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It feels as though markets are a little lost and searching for the next big thematic to key off. We have had the ‘Trumponomics’ reflation trade playing through November into December (ie short bonds and gold, long USD and financials), before everyone realised they had gotten a little too excited and perhaps many of the policies were going to take some time to filter through - if even implemented. After a reasonable unwinding of positions, we find ourselves at a fairer juncture.
US equities are lifeless and trading within a very tight range (the S&P 500 has traded in a seven-point range, the Dow within 82 points). Yesterday, we saw a strong sell-off in US financials that resonated into other countries’ banking sectors (the ASX 200 financial sub-sector was 0.9% lower) and today we can see it is the better performer (along with materials stocks), with the S&P financial sector gaining 0.5%. The KBE ETF (SPDR S&P Bank ETF) has found modest buyers after yesterday’s break of the December to January trading range, but I am keen to see if price can now reject the $43 level as this would give a far clearer confirmation that it is ready to head towards $40.
Q4 earnings from Goldman were probably the highlight of the session. While the earnings-per-share print of $5.08 was nicely above consensus estimates of $4.83 with strong trading revenues, the bar was set very high and the stock was priced accordingly. Goldman’s shares are currently 0.9% lower.
On the data front, we have seen a fairly upbeat Beige book, showing eight of the 12 districts seeing modest price pressures, amid a tight labour market. We also saw US December headline inflation jumping 40 basis points to 2.1%, with core inflation increasing a touch to 2.2%. The trend in headline inflation is certainly interesting and, of course, this is largely driven by energy, but in the coming months ahead we could see headline inflation accelerating past core for the first time since August 2014. It’s interesting that the first reaction in the market on these numbers was to buy US treasuries and sell USDs, but it didn’t last long and the USD reversed fairly quickly.
Perhaps the most telling aspect of the session was Federal Reserve (Fed) Chair Janet Yellen’s speech (at 7am AEDT). Her comments seem optimistic. They suggest the Fed are clearly on the right path and that full employment is in focus, with their inflation objectives also moving towards their goal. With the interest rate markets pricing a 31% chance of a hike by March and 70% by June (effectively two hikes over 12 months), the fact that she and most colleagues expect ‘a few rate hikes this year’ is a touch more hawkish than expected.
Locally, we face a flat open in Australia, with our call sitting at 5675. While the banks have a more positive lead to key off today, it’s hard to believe we are going to see strong upside here today. The commodity lead is not too inspirational with US crude some 3% lower than where the Aussie equity market closed yesterday and traders are watching the December and January lows of $50.71 and $50.76. A closing break here would suggest a high probability that US crude trades sub-$50. Gold prices are a touch lower, largely as result of the stabilisation and move higher in US fixed income, while bulk commodities are modestly lower, with iron ore futures down 1.4%. BHP’s ADR is suggesting modest gains of 0.6%.
The event risk today really centres on Aussie December employment data, with the consensus expecting 10,000 jobs to be created. This will naturally be watched closely by economists, but the moves in financial markets will be confined to the rates and FX markets. I would be surprised to see any moves in equities. AUD/USD has traded in a tight range overnight of $0.7567 to $0.7515, and the size of the beat/miss, and the mix by which full-time and part-time jobs contribute towards the net total will define the trend in the AUD/USD. As highlighted yesterday, we saw a nice break of strong resistance at 75c, so it will be interesting to see how price reacts if we get a re-test of what has now become support. If AUD/USD is headed to 77c, then the bulls really need to support prices on weak employment data.
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