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Trader thoughts - the long and short of it

Despite news during the New York session that the United States Congress had pushed through the long-touted tax reform plan, the markets showed very little enthusiasm on the day.

Market data
Source: Bloomberg

Given how much this topic had dominated the news cycles over the past months and further the speculative optimism the mere plan had engendered, some may be taken aback by the lack of bullish charge that followed the virtual approve. That group would not likely include traders however. The ‘buy the rumor, sell the news’ axiom is among the most popular when referring to fundamentals and their influence on the markets.

This effort has been touted since the campaign leading into the US Presidential election last year. The promises of the economic growth it would inspire were set very high and prices on equities reflect that aggressive assessment. Now that its signing into law is upon us and the
S&P 500 has pushed record highs on countless sessions through 2017, we are left to weigh our convictions. And, we assess how much value is still unaccounted for as the liquidity clock counts down to next week’s holiday drain.

Wall Street: On a quick glance, close-over-close basis, the US indices seem to be little changed – glowing a light shade of red on average. Yet, with a look to the full day’s performance, we can see that selling pressure was far pervasive through the session with the ‘bodies’ of their daily candles posting sizable open-to-close declines. Once again, it is the gap on the open that has spelled the difference. The major indicies gapped higher on the open Wednesday – the eighth time in 10 sessions for the S&P 500 – and that essentially set the peak of enthusiasm on the day. Heading into the final minutes of the close, the S&P 500, Dow 30 and Nasdaq wre little changed on the day. The stand out was the Russell 2000 which was up nearly 0.35% after only briefly turning negative in the morning session.  

US Taxes and Credit Agencies:  As has been the case for much the past week, the top story on the international wires this past session was news that the United States Congress had pushed through its long-touted tax reform bill. The effort is billed as a broad tax cut for individuals and corporations, but non-partisan policy groups are less confident in this effort resulting in a uniform improvement in tax home for all those that were on the tab. A corporate tax cut is universally considered to be the biggest impact while the wealthiest Americans will see a substantial and permanent drop in their collected tax bill. However, the benefits for the middle and poorer class generate considerable debate over whether a reduction will even last through the second year.

For investors, the long-term growth implications don’t really register in this period of short-term opportunism. For that, US Dollar and debt traders should keep an eye on the evaluation to be offered up by the major credit rating agencies. An increase in the deficit over the next decade is very likely with this plan change; and Standard & Poor’s, Moody’s and Fitch already had the United States on credit watch negative. A sovereign rating cut would have a permenant and negative impact on the US if realized. 

Bitcoin: The speculative frenzy behind Bitcoin seems to be dying down. Looking back, 2017 will certainly be considered the year of the cryptocurrency and this particularly larger-than-life coin will be at the center of this review – but not likely for its virtues. The surge that BTC enjoyed particularly between October and the peak in December was fueled by the momentum it drove rather than the true financial disruption that true believers had ascribed to it. In other words, much of that explosion was purely speculative. Evidence of this can be seen in the numerous stories about the time it takes to settle transactions (days) and the average cost per trade (over $20). These do not match what we would expect from something that is supposedly billed as the replacement of fiat currency. And, where there is a long-term place for digital, if this was virtuous adoption, we would expect those alternatives without these specific issues (like Litecoin, Ethereum and others) to have lead the charge. They did not. The question now is: ‘how much excess is priced into this market and this coin?’

Sovereign Bonds: The buyers of global bonds have taken an early vacation causing prices to drop and yields across the board to move higher. Over the last few days, global investors witnessed a relatively sharp rise sovereign yields with US 10-year Treasury yields moving to the highest levels since March at 2.49%. The forces driving the move higher have been seen as a flood of supply in 2018 as central banks look to taper their bond-buying programs.

The spread between the Australian 10Y yield (currently at 2.628% YTM) and US 10Y yields (currently at 2.49% YTM) has remained a focus of global investors to see if the dwindling yield premium could soon invert. The spread touched 7.5bps in late November as AUD/USD moved toward 75.02 US cents per A$. Naturally, investors have likely been adding to their holiday wish list a request that yields remain lower in 2018. A pop higher in global sovereign yields would disrupt the ‘Goldilocks’ environment of lower inflation, stable commodity prices and cheap debt to fuel the global shares market.

ASX 200: Cash shares are sitting at 52-week highs after gaining 0.06% or 3.8 points to 6075. The ASX is higher by 7.2% this year and 8.8% above the 52-week low of 5,587 that was traded on in early February. Tech and consumer discretionaries led yesterday's move with telecommunications as the main drag.

The implied open of BHP Billiton and Rio Tinto when pulling insight from ADRs are gains to A$28.87 or and A$65.97 or +2.05% respectively.

Commodities: The commodity market got a boost on Thursday thanks in large part to a large crude oil inventory draw out of the US as shown in the weekly EIA inventory report. The price of Crude Oil has remained sideways for much of the last two months, but the forces seem to support a move higher. Brent Crude Oil’s closing high for 2017 was recorded on December 11 at US$64.69, and today’s futures contract is looking to break above toward $65.

While demand in both China & US appears to be on the rise to help metals, it is the drop of supply that has recently been encouraging investors. Aluminum production out of China hit the lowest level in 21-months as of November per data from the International Aluminum Institute after peaking in June. The drop in supply has helped support the rice in Aluminum prices to the tune of 25%. 

Australian Dollar: The Australian Dollar is finishing off 2017 with a bout of relative strength after rebounding off 75.02 US cents per A$ in early December. An equally weighted Australian Dollar index against seven other major currencies has the Aussie stronger by 1.06% since the start of December. The 200-DMA on AUD/USD is sitting at 76.94 US cents per A$ that could provide resistance of further price advances. The economic calendar for Australia will remain light to finish out the week meaning external factors will likely drive the pair to finish the year.

Performance of the Australian Dollar in 2018 will likely draw from market expectations of whether or not the RBA will lift rates after holding at 1.5% since cutting on August 31 last year. There remains doubt that the RBA will be in a rush to hike as Australian households are holding record debt with weak wage growth.

Market Update:

SPI futures moved 3.83 or 0.06% to 6075.62.

AUD/USD moved 0.0002 or 0.026% to 0.7674 - Session High: 0.768 Session Low: 0.766

On Wall Street: Dow Jones 0.06%, S&P 500 0.1%, Nasdaq 0.07%.

In New York: BHP 2.01%, Rio 2.22%.

In Europe: Stoxx 50 -0.83%, FTSE 100 -0.25%, CAC 40 -0.56%, DAX 30 -1.11%.

Spot Gold moved 0.07% to US$1266.14 an ounce.

Brent Crude moved 0.89% to US$64.37 a barrel.

US Crude Oil moved 0.75% to US$57.99 a barrel.

Dalian Iron Ore moved 0.38% to CNY529 a tonne.

LME Aluminum moved 1.21% to US$2099 a tonne.

LME Copper moved 0.54% to US$6942 a tonne.

10-Year Bond Yield: US 2.49%, Germany 0.41%, Australia 2.63%.


By John Kicklighter, Chief Strategist, IG Chiacgo

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