- US futures, European shares extend Asian rally
- Oil sees its longest rally in 17 months, advancing for eight straight session
- Yields rise, dollar slips ahead of Fed minutes
- Small caps provide a possible divergence to trade resolution hopes
Key Events
European shares and futures on the S&P 500, Dow and NASDAQ 100 extended a rally this morning, echoing solid Asian gains, as hopeful investors increased their risk appetite amid ongoing trade negotiations between the world’s two largest economies.
US contracts were higher for a fourth straight session, their longest winning streak since November, as President Donald Trump’s address to the nation on border security had little impact on investors compared to the easing of two of the key drivers of recent market jitters: the Fed's tightening path and the US-China trade dispute. Investors' renewed optimism for growth, helped by Fed Chief Jerome Powell’s shift towards taking into account market conditions when fine-tuning interest rates hikes, was further buoyed by Friday’s employment report, which showed a healthy economy.
The STOXX Europe 600 climbed, buoyed by automobile makers and miners, export-reliant sectors that benefit from mending trade relations.
In the earlier Asian session, Hong Kong’s Hang Seng (+2.27%) led regional indices higher, thanks to greater demand for Chinese companies after the PBoC reduced bank’s reserve requirements, increasing liquidity. Tencent Holdings (HK:0700) jumped 3.80 percent, lifting the index. China Mobile (HK:0941) leaped 1.72 percent after Nomura upgraded the stock.
The bank stated that, due to the telecom firm's market share, it is set to benefit dramatically from the development of the 5th generation mobile network in China. The analysts also cited the company's strong balance sheet.
Ironically, the mainland’s Shanghai Composite advanced only 0.71 percent, underperforming regional peers.
Global Financial Affairs
Yesterday, equities in the US extended the 'dovish Fed-trade negotiations' rally. The Russell 2000 (+1.38%) edged higher for a third straight day, as it continued to outperform, perhaps providing a negative divergence to expectations for a resolution of the US-China trade spat. If investors believed an end to the trade war is at hand, small caps should have been discarded in favor of large caps, since the outlook for relaxed tariffs should truly increase.
The S&P 500 climbed for a fourth day, ticking 0.97 percent higher with all 11 sectors in the green. Real Estate (+1.74%), a key beneficiary of a slower tightening cycle, led the advance, while Financials (+0.08%) lagged, as the outlook for bank profits took a hit from the same catalyst.
The Dow Jones Industrial Average rose for the third straight session, gaining 1.09 percent. Boeing (NYSE:BA) (+3.79%) helped lift large caps with a strong fourth quarter delivery report. Pacific Gas & Electric (NYSE:PCG) took the biggest fall, dropping 7.34 percent amid reports that the California utility giant is considering filing for bankruptcy.
The NASDAQ Composite also inched higher yesterday, for a third day, climbing 1.08 percent. Technically, it formed a hanging man, confirming the new resistance of the October-December resistance, and we see the arrival of the 100 DMA and the 100 DMA crossing below the 200 DMA.
Meanwhile, 10-year Treasury yields extended a rally to a fourth day, to above 2.7, ahead of the release of minutes from the Federal Reserve’s December meeting.
Conversely, the dollar slipped lower in anticipation of the release, which may shed more light on the Fed's dovish turn.
West Texas Intermediate crude climbed above $50, extending its longest rally in 17 months to an eighth straight day, after China stepped up measures to spur consumption—a move that also pushed most industrial metals higher. We have reported of a potential bearish flag with a downside breakout. The flag is still intact.
While it’s very difficult to determine the point where the pattern dynamic dissolves, we estimate it will be at the pressure point between the former support November 23-December 17, the downtrend line since December 4 and the downtrend line since October 4. The 'X' on the chart marks that spot—somewhere between $51 and $52.
Up Ahead
- Wednesday sees the release of minutes from the Fed’s Dec. 18-19 policy meeting. Powell will speak to the Economic Club of Washington D.C. on Thursday.
- Britain’s Parliament resumes a debate on the Brexit withdrawal bill, with Prime Minister Theresa May seeking to avoid defeat in a vote set for the week of Jan. 14.
Market Moves
Stocks
- Futures on the S&P 500 rose 0.1 percent, the highest in more than three weeks.
- The STOXX Europe 600 climbed 0.5 percent to the highest in almost four weeks.
- The UK’s FTSE 100 increased 0.6 percent to the highest in almost five weeks.
- Germany’s DAX gained 0.7 percent to the highest in almost four weeks.
- The MSCI Asia Pacific Index jumped 1.4 percent, hitting the highest level in almost four weeks with its fifth straight advance.
- The MSCI Emerging Markets advanced 1.3 percent to the highest in almost five weeks.
Currencies
- The Dollar Index dropped 0.1 percent.
- The euro gained 0.2 percent to $1.1464.
- The British pound increased 0.1 percent to $1.2735.
- The Japanese yen fell 0.1 percent to 108.85 per dollar.
Bonds
- The yield on 10-year Treasurys slid one basis point to 2.72 percent.
- Britain’s 10-year yield climbed one basis point to 1.284 percent, the highest in more than a week.
Commodities
- WTI climbed 1 percent to $50.26 a barrel, hitting the highest level in more than three weeks with its eighth consecutive advance.
- Gold fell 0.2 percent to $1,282.93 an ounce, the weakest level in a week.