A quick recap: Stocks stayed strangely strong in the US on Friday night given the blowout print of 271,000 new jobs for non-farm payrolls. The result was well north of the market average expectation of 180,000 and far above the top pick of a 240,000 increase.
That all but guarantees the Fed will lift rates in the United States for the first time since 2006 at its mid-December meeting. But, in the end the Dow and Nasdaq managed to post small gains while the S&P fell an almost indiscernible 0.03%.
It’s likely to be a different story for the Australian market this morning however. The December SPI200 futures are indicating a 28 point fall on the physical ASX market to follow Friday’s small gains. But that weakness could be exacerbated by the disappointing Chinese trade data that was released over the weekend. Specifically exports fell 6.9% against the 3% the pundits predicted, while imports fell an incredible 18.8% against the 16% expected year-on-year dip. That’s driven the trade surplus to $61.64 billion and highlights that not only is Chinese growth slowing but client economies are slowing as well.
That’s likely to weigh on sentiment in Asia today and potentially push the ASX, and other indexes, sharply lower. Watch the 5,150 level in the physical ASX – other traders will be.
Already this morning the data has knocked the Australian dollar lower in early trade. It’s only off around 20 pips from the close on Saturday night but as the Fed moves toward tightening, continued US dollar strength is expected by most traders so the pressure is likely to remain on the Aussie. Likewise weaker than expected Chinese data will weigh.
Elsewhere on forex markets the Euro is opening the week a little above 1.07 for its weakest open in six months. Over the weekend Bundesbank president Jen Weidmann and BoF governor Villeroy both reiterated ECB has more room to move policy lower in Europe. 105 seems the target now. Sterling broke lower as well. Th CAD and Kiwi are also under a little pressure after the US dollar non-farm induced surge knocked commodity prices.
Speaking of commodities front contract Nymex crude collapsed to $44.29 on Friday night and it’s likely to be pressured again after the Chinese data. Gold is back at $1089, copper at $2.24 and iron ore remains in the doldrums.
However: the market I’m watching the closest, the one I think is the most dangerous price in financial markets, is the US 2 year note yield. It hit 0.95% on Friday night and closed the week at 0.89% – the highest close since 2011. If we see it break 1% then all heck could break loose in global markets as higher bond yields in the US push bond yields higher in countries that simply can’t cope with higher rates. Certainly watch EM bonds and especially EM corporate bonds. Sure 10 years are the global benchmark and they are rising fast with the US 10 finishing at 2.33% but its the 2’s that might be a better lead for capital flows.
On the data front today in Australia we have ANZ job ads and then tonight its German trade (watch out for more weakness after the Chinese data) and then the OECD economic outlook. In the US, labour market conditions will take on a little more importance than normal. Likewise the speech by Boston Fed president Rosengren will be listened to closely.
You can see what all the other big events and data out this week are in my diary of the week ahead. You can find it here.
The overnight scoreboard (7.37am AEDT, NB: US MArket close is 8am AEDT):
- Dow Jones Industrials +0.26% to 17,910
- Nasdaq Composite +0.38% to 5,147
- S&P 500 -0.03% to 2,099
- London (FTSE 100) -0.17% to 6,353
- Frankfurt (DAX) +0.92% to 10,988
- Tokyo (Nikkei) +0.78% to 19,265
- Shanghai (composite) +1.9% to 3,589
- Hong Kong (Hang Seng)-0.8% to 22,867
- ASX Futures overnight (SPI December) -28 to 5,194
- AUDUSD: 0.7024
- EURUSD: 1.0723
- USDJPY: 123.26
- GBPUSD: 1.5050
- USDCAD: 1.3302
- Nymex Crude (front contract): $44.29
- Copper (US front contract): $2.24
- Gold: $1,089
- Dalian Iron Ore (January): 344 (denominated in CNY)
- US 10 year bond rate: 2.33%
- Australian 10 year bond rate: 2.77%
– Fed speakers are getting a little excited about the prospects for the first tightening in 9 years. Charles Evans, Chicago Fed president, said over the weekend “we’ve indicated that conditions look like they could be right for an increase… The real side of the economy is looking a lot better.” Evans reckons US GDP growth will be about 2.5% in 2016 and that this will change the conversation to the path of interest rate rises not just lift off he added.
Also speaking over the weekend was John Williams, San Francisco Fed president who said Saturday it’s time to raise rates sooner rather than later in order to make the path smooth and a more gradual process. “An earlier start to raising rates would also allow a smoother, more gradual process of policy normalization, giving us space to fine-tune our responses to any surprise changes in economic conditions,” Mr. Williams said. “If we were to wait too long to raise rates, the need to play catch-up wouldn’t leave much room for maneuver,”
He’s also bullish on jobs, growth and the return of mild inflation.
“We’ll reach our maximum employment mandate in the near future and I’m increasingly confident that inflation will gradually move back to our 2% goal…I see real [gross domestic product growth] increasing at about a 2% annual rate on average over the second half of 2015 and next year,” Williams said.
– While crowing at his organisations long held view we’d see a December liftoff from the Fed – Neil McLeish, global director of macro research at Morgan Stanley said in a note this morning that “our fourth quarter macro baseline opens the tantalizing prospect that the Fed will do in December what the market has been consistently wrong about for the last five years, and finally execute a rate hike. Friday’s strong NFP outcome was obviously supportive of this outcome.”
But he added that “in a highly leveraged, dollar-dominated global economy, it will be aggregate financial conditions that dictate the outcome, and we think the light is green.” That means McLeish reckons that there is still plenty of monetary firepower at the ECB, BoJ, in China and elsewhere around the globe to offset the Fed’s move on rates. That also implies continued US dollar strength.
– This is a huge week for markets. It’s clear now that the Fed is going to lift off with an interest rate increase in December. That’s weeks from now but the big debate is what that means for markets.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Over time, it’s looking increasingly as though the US will gradually lead the rest of the world into the next stage of the business cycle. This is characterised by ongoing economic growth but rising interest rates. At this stage of proceedings, cyclical stocks including industrials typically outperform defensive sectors in an ongoing bull market. This rotation between sectors looks to be well under way already in US stock markets.
Pallet maker, Brambles is the type of stock that does well in these circumstances where industrial production picks up over time. It will also benefit from a weaker $A.
Right at the moment Brambles has returned to its 200 day moving average. If it can get clear of this resistance (even after any correction that might occur first) then the $10.90 area is a possible initial objective. Here the latest “bc” swing would be the same size as the “ab” swing and this coincides with the 61.8% Fibonacci retracement of the last major move lower.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC
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