Rebound was the name of the game across the world this past session, but the recovery effort was uneven with those suffering the worst declines of late offering up the least enthusiasm. The champion of the day’s bullish sentiment were US markets. US equity indexes flipped from tentative head-and-shoudlers breakdown to the strongest single-day rally in months. Moving further away from the epicenter of complacency, emerging markets and junk assets are scaling a far deeper crevasse, while global indices were far more measured in their recovery. The question investors and traders need to ask themselves is whether this is a wave of confidence or mere scramble to ‘buy the dip’ when the first opportunity in a while presented itself. Another consideration: would there be a difference in the ultimate outcome for the market?
Wall Street: The red-flag of risk-off sentiment looks to be coming down as Thursday’s risk-on fervor was evidenced by top equity markets led by the NASDAQ up 1.4% and the smaller cap, Russell 2000 rising higher 1.83%. The NASDAQ reversed from a loss for the month on Wednesday’s US trading session to an all-time record on Thursday. Other signs of risk-seeking behavior returning after a few days of selling was seen in emerging markets and junk bonds with the latter seeing their best day since March. Another simple way to track what could be the beginning of the next melt-up in stocks is the ~11% drop in the VIX or Volatility Index. The VIX reflects the market’s estimates of future volatility for the SPX500 and a drop signals the proverbial calmer waters ahead. The VIX is higher for the month currently with a 14% rise to date, but the trend of selling volatility and expecting the equity rally to celebrate its ninth birthday this March remains on track.
US Tax Bill: The US House of Representatives secured the needed 218 votes to send the US Tax Reform bill, properly known as H.R. 1 to the Senate next week that currently holds less confidence of passage. A passage in the US Senate as well would be a boost to US President Trump who has yet to oversee passage of a significant legislative bill with the supermajority he helped secure a little over a year ago. Echoing the previous point, while Bull markets often climb a wall of worry, the passage of the Tax Reform or Tax Cut depending on whom you support that is designed to ultimately cut the corporate tax rate to 20% could give a further boost to the equity rally and fundamental economic data. Such a development, though often slow to work through to fundamental economic releases would likely put further pressure on the Federal Reserve not to fall behind the inflation curve and keep on hiking rates.
Holiday and Seasonal Conditions: We are heading into the final 24 hours of the trading week, and what trend their may have been on a global basis – risk aversion – seemed to have been shelved. Market conditions are going to be a significant interference to trade and investment development over the next six weeks. Looking ahead to just the coming week, the US will be offline for its Thanksgiving holiday (third Thursday of the month of November). This market closure though not widely shared has a history of significantly curbing global activity. And of course, looking into the month of December, holidays and anticipation of holidays is abundant. Either a legitimate return to conviction (less likely) or genuine deleveraging (more likely) are increasingly overdue; but how will these anticipated market conditions influence our bearings? One thing is for sur, we shouldn’t quickly dismiss volatility until 2018. There is too much to lose – and miss for opportunit.
Central Bank Speak: global financial markets. Bank of England Governor Mark Carney said despite “pretty big forces” (i.e., Brexit,) that the rate at which the economy is growing and with the extra slack in the economy diminishing that the Bank of England would likely to raise interest rates a ‘couple of times over the next few years.’ Across the pond, Federal Reserve Bank of Dallas President Robert Kaplan said he believed the Fed will make progress on the 2% inflation target and that as an FOMC voting member that he is “very open-minded and actively thinking” about continuing to gradually raise interest rates. From the ECB, we heard European Central Bank Governing Council member Ewald Nowotny say that the EU has strong growth rates and that the ECB expects this recovery will go on for the next few years, which may lead to the reduction of bond purchases as part of the ECB’s QE program and they could shift to corporate bond-buying during the unwind.
Bitcoin and Ripple: Bitcoin continues to earn the bulk of the top headlines for the cryptocurrency world as the most liquid coin charged on towards fresh record highs through the past session. Adding to Bitcoins expansive collection of headlines this week was news that a Swiss bank was planning to introduce futures based on the digital currency that would spread the legitimacy push following the CME and CBOE’s announcements that they were pursuing futures and ETF derivatives of their own. Yet, as high as Bitcoin stretched Thursday, the stand out coin in context seems to have been Ripple. American Express and Santander are reportedly intending to use Ripple’s blockchain network for faster cross-boarder payments that would also be traceable.
ASX 200: As with most indices this past session, the ASX 200 managed to find a degree of lift from its recent spill. Relative to the Dow and DAX, however, the Australian benchmark fared far better in its rally back towards 6,000. As we trade around 5,985, we should remember that until two weeks ago, this was a multi-year range high with considerable technical weight. Though we have subsequently broken this level both in bullish and bearish tides since, there is still a degree of conviction that is more difficult to foster for true follow through.
Commodities: The standout commodity this week is Aluminum while everyone else remains mixed. The shift of favorable risk sentiment will likely remain as a supporting point going forward though sentiment still takes a back seat to Chinese-specific demand. So far, Aluminum, as priced on the LME, is up 25%, YTD leading copper as the next best performer at 23%.
Aluminum was broadly supported on the view that as demand in China will keep producers happy while raw materials costs are rising and will lead to cost pressures. In addition to rising cost pressure, China is expected to keep constraints in play to reduce and ideally eliminate the illegal excess capacity while consumption in China is expected to rise. Other commodities were on the wrong side of mixed losing less than 1% while energy investors seek clarity on what to expect from OPEC and allies in Vienna when they meet at the end of this month to discuss length and depth of further cuts.
Aussie Dollar: There was little consistency in the Aussie’s trend this past session despite the event risk that crossed the newswires. The jobs data was a mixed bag between a decent full-time positions increase and downtick in the unemployment rate due to the headline payrolls strolling in at 3,700 added positions versus 18,800. The sharp drop in consumer inflation expectations to 3.7 percent versus a previous 4.3 percent hits the currency where there is more FX leverage: rate expectations. That said, the Aussie did not add fuel to the fire that has driven AUD/USD to loose trendline support around 0.7575; EUR/AUD was knocked off a five-day swell and GBP/AUD stalled just as a five-month high was touched.
SPI futures moved 9.28 or 0.16% to 5943.51.
AUD/USD moved 0.0005 or 0.066% to 0.7594 - Session High: 0.7609 Session Low: 0.7571
On Wall Street: Dow Jones 0.82%, S&P 500 0.88%, Nasdaq 1.39%.
In New York: BHP 0.07%, Rio 0.04%.
In Europe: Stoxx 50 0.54%, FTSE 100 0.19%, CAC 40 0.66%, DAX 30 0.55%.
Spot Gold moved 0.18% to US$1280.4 an ounce.
Brent Crude moved -0.58% to US$61.51 a barrel.
US Crude Oil moved -0.22% to US$55.21 a barrel.
Dalian Iron Ore moved 2.09% to CNY463 a tonne.
Iron Ore delivered to Qingdao moved -0.44% to US$61.57 a tonne.
LME Aluminum moved 1.15% to US$2106 a tonne.
LME Copper moved 0.21% to US$6773 a tonne.
10-Year Bond Yield: US 2.35%, Germany 0.38%, Australia 2.58%.
By John Kicklighter, Chief Strategist, IG Chicago