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How significant this deal is to the market is yet to be seen, but as things stand we’ve only seen a one basis point sell-off in the US ten-year treasury (now 2.81%), while S&P futures are up 0.3% from the cash close. Perhaps the market had already expected this agreement and safe passage through the necessary channels prior to today’s announcements, but it should be celebrated that finally we have bipartisan agreement in Washington, even if it is only $85 billion of total savings and doesn’t avert a debt ceiling event in February. Finally US politics is starting to look like it can actually function without political partisanship or using the economy or markets as a bargaining tool like we’ve seen over the recent years. Still, the fact that many are placing yesterday’s sell-off in Europe and the US down to concerns around budget agreements suggests those bearish trades will be unwound today.
This agreement could be the final catalyst the Fed needs to taper in January, February or March, but as I mentioned yesterday, when the Fed actually decides to taper is now largely irrelevant. That is of course unless next week’s FOMC meeting provides narrative that a taper is some way off and they have given a much higher consideration to inflation. That would go against all the rhetoric we’ve heard of late from Fed members (even from the Fed’s doves) and thus unlikely. However, the key will be whether tapering is backed by a change to its forward guidance with regards to a hike in the Fed funds rate. As things stand the Fed funds future (December 2015) has not moved in days and thus a failure to lower its threshold guidance to hike the Fed funds rate when unemployment hits 6% could see a fairly hefty sell-off in the bond and equity market, as traders lose confidence in the credibility that ‘tapering is not tightening’.
US futures moving higher in Asia
While US futures have moved modestly higher, there hasn’t been too much of a move in regional indices, G10 FX pairs or the commodity complex. Just looking at the ASX, where there has been volatility it has been in gold stocks after they price in the overnight move in the precious metal. I can’t see how this move in gold can be anything more than a currency induced move, with the falls in the USD bringing out gold buying. Whether that continues is obviously not yet known, but gold will need to break $1268 (the 38.2% retracement of the October to December sell-off) if it is to make a tilt at the March downtrend resistance of $1314. Still, there has been actually buying of gold stocks, and not just simply short covering.
It’s also worth pointing out that while traditionally December is not a great month to be long gold (over the last ten years gold has lost 0.2% on average), December is easily the best month to be short USD’s against pairs like the EUR and the CHF, and this factor alone could work in favour of gold moving through $1268. However, looking at the current inverse correlation gold is exerting with USD/JPY, it’s the most compelling, and the two asset classes (up until last night) were trading in near lock step. I think the US bond market is now fundamental for price action in both the USD and gold from here though and unless we see the US ten-year moving to 3%, then the USD is going to struggle to gain much traction.
Gold stocks finding good buying activity
Elsewhere in Australia banks are mixed, while mining stocks (outside of gold) have also struggled to get any traction. Resource names have certainly not been assisted by a Chinese market under reasonable pressure, after yesterday’s slightly-below-expectations data dump (industrial production, fixed asset investment and retail sales). I personally see the numbers as positive, as the retail sales number were much stronger than expected, while the investment focused data points missed consensus. Isn’t that exactly what the Chinese are trying to engineer over the longer-term? That is a move away from investment led growth and onto a more consumption focused model. Surely strong retail sales are a good thing and a trend we should continue to see.
So despite no real assistance from Asia, we expect to see European markets higher on open, although from a pure event risk perspective there is less to focus on today. We do get speeches from ECB members Ewald Nowotny and Vitor Constancio, while EU President Herman Van Rompuy will be discussing youth unemployment, which should resonate through most of the southern states. It seems fitting that Mr Van Rompuy is talking about employment given French payrolls and the Greek unemployment rate are released on the same day.
On an index level, DAX bulls will be happy to hold longs at current levels, and should look to reduce positioning on a break of 9067 (the 38.2% retracement of the rally from October 9 to the high of 9424). The FTSE’s price action is a little less convincing and continues to look like a mirror image of the ASX 200, just in a different time frame.