Stocks in Europe and the US had a positive night as investors seem to be betting the Fed won’t derail growth and earnings.
But bond and forex traders appear to be almost singularly focused on what the Fed is likely to do in 2017 with the US dollar cutting a swathe through currency markets and bond rates higher again.
Gold has been hammered, the Aussie dollar is around 73 and a half US cents, but base metals and oil have managed to hang in with flat to higher prices for the most part.
The wash-up is that futures traders on the ASX are betting that we’ll have a better day than yesterday with the March 2017 SPI 200 contract up 11 points this morning.
Here’s the scoreboard (7.52am AEDT):
- Dow: 19863 +30 (+0.34%)
- S&P 500: 2262 +9 (+0.40%)
- SPI 200 Futures (March): 5,495 +11 (+0.2%)
- AUDUSD: 0.7352 -0.0057 (-0.77%)
The top stories
1. The US dollar is at its strongest levels since early this century and the Aussie dollar is getting hammered. Stocks might be focused on fiscal stimulus and economic growth but forex traders have their eyes on the reaction function of the Fed to this expected growth in the US. Forex traders also have their eyes on the policy divergence between what the Fed says it will do and what other central banks won’t do in the year ahead. It’s this policy divergence as the Fed raises rates while the ECB, Bank of Japan, Bank of England, RBA, Swiss National Bank and others leave rates on hold which is driving the US dollar’s strength right now.
That knocked the euro down to 1.0364ish, its lowest level since December 2002, overnight. And it’s knocked the Aussie down to 0.7353 as I write. David Scutt has more here on the Aussie.
2. Bonds are flashing a warning sign for stocks. Stocks were higher in Europe and the US overnight after investors seemed to bet the path of Fed tightening won’t derail the US economy from its expected stimulus-induced lift in nominal growth. But that very thing is freaking bond vigilantes out with outright rate rising and curves steepening.
Quoting some Soc Gen research, Jonathan says the sell-off in bonds from the lows now threatens equity valuations. It’s something I’ve discussed as an ultimate consequence here for some time. The question is how far do bonds need to run before stocks traders take notice?
3. Speaking of bonds, the Bank of Japan is going to have an interesting year in 2017. The single most interesting thing about the Bank of Japan’s latest policy initiative from a few months back was that it explicitly said it would keep long bonds anchored around zero regardless of the economic and market activity. That means as rates are rising now around the globe in sympathy with US rates, the Bank of Japan has to buy bonds. Like it did earlier this week for maturities between 10 and 25 years.
Jonathan Garber has been reading a Albert Edwards missive and reckons this situation means the BoJ is going to have to fire up its printing presses again. Which of course is entirely the BoJ’s point. It’s the Japanese version of running the economy hot.
Interestingly, and unhelpfully as the BoJ quietly pops champagne while the yen gets hammered, is a story in Reuters this morning which says rate hikes are back on the radar in Japan. Apparently it won’t change the target rate of the 10-year near zero but just raise short rates. Imagine the communication nightmare.
2017. Already shaping up as another volatile year.
4. Speaking of volatility, the Bank of Mexico just jacked rates up by another 50 points. Emerging market currencies are getting hammered and capital is still flowing from these nations as investors shift their asset allocation mix back toward the US and developed markets.
There is little an EM central bank, any central bank really, can do to successfully arrest a fall in their currency in the face of such a dominant move in the US dollar. But that doesn’t mean they won’t try. Last night it was the Mexican central bank’s turn, Banxico, to react and it decided to exceed market expectations and raise rates another 50 basis points to 5.25%. The peso is 0.4% stronger as a result on a day when almost every other EM currency I watch has lost ground.
Maybe Banxico can actually win this war. Elena Holodny has more here.
5. Speaking of central banks, the end of 2016 and the hand off to fiscal policy probably can’t come quick enough. Enda Curran, writing with Jeff Black and Craig Torres over at Bloomberg, says that 2016 was “the year central bankers discovered their limits”.
The trio go on:
Instead of earning praise for shouldering the burden of sluggish global growth, monetary policy makers this year were scolded for meddling. Negative interest rates were blamed for crimping bank earnings. Massive bond buying programs were singled out for stoking market speculation rather than investment.
Now, amid surging populism and as government spending comes back into vogue, 2017 is shaping up to be the year that central bankers quietly shuffle from center stage.
It’s a really good read – more here.
6. And you can’t miss the latest episode of BI’s excellent Devils and Details podcast with none other than Stephen Koukoulas. The Kouk, as he’s known on Twitter, is one of Australia’s best and most high-profile economists. He famously took on RBA analyst Andrew Roberts’ doomsday scenario earlier this year and got it right.
It’s just of the topics The Kouk discusses with Paul Colgan and David Scutt. You can jump to the post here.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
eBay almost feels like an old fashioned stock despite being in the e-Commerce space.
It’s profitable and trades on a traditional valuation multiple of around 14.6 times forward earnings. According to the Bloomberg consensus; Earnings per Share growth will be 10.4% in 2017.
This puts eBay in a totally different space to the high growth Amazon which is valued at a stellar and potentially far riskier, 85 times 2017 earnings.
eBay’s stock price has had a good run in December but it’s hit the bottom end of chart resistance suggesting potential buyers might be rewarded for a bit of patience at this stage.
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC