The US dollar continues to surge, driving USDJPY to 112.50, euro to 1.0550 and knocking the Aussie dollar back below 74 cents. It’s at 0.7386 this morning.
What’s fueling that dollar surge is strong US data, expectations of a Fed rate hike, and widening bond differentials, all of which are based on traders and investors betting Donald Trump’s policies will drive growth and inflation.
US stocks are holding up though because traders are focusing on the growth aspects, not that US 10s have risen more than 50 points since the election and are at 2.36%.
So as markets ready for Thanksgiving, team USA is winning.
That’s left gold back below $1200 an ounce and emerging market currencies under acute pressure. But the fact metals are still driving higher and stocks are holding in across US markets means that SPI futures are largely unchanged since the close yesterday.
That suggests the local market could hold onto the last two days’ rally. But at 5484, the ASX200 is very close to resistance at 5500. Can it break? That’s the question for traders.
Here’s the scoreboard (8am AEDT):
- Dow: 19083 +59 (+0.3%)
- S&P 500: 2205 +2 (+0.1%)
- SPI 200 Futures (December): 5,495 +0 (+0.0%)
- AUDUSD: 0.7384 -0.0014 (+0.20%)
The top stories
1. The Fed minutes back a December rate hike. But there is also a discussion which might get the bond vigilantes’ interest. The Federal Reserve thinks it will be appropriate to raise interest rates “relatively soon”, according to minutes of its most recent meeting released overnight. Akin Oyedele reports.
The markets are betting that means a 25 bps hike is a lock and there is a small fear in pricing that it could actually be a 50 point move from the Fed.
I’d doubt that straight up, given everything the Fed has communicated over the past year. But the “dot plot” is a fair chance to contain more rate hikes than the two the market seem to be expecting in 2017.
But back to the minutes. The Fed said that staff briefed the FOMC on the potential balance sheet policies going forward. While there looks like there is a clear consensus on buying bonds – QE – when the economy needs it. But there was also a discussion about a smaller balance sheet, meaning the Fed will own less bonds. That could – I stress “could” – put further upward pressure on the curve.
2. The Fed and US economic data is fueling a US dollar surge across the globe. Durable goods, consumer sentiment, and the PMI data in the US were all stronger than expected last night. That’s a great platform for Donald Trump’s policies to launch from.
But it is also fueling an expectation in forex markets that the Fed is going to be more aggressive than many think. That in turn, is causing capital flight from emerging markets – which were previously the only game in town under developed market central bank low growth, low inflation policies. The yuan is at the lowest levels in more than a decade and EM Asia and LatAm forex is getting pumped.
Even the biggest currencies on the planet are getting pummeled by US dollar strength with USDJPY at 112.50 and the euro back at 1.0550. It’s also knocked the Aussie dollar back from its high in the past 24 hours of 0.7440/45. How far the US dollar can rally in the months and year ahead is an open question.
3. The IMF has an ominous warning about Chinese banks hiding bad debts like US banks did for the GFC. You just have to read this story from Jim Edwards which says the IMF believes China’s banks are disguising bad debts by turning them into “securitized packages” rather than writing them down as non-performing loans.
The “untradeable debt” comes from China’s “shadow credit” world, which has generated a massive amount of credit that has the potential to become suddenly illiquid. The debts consist of interbank loans in “a structure potentially susceptible to rapid risk transmission and destabilising liquidity events,” the IMF says.
Even long-term China bulls need to keep an eye on this.
4. OPEC is trying to get a production cut deal done and Nomura says they have a 70% chance of success. That expectation is because “OPEC has a good track record of taking urgent decisive actions to cut output to boost prices”, analysts at Nomura said in a new note looking at the outlook for the cartel’s November 30 meeting.
“The success of Saudi Aramco’s strategic IPO and the long term restructuring of the Saudi Arabia economy also hinges on higher oil prices ahead. Trump’s surprise election win could also shift Iran’s focus on market share to maximising short-term revenue,” Nomura said.
That would increase the chance of a deal. But even though the fiscal imperative OPEC, and non-OPEC, face almost demands a deal the geopolitics of the Middle East can’t be discounted as a potential hurdle. Likewise, while Russia always seemed happy with a production freeze the country seems less enamoured with actual production cuts, Reuters reports.
So that 30% chance of failure is a non-trivial and material risk that OPEC could fail and oil prices will collapse.
5. Beware of data mining. Barry Ritholtz, writing over at Bloomberg, has a cracking article this morning which is highly applicable to traders and investors.
Ritholtz is discussing the ex-poste explanations of why Trump won, Clinton lost, which were obvious to no one in an ex-ante fashion. That is, folks are using a hindsight bias and data mining to find reasons to explain the election. We are all wise after the fact.
It’s worth a read if for no other reason to remind us all that when we are presented with “data” we should question its source and veracity. As Ritholtz says, “You probably have never seen a sales pitch that didn’t have a back test ‘proving’ market-beating returns. If only you had a time machine to go back to the period of time covered by the data set.” Yep, if only I could find a way to invest when I know the outcome.
6. Gold got crushed overnight. It seems rising bonds and stocks plus a surging US dollar is the perfect storm for gold which fell $31 an ounce at one point last night to a low of $1181. Akin Oyedele and Reuters report that Robin Bhar, head of metals research at Societe Generale in London, said: “It’s been a pretty dreadful time for gold . Everything that’s good for growth has been negative for gold.”
That’s seen the price fall a remarkable $158 since the night of the US presidential election. Our gold miners will be under pressure on the ASX today as a result, most likely.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
It’s been a volatile month for online travel booking platform, Webjet.
Through all this, the news has been essentially good. On 9 November, Webjet pleased the market with a positive announcement on F17 earnings guidance and sale of its underperforming Zuji business at a profit. Webjet has also been picking up market share in a difficult environment for travel agents.
Yesterday, Webjet announced a partnership arrangement with Chinese Group Dida Travel. This deal is with Webjet’s relatively new Asian B2B business, FIT Ruums. This business aggregates and distributes hotel booking opportunities to business partners. Dida does the same thing in China and is its largest operator. This deal looks like providing Webjet with a good offering and solid growth platform. The share price was up 9.7% yesterday.
From a chart perspective it would be nice to see the share price clear resistance at $10.85. Otherwise it remains in danger of forming a bearish looking triangle pattern. Clearing that resistance would open up potential to rally back to the previous resistance zone between about $11.25 and $12.20.
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC