Rising equity prices remain the path of least resistance as US indices push to new record highs. The Fed continues to remove itself from the considerations of good/bad catalysts to market dynamics, leaving US-China trade talks as the only factor. Even the impeachment proceedings are far from being considered as material to risk. Indices push higher after each piece of good news on the US-China trade war front (Kudlow's comments), bounce back swiftly on not-so good news, while macro US data makes no difference (more below). Intermarket moves reflect a broadening risk-on climate, as USD and JPY weakness underpins strength in NZD and GBP, and even CAD is recovering alongside oil. How can we extend in this fashion? The Premium video below highlights my updated analysis on the expected limits of the current extensions in SPX and DOW30, with a focus on USDX, EURUSD, USDJPY and GBPUSD.
The chart breakouts in technology, semi-conductors and financials highlight that these industries have led indices over the last 4 weeks, at the expense of typically defensive sectors (utilities and real estate). US 10-year yields remain on a gradually rising trend since Sep 3rd, but not yet posting higher highs in the channel. 1.912% and 109.30 are the required closing levels for the 10-year and USDJPY to lead momentum higher.
US retail sales matched expectations with a 0.3% rise in October, while industrial production fell 0.8%, posting its biggest drop in 10 years. Fed Chair Powell's testimony did everything to confirm markets' positioning of no rate cut next month. The markets-data matrix has entered a confluence where a rate cut is not needed to preserve indices' ascent, considering no new negative developments traspire from the trade talks. But traders will soon require a firm confirmation from Chinese officials about a trade agreement deal instead of one faction of the US delegation or another. Once that's done, the 2nd catalyst is finally removed from the list of potential obstacles. But I strongly expect that a full trade deal will never be realized between the US and China i.e. China will never yield completely to all of Trump's demands.
Global equity indices are a lower across the board due to a number of factors after the S&P500 posted its 19th record high of the year, matching the same number of highs in 2018. The DOW30 remarkably matched (but did not break above) its high from earlier this week. Not only Trump's speech stayed far away from confirming reports of removing US tariffs on China, but also renewed his threats towards Beijing. The RBNZ's surprise decision to not cut rates is also contributing to the risk-off climate, especially as Fed chair Powell will be expected to deliver the same message to Congress (no need for any more rate cuts any time soon). A new trade was issued yesterday, backed by 5 charts.
Powell's testimony to lawmakers at 10 Eastern text of speech may be released as early as 8:30 Eastern or 13:130 London) is expected to maintain the same neutral tone he held at last month's post-FOMC press conference, but the extended Q&A period will shed light on the extent to which he is deviating away from a December rate cut. So far, the market sees no chance of a rate cut until Spring.
Trump (and the markets) will be busy watching the first day of the hearings on his impeachment, but no urgency is expected to weigh on markets unless there is a sign that Republicans are clearly starting to turn on their president.
One more regarding to China –Remarks from US officials expressing denouncing the violence in Hong Kong and backing their support for protesters may lead to a pushback from Beijing in the form of bellicose statements relating to the trade talks, especially after Trump's renewed threat that tariffs will “raised very substantially” if no truce was reached.
|Fed Chair Powell Testifies|
|Nov 13 16:00|
|FOMC's Quarles Speaks|
|Nov 14 10:30|
|RBNZ Gov Orr Speaks|
|Nov 13 19:10|
The pound jumped by a full cent to 1.2898 after Brexit Party chief Nigel Farage said his party will not run in Conservative-held seats in next month's election so as to help result into a victory for the Conservatives and for Brexit (More below). China's consumer inflation hit 7-year highs, complicating the PBOC's decision to cut rates last week. CFTC positioning data showed growing CAD longs and EUR shorts. This week's market highlights include: UK jobs (Tues), UK and US CPI (Wed), Powell's Congressional testimony (Wed), RBNZ rate decision (Thurs), UK retail sales (Thurs) and US retail sales (Fri). Gold printed 1448, stopping us out at 1450. A new Charts analysis on gold has been sent to the Premium subscribers.
Farage DecidesThe pound's surge emerged after Farage said his party will not contest the 317 seats held by the Conservatives in order to help Conservatives' chances of winning Parliamentary majority and achieving Brexit. Farage said his Brexit Party will only contest the +320 seats in mainland Britain that are not held by the Conservatives on the rationale and assumption that they will be successful in defeating Labour in the Leave constituencies.
It would be a risk and danger to pound bulls in the event that Leave constituencies with marginal Conservative or Labour majority would vote for Labour instead of the Brexit Party, in which case would produce Conservatives win and Hung Parliament.
China Inflation DilemmaChinese CPI rose to 3.8% y/y in October in a surge from 3.0% in September. That was much higher than 3.4% anticipated as inflation has accelerated from 1.5% y/y in February. It's the highest reading since January 2012.
The big caveat in the report is pork prices. They've jumped recently because of African swine fever and the trade war. The PPI report showed pipeline prices down 1.6% y/y, slightly worse than the 1.5% expected.
Last week, China's central bank lowered one-year medium-term lending facility by 5 basis points from 3.30% to 3.25%. That has the spillover effect of lowering the loan prime rate (LPR) which is a growing part of the PBOC's toolkit as new banking regulations come into effect next year.
While the drop in rates is token in size, it was likely a signal of more easing to come. A Global Times report Friday said monetary policy may 'switch gears' in the coming months to follow the worldwide easing trend. The CPI report probably won't derail that plan but it may forced policymakers to be more cautious or patient.
Much of that will depend on how the trade war shakes out. Surging Treasury yields and record highs in the S&P 500 signal optimism but the White House continues to send mixed signals. Peter Navarro said on the weekend that there is no agreement to rollback any existing tariffs as part of the Phase One deal while Trump said reporting on tariffs had been incorrect.
No one has forgotten how Trump flipped the tariff script on July 31 with a tweet and everyone remains on guard for a repeat.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -61K vs -53K prior GBP -29K vs -32K prior JPY -27K vs -20K prior CHF -14K vs -12K prior CAD +54K vs 44K prior AUD -27K vs -40K prior NZD -39K vs -40K prior
The soft Canadian jobs report on Friday surely sent a shudder through the crowded long CAD position but it's a minor setback as job growth stands at its strongest pace in 16 years. Meanwhile, the euro continues to cement its reputation as the funding currency of choice. That should cap its upside even if the global economy picks up. Finally, AUD shorts were quick to cover following the RBA. This week, it will be interesting to see if NZD can rally even if/when the RBNZ cuts rates. That would be an early signal of a bottom.
|FOMC's Clarida Speaks|
|Nov 12 10:30|