The market reverberations from the Trump electoral victory continued overnight with the US dollar, stocks and bonds all higher.
Those moves were helped by mostly solid US data and comments by Fed chair Janet Yellen that rates will rise “relatively soon” put a lock on a December rate hike in the minds of traders.
The wash-up is that the Aussie dollar is down near 74 cents, the yen and euro remain under acute pressure, while gold and commodity markets are similarly impacted.
It means the 14 points that ASX futures traders are betting the index is up when it opens this mornings won’t be universally applied. Financials did well in New York, and stocks exposed to a lower Aussie dollar might move, but with oil and gold lower there will be plenty of movement in the energy and mining space as well.
Here’s the scoreboard:
- Dow: 18903 +36 (+0.2%%)
- S&P 500: 2186 +9 (+0.43%)
- SPI 200 Futures (December): 5,355 +14 (+0.4%)
- AUDUSD: 0.7414 -0.0054 (-0.72%)
The top stories
1. The Aussie dollar got hammered by a stronger US dollar overnight and is down near 74 cents this morning. The US dollar index has busted up and through the 100 level where it had previously stalled twice since 2015 last night and it sits at 100.94 – the highest level since 2013.
That strength has knocked the Aussie dollar down and through the bottom of its 0.7450/0.7750 range and it’s looking vulnerable. Just how vulnerable is best reflected in the relationship between the Aussie dollar and the US dollar index. I’ve inverted the index (the black line) but you can see all those bears who have gone quiet might become emboldened once again based on this relationship. 70 cents? 71 maybe?
2. Janet Yellen all but guaranteed a Fed rate hike in December. “Relatively soon” is the way the Fed chair described the timing of when rates will next rise in the US. Those two words still leave wriggle room in case something comes out of left field to knock the Fed off its course. But it is clear that save for a Black Swan, rates will be higher after the next meeting.
That’s not earth-shattering news. But what Yellen also said about Trumponomics gave a window into rates in 2017 and helped drive US bonds and the US dollar higher again overnight. She said “markets are anticipating…a fiscal package that involves a net expansionary stance of policy and that [is] in a context of an economy that is operating reasonably close to maximum employment with inflation heading back to 2 percent”.
Translating from Fedspeak, that means rates will have to adjust to take account of stimulus.
3. But the most important thing in markets over the past 24 hours was not Janet Yellen. It happened in Tokyo. Traders are used to foreign exchange intervention by central banks. But I’m guessing when the BoJ called through to bond desks in Tokyo yesterday and said “I’ll buy any amount of JGB’s”, bond traders’ hearts were aflutter.
The important of this action, to keep bond rates anchored near 0% in Japan under the BoJ’s policy framework, is the first look at the bank’s plan to be credibly irresponsible. That is even when inflation, or growth, picks up, the bank won’t let bond rates rise. That keeps policy more accommodative than it otherwise would be, helping the economy. And it also sends a signal to forex traders that the policy divergence between the Fed, BoJ, US, and Japanese economies will widen. That helps undermine the yen and has helped propel it to 110 this morning. It also suggests BoJ governor Kuroda might get what he wanted when he took rates negative back in January this year. USDJPY back in the mid 120s.
4. I have a message for emerging market central banks – do not panic. Mexico’s central bank raised rates by half a per cent to 5.25% last night and issued a statement which suggested it should have done anything but that. Elena Holodny has a full report here but Banxico said the global economy has become more complex and noted that “although the global economy had given indications of a moderate recovery in the third quarter of the year, the possible implementation in the United States and other countries of some measures to hinder external commerce and foreign exchange, makes the balance of risks to the growth of the global economy [deteriorated]”.
So the bank clearly raised rates to protect the currency. But USDMXN is up 0.8% on this time yesterday at 20.82. Own goal? Time will tell. Yesterday I noted that Malaysia’s central bank is trying to get offshore banks to stop trading in the unofficial ringgit market to protect the country from the US dollar strength. But some traders and investors are saying this is a capital control and could actually cause capital flight.
It’s easy for an Australian to say be like the RBA and let the currency rates adjust because there is nothing you can do about a stronger US dollar. But EM central banks might want to call the RBA for some advice because any hint of panic will cause what they are trying to stop.
5. And on the topic of “don’t panic”, here’s a piece from Aberdeen Asset Management saying Trump’s policies can’t stop the fastest growing economies in the world. Devan Kaloo, global head of equities at Aberdeen Asset Management, says:
Developing economies, on the whole, are in a better position to weather uncertainty than even a few years ago. Economic and monetary policies are very orthodox and this has been paying off. Inflation is largely under control or falling. Currency weakness may slow but should not prevent central banks from cutting interest rates to support growth. At the corporate level, there are signs the earnings cycle is turning for the better.
6. Last night British retail sales data shattered expectations printing 1.9% for the month of October, but fears still linger of the terrible impact of Brexit. Here’s Goldman Sachs’ doomsday Brexit scenario. Goldman isn’t expecting a recession in the UK anymore and is in fact actually expecting growth in the UK to be positive, although below the pre-Brexit track. But Will Martin has the investment banks disaster scenario here.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
James Hardie Industries
James Hardie had an extraordinary trading session yesterday. The company trimmed its profit guidance for F17 producing a sell-off which turned on a dime to become a significant rally. The stock closed 9.4% above its low.
The downgrade in guidance was only about 4%. It’s now $US 250-270m compared to $US 260 -290. This was also due to relatively short term factors. The company is unable to produce enough of its building trim to satisfy demand.
The housing market has been bedrock of the US economy over the past couple of years. With continued population growth and an improving labour market that should continue even if interest rates are going to get a bit higher. Last year 77% of James Hardie’s revenue came from its US building supply business.
Patient buyers, prepared to wait for possible value opportunities might be interested in the chart support zone between about $17.50 and $18.50
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC