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There has been some hesitation to push markets higher in the overnight US session with most of the moves taking place on Wednesday night. The US ten-year treasury is back at 2.50%, moving up from 2.30% on 12 January and eyeing a move into 2.63%. The S&P 500 has broken out of the recent consolidation pattern and even poked its head above 2300, and on the weekly chart is looking ominously poised to print a bullish outside week reversal (where price trades below last week’s low and closes above last week’s high). US banks are finding buyers amid the move higher in bond yields (and the translation effect of higher net interest margins). The KBE ETF (US bank sector ETF) is testing the top of its recent range of $44.50 as well.
Of course, the Dow breaking 20,000 has been widely noted and the deafening sounds of households staging a Dow 20k party were heard amid yesterday’s Australia Day celebrations. Funnily enough, this is hardly the case - it's merely a round number, and if market participants exposed to US equities are going to celebrate anything it would be the S&P 500 at all-time highs and the bulls are actually in control here. As mentioned before, a market trading at all-time highs is undeniably bullish and must be traded as such.
US earnings have been generally supportive and a nice tailwind to the optimism that perhaps Trump can generate higher nominal growth. Some 30% of S&P 500 corporate have released numbers with 75% having beaten on the earnings line and 52% on sales. For those that have reported, the aggregate (year-on-year) earnings growth has been 4.9%, with 2.4% revenue growth.
The leads for Asian markets are clearly positive, with S&P 500 futures 0.7% higher than the ASX 200 close on Wednesday (or from 4pm AEDT). For traders focusing on the bigger picture, Japanese national inflation data is due at 10.50am AEDT, and then we get the core read later at 4pm (expected to print 0.1%) which is the read the Bank of Japan look at. Further ahead, US Q4 GDP is released at 12.30am AEDT with the market expecting 2.2% annualised growth. The USD could be fairly sensitive to this, given the view of rising inflation expectations. For what it’s worth, the New York Federal Reserve’s Q1 2017 GDP model is running at 2.66%.
However, most of the focus is firmly on Trump. While the headlines have been on signing executive orders on voter fraud and relations between the US and Mexico, we now turn to Trump's relationship with UK Prime Minister Theresa May and their joint press conference (no set time). The market likes what they have heard from Trump and his administration, perhaps not from a wider humanitarian perspective, but certainly where the rhetoric and actions highlight a sheer urgency, purpose and drive to push the US economy forward. This has traders putting risk back on the table.
Our call for the ASX 200 sits at 5700 (+29 points) and it won’t surprise that SPI futures are up 30 points from the ASX 200 close at 4pm (AEDT) on Wednesday. One should expect support for the banks, but the open for mining stocks will be interesting with BHP down for the past two sessions in London and the ADR suggesting an open 2.4% weaker. We have seen slight weakness in copper futures, with spot iron ore closing up 1% and iron ore futures closing up 1.1% yesterday, although the Dalian futures exchange is now closed for Chinese New Year. If the BHP’s ADR is correct and we do see weakness this morning, it will be interesting to see whether the buyers step back in. Gold stocks are also likely to find sellers, as will REITS (given the move in bond yields)
On the FX front, GBP/USD will be of interest given the May/Trump meeting and notably a close tonight above $1.2775 (the neckline of the double bottom pattern) would suggest a stronger rally into $1.3500. I am sceptical of this move though and we are seeing better flow from the sellers. AUD/USD has traded in a range of $0.7585 to $0.7516 and seems happy to oscillate around current levels, with no clear trend.