Markets are too optimistic

All three major US indices closed into the highs again this morning.

US flag
Source: Bloomberg

The difficulty is trying to figure out if US equities, and global equites for that matter, are too expensive. And if too expensive, what are they relative to? Interest rates remain low on a global basis, with yields ranging from 2% to 8% on average. Therefore, equities are not expensive.

Are traders and investors out of their comfort zone because equities are too expensive? Or is it the fact that there seems to be no higher selling in this day-to-day grind? Retracements in the markets are lasting mere hours, as opposed to days and weeks, as is the norm.

The markets are most unusual, or has the trading and investing community been conditioned to volatility in such a way that when a bull market emerges no one recognises the elements? Traders should keep in mind this is not the new normal - nothing is in the equity markets.

Global growth rising and now tipping towards 2% in the US and Euro region, low interest rates and full employment in western economies; they are the second largest group of consumers. Chinese and American consumers continue to spend.

Trump has made preannouncements in his address to state governors of a significant increase in military spending. Lockheed Martin, a beneficiary of government spending, rallied 1.2% to an all-time high of $269.60 on the news.

Bond markets retreated with the US ten-year-yield rising over 2% to 2.36%. At one point last week the bond market rally may have been calling Janet Yellen’s bluff to raise interest rates at the Federal Open Market Committee (FOMC) meeting, taking place on 13 March 2017.

Marine Le Pen has increased her lead in the first round of the election poll. The spread between the French and German ten-year-yield has narrowed some 15% to 0.6789, down from 0.80 last week. The growing view is that independent Emmanuel Macron is holding his first round percentage. This is improving as Francois Bayrou lends his support to Macron. The French election is now becoming a lower key event behind the Trump-inspired rally.

The Euro rose on these developments and data around economic confidence came in at the highest for six years. A sign of continued momentum in the region.

There was a bounce back in commodities last night with iron ore futures trading back to $92.33 per ton, copper found buying support, again above $2.68lb and closing in on $2.70lb. This still remains one of the potential sleeper trades, as strikes continues at the BHP Escondida mine in Chile. The real risk is a physical shortage of copper in mid-2017.

Nickel also continues to rally from the completed base pattern of 2016.

The BHP ADR indicates a higher open for today at $25.19.

Traders would have noticed that iron ore miners found the bid late in yesterday’s trade; this is expected to follow through today.

From a technical perspective, the ASX 200 found support at the key level of 5720 and a further increase is expected today based on this level.

The CBA ADR also indicates a higher open at $82.91, from a last close of $82.24.

All is good in the trading world.

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