6 things Australian traders will be talking about this morning

The Extreme Sailing Series 2016. Picture: Jesus Renedo/Lloyd Images

Red.

That’s the predominant colour on my screens this morning as stocks in Asia, Europe and the US were mostly lower. There is also red across many forex markets as well with the US dollar lower after pushing aggressively higher – especially against the yen – at one point before it reversed overnight.

That US dollar weakness has lifted the Aussie dollar back to 75 cents at one point before drifting back below that level again – that’s about the fourth time in a week or so.

Elsewhere oil has managed to grasp failure from the jaws of success. It was up 6% at one stage last night but is now back at $52.35 in WTI terms for a gain of just 1.65%. Gold is a little higher and copper is at risk of a big break lower if $2.59 a pound gives way.

The wash-up is that futures traders on the ASX have marked the December contract down 23 points suggesting a weak open when trade begins this morning.

Here’s the scoreboard (8.10am AEDT):

  • Dow: 19795 ++40 (+0.2%)
  • S&P 500: 2257 +-2 (-0.10%)
  • SPI 200 Futures (December): 5,554 -19 (-0.4%)
  • AUDUSD: 0.7488 0.0030 (0.40%)

The top stories

1. This could be why Australian stocks struggled yesterday. Just two points. That’s all the ASX 200 could muster as a gain yesterday even though the futures were pointing to a 23-point lift when last week’s trade closed Saturday morning. To say this was disappointing is an understatement.

But as the local market gets closer to the highs of the year around 5610, questions of overall market valuation will naturally be filling the heads of investors and traders. My guess is they are still anchored to the year’s lows, not last year’s highs. That means prices will feel stretched.

Perhaps another reason why the ASX is struggling is that it has caught up to the moves in the US and needs a further push higher in this Trumponomics rally to lift local stocks. Here’s the latest update of this chart we’ve been watching for months.

ASX 200 and S&P 500 Daily prices (Source: Reuters Eikon)

2. The head of JP Morgan’s giant corporate and investment bank said the market’s moves have perfectly mirrored Trump’s policies – but added there are risks. The division Daniel Pinto runs at JPM generated close to $27 billion in revenues in the first nine months of the year and $7.4 billion in profit. He’s got eyes and ears in all corners of markets and banking and Business Insider’s Matt Turner sat down with him to talk about the business, the markets, and the chart his boss Jamie Dimon was frothing over.

On markets, Matt asked Pinto what he makes of the post-Trump market reaction which has sent stocks to record highs and driven bond rates and other assets exposed to inflation.

Pinto said:

“When you listen to his potential policies, the market reaction is pretty much the mirror image of what he might do. He is pro-US growth, so therefore what you have is higher interest rates and the potential for the Fed to be more aggressive than it would have been otherwise. The equity market valuations we’re seeing aren’t low, but there could be additional momentum, particularly in financials. It is not such a surprise.”

Pinto said the “reality will come” of what Trump actually does. That sets up some risk given so much has been priced in already, and Pinto said once we see what Trump is actually implementing then “the market will adjust”.

3. Morgan Stanley says US 10s are at an “important” level. I wrote a piece on the bond market rout yesterday and what’s driving it and concluded that the selling may not abate and rates could rise further.

For me, the big question of the bond market rout is how high rates have to go before they become a handbrake on the US equity market rally.

So I was interested in Jonathan Garber’s piece covering a note from Morgan Stanley strategist Matthew Hornback, who says the current level of 2.50% for the US 10-year yield is “important” and that there are two paths going forward. Hornback says rates will either head back into a 2.00/2.2% range or up to 3%. He is not a near-term bear and favours a retracement of recent selling.

4. And here’s a different Morgan Stanley analyst saying the scariest four words in finance when it comes to the US dollar for 2017. “This time it’s different” are widely regarded as the four most dangerous words in finance and economics – perhaps life. But Andrew Sheets, Morgan Stanley’s excellent chief global cross asset strategist, says the outlook for the US dollar in 2017 is different to the failed rallies we’ve had in recent years.

Bloomberg reports Sheets has four reasons why that will be so. They are: manufacturing is back; the Fed is close to fulfilling its mandate; inflation expectations are rising; and the Fed is still going to take its time. More here.

5. Foreign investors just sold Asian emerging market stocks and bonds at the fastest rate in three years. At a macro level, everything in markets is about Trump right now. Investors trying to anticipate the winners and losers are moving money around and reallocating capital to either profit or protect themselves from the expected moves.

Nowhere is this more obvious than in emerging markets, which have seen big outflows recently. David Scutt reports the team at the ANZ said $US22.1 billion in foreign capital was yanked from Asian emerging market bonds and stocks last month, accelerating sharply from the levels in October. Interestingly, Taiwan accounted for more than third of the equity outflows. More here.

6 Okay. I agree with Donald Trump that free markets are a “dumb market”. Linette Lopez has her take on what that means. One thing that has bugged me for years is the political belief that the rights of the company usurp the rights of individual citizens, because if companies prosper then so will the citizens. Of course I’m stylising the argument but that’s essentially what “free markets” has meant in recent years. Given that we know managers manage for shareholders, not citizens, this notion stuck me as both ridiculous and ultimately self-destructive.

Cue Brexit and Donald Trump.

Already Trump has popped Boeing for the cost of Air Force One, and last night he popped Lockheed for the cost of the F-35 fighter. His modus operandi when it comes to companies appears to flow from his comments about Boeing. Trump said words to the effect of “it’s okay for American firms to make a lot of money, just not that much”.

So when I hear him say in response to a question on Fox about the free market, “It’s the dumb market”, I get what he means.

But Linette Lopez worries Trump could turn America into Argentina. I doubt that, given whom he is surrounding himself with on the markets and economic front. I can’t imagine Wilbur Ross, Steve Mnuchin, Jamie Dimon, or Gary Cohn buying into that plan.

But Linette maps out how she thinks things could go wrong. She has more here.

I’m Greg McKenna and you can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

From Ric Spooner at CMC Markets, here’s today’s Stock to Watch

Woodside Petroleum

Oil staged a weak finish in US markets and closed well below where it was trading in our time zone yesterday.

While the OPEC production agreement will help support oil prices, traders are alert to the potential for increased shale oil production and producer hedging in the mid $50’s range.

That suggests a soft day for local energy stocks. The Woodside chart is setting up a zone of resistance in the $31.50 to $32 range. The upper boundary of this is the 61.8% Fibonacci retracement of the last big down trend.

A quick move back into the gap created by yesterday’s strong open would tend to confirm this resistance as a significant hurdle for a while.

Source: Supplied

Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter:@ricspooner_CMC

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