Markets Morning 29112018

on November 29, 2018

Morning folks – Welcome to McKenna’s Market Mornings.

In a rush? Here’s the key takeaway

Aussie dollar up 1%+, Kiwi up around the same, USD index down 0.55%, the Dow 617 points to the good for a rally of 2.5%, the Nasdaq 100 up 3.17% at 6,913 and the S&P 500 up 2.3% at 2,743 for a 61 point gain.

That’s what happens when a market wants to be bullish and interpret the Fed chair that way. Of course, he’s definitely shifted gears as I’ve highlighted before. Now for Trump and Xi at the weekend.

Oil collapsed, US bonds remained close to recent levels but oil collapsed and Bitcoin surged 13%.

Thanks again to the more than 300 of you who took the time to fill out my survey.
There are close to that amount of comments and feedback as well so I’ll get to those in time. But thanks for those too, even the odd brickbat – and there were only a few – are still helpful. 
Anyway, here’s another set of stats – 75% of my readers/viewers trade forex, 56% stock indexes, 35% precious metals, 32% Oil and energy, 41% individual stocks, and only 4% cryptos.
Market Summary (As at 8.30amish Sydney after NY close)

I’m not sure Fed Chair Powell brought his dove game to his speech in New York Wednesday. But that the way the market read his comments and the result is soaring US stocks markets and a US dollar which has had a big reversal.Rather my sense is Powell reiterated again the Fed is data dependent. But coming a day after the President again targeted the Fed and Powell with his ire traders read this as a blink. The market reckons that data is slipping and with it the chances of multiple rate rises in 2019 are also.

And that, if President’s Trump and Xi can at least give the impression of a cooling in tensions at the weekend G20 meeting could ignite a big reversal of many of 2018’s trends as we head toward Christmas.

It’s been a good night for stock bulls, USD bears, and owners of “risk” assets.

As highlighted above we’ve seen that in the big rallies in US stocks, the Aussie, Kiwi and also copper which lifted 1.86%. It’s been a universally positive day for risk assets and a number of EM currencies. The Brazilian real is 0.6% stronger against the USD, the Mexican peso gained 1%, and the South African rand picked up around 1.2% day on day.

But the Russian rouble and Canadian dollar lagged. No doubt that was in part because the big inventory build of 3.5 million barrels, the apparent insouciance of Russian President Putin to Saudi calls for production cuts, and the Saudis themselves saying they won’t go it alone all hurting prices. SO both WTI and Brent are around 2.5% lower atb$50.25 and $58.65. Very close to recent lows which must hold to avoid another big drop.

So it’s going to be a good day in Australia and Asia today, European stocks should play a bit of catch up to. My sense is folks want to believe a Santa rally is coming. It may if President’s Trump and Xi call a truce in the trade war. That’s a low probability high impact event.

On the day today, we have Private new capital expenditure here in Australia which, if they follow the construction data yesterday provide a handbrake on ebullience here in Australia. Also out are the HIA new home sales and NZ business activity index. Swiss GDP is out tonight, French GDP, German unemployment and CPI, GBP lending and money supply data and EU business and consumer confidence and climate data.

In the US it’s personal income and spending data. Remember folks, the Fed is data dependent, so this is important data.

Macro stuff that affects everyone and everything – either today or eventually

  • The trouble with central banks who attempt to be honest and transparent is that it can increase volatility. And that’s what happens when you appear to turn dovish the day after the President says the fed is a bigger danger than China :S.
  • That’s what Fed chair Jay Powell has done over the past few months in saying (at different times) that notions of neutral rates are difficult, that rates in the US were a long way from neutral, and then Wednesday in New York that “interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth,” (my emphasis). So, dunno. long way, just below were the messages from chair Powell. All in a few short months and all while still saying what and where neutral is, is a hard concept to grasp.
  • Anyway, You can read the full speech here. I’m not going to quibble with the market’s interpretation because as readers know I signaled my sense the language had shifted a few weeks back. Rather for my newsletter readers the key thing to note is that like yesterday’s speech by vice-chair Rich Clarida, Powell reinforced that this is a data dependent Fed. “While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us. ,” Powell said Wednesday. And in reinforcing that Powell and his colleagues have given traders and investors room to exercise their own worries about the US economy and the fact that it will constrain the Fed from tightening as much as it suggested it would at the September meeting.
  • That’s why the USD has fallen. But what of stocks? Is a weaker USD because the economy is expected to slow, constraining the Fed, consistent with a bounce of close to, or above, 2% in US stock indexes – depending on which one you look at. The answer is yes and no. Yes because Powell is also signaling that the gradual approach will continue and the Fed is not trying to tighten policy yet but aiming at making monetary policy decisions “designed to keep the economy on track in light of the changing outlook for jobs and inflation”. Data dependent.
  • But if you do hold a view the US economy is slowing and if the genesis of the stock market funk was – as I believe it was – the slowing in earnings GROWTH rates as evidenced in the last earnings reports then the big bounce is probably not warranted. As Danielle Lacalle wrote on Twitter this morning as I was writing this, “The biggest mistake that investors can make is to believe that if Fed delays rate hikes it will be a buying opportunity. If you think investment, consumption or credit will soar, think again. The message that action would convey is ‘the economy is in much worse shape, run away'”. Indeed.
  • Equally though, if the Fed is data dependent and if the economy stays strong – as Powell suggested when he said “My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent” – then the Fed will keep tightening. Data is truly the key.
  • So, what of the price action? Three very good days of rallies have delivered close to 4% for the S&P 500 and brought price (futures based) into the 2,733/2,744 resistance zone (different time frames and moves). This looks like important resistance. But a break would suggest a move back to the 2,817/23 region which proved to hard a nut to crack recently. A close on the 4 hours above 2,748 would open the door for this run.
  • And naturally if President’s Xi and Trump have a good meeting we could have the catalyst for further gains next week. Frankly, I’m kind of torn. President Trump and Xi do seem to have an affinity, President Trump does appear to be much more conciliatory when he is actually meeting leaders than when he’s Tweeting or ranting at them. Throw in the GM issue this week which has clearly raised the president’s hackles and we have another complicating factor. That may be the one that tips him more toward holding firm.
  • As this article from Bloomberg on how Trump and Xi ended up where they are in this trade war suggests at the end, “The Chinese still aren’t sure which Trump will show up when the two leaders get together—the leader who surprised China with his determination to see tariffs through, or the deal maker Chinese leaders thought they knew”. My sense is a combination of both. But that doesn’t help. Short term that may help stocks, but if China isn’t yet ready to fold on some big issues the trade battle will continue.
  • US home sales fell 8.9% last month relative to the previous month. That’s a number to remember because housing has been the enabler for bearish views on the economy for a while now. And even though there was a big upgrade to the previous month’s data from -5.5% to +1% the market wants to be bearish on the economy and its impact on the Fed.
  • The USD Index has printed a bearish engulfing candle after Jay Powell’s speech. That’s another failure above 97 and demonstrates the USD is not yet ready to break nor hold the 97.70 recent high. That, in turn, remains the key resistance area. Support in DXY terms is thus 96.50/60 and then below that 95.85/96.00 trendline and fractal. But, the USD Index could fall back to the 38.2% retracement level of the move from ~93.80 which comes in around 96.20/25. Watch the trendlines for indications of a deeper move.
  • Naturally, the corollary of that USD INdex move is the Euro which has had a big rally and a bullish engulfing day. The target would now be back into the 1.1443/1.1515 region which are the 38.2% and 50% retracement levels of the bounce off the 1.1215 low and where the Euro’s rally pulled up last time.
  • Interestingly, if I take the Fibo’s off, erase any trendlines and look at the chart with just my usual indicators what I see is the following. Two ranges, one big, one smaller. One 6 big figures between 1.1200/20 and 1.1815ish and the other 3 big figures between 1.1200/20 and 1.1500. There is a nice symmetry there. So while any run at 1.15 should be resisted given the parlous state of the EU economy that’s coming down the pipe (despite what the ECB keeps telling us). But if 1.15 breaks and certainly if 1.1585 gives way there may be an unexpectedly strong Euro rally. Not my base case. But like Chair Powell I’m dependant on what flows – in this case, price action dependant.
  • USDCAD had a head fake above the recent high last night before a reversal. This one is key for me along with USDSGD as key indicators of the overall USD move. Both daily candles are bearish for the Greenback. Levels I’m watching are trendline support at 1.3217 and 1.3679.
  • GBPUSD is still in the range and not driven by Brexit this past 4 or 5 hours. Rather even though Mark Carney was warning of economic carnage and a big fall in the Pound if the UK goes out backwards from the EU it was Powell’s USD negative comments which dominated. In price terms it’s still in the range but overhead resistance is now in the 1.2850 and then 1.2906 region. USDJPY has reversed from resistance and it is likely it could pullback toward 112.85/113 trendline support. And ifthe NZD breaks 69 cents, IF, lookout. 0.7020 would then become the target.
 PLEASE NOTE – The daily video is back and I will run thought Euro, USDJPY, GBPUSD, AUDUSD, USDCAD, NZDUSD and any other pairs that jump out each morning.  You can subscribe here. 

COMMODITIES-Oil, Gold, and Copper  (depending on what is most interesting)

  • OIL – Another big built in US inventories, signs that Russian President Putin may be happy with oil where it is, and a clear message from the Saudis they aren’t going to cut alone hurt prices Wednesday. The build in inventories of 3.6 million barrels saw US stockpiles grow to slightly more than 450 million barrels which is the highest in a year.
  • Associated with the release was US production data which showed production levels of 11.7 million barrels while exports hit a new high of 6.3 million barrels of refined product. To put the Saudi comment that it won’t move in isolation, even though Khalid Al-Falih clearly still believes the oil market can and does need manipulation, the US production number is up close to 2 million BPD on last year. There’s your swing producer.
  • We’ll see what happens on the sidelines of the G20 when the Russian president meets the Kingdom’s MbS. Now would be a good time to do a deal given where prices are. But they are holding their lows in both WTI and Brent terms, just with WTI above $50 and  $58.40 in Brent terms. If oil can hold and form a base then a rally can ensue. But today’s price action is not constructive and if the lows are taken out the next support in WTI terms is $45.45 and in Brent it’s $54.34.
  • Gold is up half a percent at$1,220 but still not looking out of the woods technically. Silver’s wild ride in its current range continued and that’s the parameter through which I looking at it – range. And Copper having looked biased toward a test of the wedge lows instead bounced to the top. Tough times in some of these markets with their whippyness. But I guess the Aussie’s 1.25% rally, coppers 1.86% bounce suggest some hope for a Xi-Trump truce to go with the perceived Fed message.
PLEASE NOTE – The daily video is back and I will run thought Brent, WTI, Copper,  as suggested last week. Gold and any other commodity that jumps out each morningYou can subscribe here. 

Aussie Dollar

  • Not quite there, yet. The AUDUSD is back above 73 cents with an amazing 1.25% rally on the back of rising risk appetite as seen in stocks, with copper rallying, and with the USD falling. It’s clearly a squeeze of the shorts as much as anything else with players (like me to be frank) underestimating the impact of Powell’s speech on the market. Or maybe it’s just that I’m not surprised by what he said and don’t see him having said anything remarkable compared to what I’ve been writing in this Newsletter has been the shift in Fed thinking.
  • But, we are in a world of headline chasing algos where moves are exacerbated and liquidity thins out around big events and announcements. Given their smaller size that’s partly why the Aussie and Kiwi outperformed the Euro so strongly. But part of it is the linkage with risk appetite.
  • And interestingly we still inside the range from two weeks back. Just, but still below the 0.7335/40 region it needs to crack to run to 0.7440. It may yet. But respecting this 0.7160/0.7340 range unless or until it breaks.

ASX Indexes(mostly SPI because it trades almost 24 hours a day)

  • Base formed, resistance now being tested at 5,765. That the key technically today and if the narrative folks are telling themselves is that the Fed is not going to be a headwind to the US economy or stocks – or even if President Trump has bullied them – then the buyers are going to be in with the hot hand today.
  • So the next target is 5,807 and if the market was to get above, and hold, that level the 5,900 level comes into the frame :S.
Have a great day
@gregorymckenna on Twitter
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