growth of regulations. The EO says for every new regulation two need to be cut. This is one of the core planks of what business wanted and why stocks have rallied so hard. Yet it's lost in the maelstrom of uncertainty created by talk of Walls, tariffs, and immigration.

• Has the emperor got no clothes? That's the big fear traders now harbour.

• That’s a reasonable question to ask because uncertainty has risen materially in Trumps first days because of his Executive Orders. This is not the conciliatory president elect whose acceptance speech on election night saw the market turnaround from its mini-crash in the wake of Trump’s victory. The Dr Pangloss in me hopes this is just an early administration flurry and things will settle down. But the risk is that uncertainty causes money to be withdrawn from markets and placed in cash and bonds. . That could crash stocks and the US dollar and drive rates lower.

• Indeed the CBOE Volatility Index is up 17% overnight to a still low 12.38. As I say this is only a very muted response so far. This may be it – the regulation EO is the one business wanted after all. But we’ll see in the days ahead.

I've done a separate piece on the VIX and what it means.

Elsewhere

• German inflation is through the roof – relatively anyway. Last night data showed that inflation in Europe’s biggest economy rose to 1.9% - a three and a half year high. The stock selling kept German bonds in check but the periphery of Europe came under pressure. French yields rose on election uncertainty.

• Indeed there is growing uncertainty around Italy and it’s place in the euro. Overnight both the Italian and European central banks felt the need to say that Italy leaving the euro would be a disaster. That cam after comments by 5-star leader Beppi Grillo last week that a referendum in Italy on its place in the euro needed to be held so Italians could work out the costs and benefits.

• Bank of Italy deputy governor Rossi told radio that “the scenario is one of catastrophe and disaster…this does not mean it cannot happen, because anything can happen”. He warned heading back to the Lira would devalue “everybody’s savings”. In Vienna Austrian central bank boss Ewald Nowotny said “It would be economic suicide for Italy to leave the Euro zone. The same is true for France”.

• In US data consumer spending rose 0.5% in December, incomes were up 0.3%, wages 0.4%, and core PCE prices rose 1.7% from a year ago. Also out was pending home sales which rose a stronger than expected 1.6%.

• More than a million Britons have signed a petition saying they don’t want Donald Trump to come for a state visit.

Australia

• It was clear early that Australian traders were worried about the impact of Donald Trump’s policies on other traders and investors. They marked the US dollar lower from the 5am Sydney open and then sold the ASX down heavily.

• In the end the S&P/ASX 200 finished 52 points lower at 5661. But, while today’s trade may have had its genesis in disquiet over president Trump’s actions, and the backlash it has caused around the globe, it also fit neatly with the technical failure to break resistance from the high of 5827 on January 9. Here’s the chart from my Reuters Eikon terminal.

• Looking at the internals the fact that 160+ of the 200 stocks in the ASX200 and all sectors of the index down tells you that there is a lot of fear flashing through traders minds. That’s not unreasonable really and the SPI 200 is down another 15 points this morning.

• The key levels to watch are 5600 on the physical ASX 200 and 5550/60 on the SPI 200.

• This morning we get the release of the NAB’s business survey. This should give a window into the current situation in the Australian economy through the prism of Australian business. That’s important because the index gives us a look at conditions, confidence, trading, profitability and employment situations. Through this index we can judge where the economy is headed in 2017 and beyond. Worth noting is that business optimism and conditions have been falling recently and the NAB has a forecast for two more rate cuts in Australia this year. That’s because they think 2018 will start to look like a weak spot later this year – one which the RBA will seek to bolster via rates moving to 1%.

Forex

• The US dollar index is holding in at present because the little risk off trade has knocked many currencies a little lower. That’s except the two safe havens – the Swiss franc and the yen – which are 1.1% and 0.3% stronger against the US dollar respectively this morning. USDCHF is at 0.9956 while USD/JPY is all the way back at 113.77 after closing above 115 on Friday night.

• Interestingly though after failing in the 1.26/27 target zone we had late last week GBP came under selling pressure again to kick the week off. Its down 70 odd points at 1.2475.

• The Aussie dollar is hanging tough. It made a low in the mid 0.7520’s as support in front of 75 cents remains fairly robust for the moment. The NAB survey is a potential risk, or boon as it may be, for the Aussie today.

• Naturally the big event today is going to be the Bank of Japan decision on monetary policy. There is little, if any, expectation the bank will change policy. But there is some chance it will upgrade it's outlook for the economy and for inflation. That could be Yen supportive. But teh bank is also likely to reaffirm its commitment to keeping the 10 year around 0%. Indeed that is the beauty, and the prescience, of the BoJ's policy change last year. The signaled a commitment to keeping bond rates low to allow the economy room to heal and grow,

Commodities

• The price of gold is really interesting insofar as it hasn’t really rallied over the past 24 hours. It should be higher if traders are really spooked by Trump and this just isn’t stock specific fear. Certainly gold bounced perfectly off support on Friday night – that tells you there is plenty of support at present. But if Trump is really going to spook folks we’ll see the shiny stuff back above $1200/$1210. Then we’ll know something funky has begun.

• Crude is lower again. WTI is down 1% to $52.63 while Brent is off just 0.5% to $55.26. As I wrote yesterday the market is super long of oil and is vulnerable. This $52.50 region is the one I’m watching in WTI to kick off a clean out lower now the trendline from November has broken.

• Copper is caught in the maelstrom and is down 1% this morning.

Today's key data and events (all times AEDT)

• Australia - Private Sector Credit (MoM) (Dec), Private Sector Credit (YoY) (Dec) (11.30am)
• New Zealand - Visitor Arrivals (YoY) (Dec) (8.45am)
• China - Chinese New Year (24h)
• Japan - BoJ Monetary Policy Statement (1pm); BoJ Interest Rate Decision (n/a); BoJ outlook report (2pm); Housing Starts (YoY) (Dec), Construction Orders (YoY) (Dec), Annualized Housing Starts (Dec) (4pm); BoJ Press Conference (5.30pm)
• Germany - Retail Sales (YoY) (Dec), Retail Sales (MoM) (Dec) (6pm); Unemployment Change (Jan), Unemployment Rate s.a. (Jan) (7.55pm)
• EU - Unemployment Rate (Jan), Consumer Price Index (YoY) (Jan), Consumer Price Index (YoY) (Jan) (9pm)
• UK - Gfk Consumer Confidence (Jan) (11.01am); Net Lending to Individuals (MoM) (Dec), Consumer Credit (Dec), Mortgage Approvals (Dec), M4 Money Supply (MoM) (Dec), M4 Money Supply (YoY) (Dec) (8.30pm)
• Canada - Industrial Product Price (MoM) (Dec), Raw Material Price Index (Dec) (12.30am)
• US - Employment cost index (Q4) (12.30am); Redbook index (YoY) (Jan 27), Redbook index (MoM) (Jan 27) (12.55am); S&P/Case-Shiller Home Price Indices (YoY) (Nov) (1am); Chicago Purchasing Managers' Index (Jan) (1.45am); Consumer Confidence (Jan) (2am);

Have a great day's trading.