Investing.com | Jul 13, 2017 06:58AM ET
by Pinchas Cohen
Asian equities advanced with US futures and government bonds, resuming yesterday’s US rally, after Fed Chair Janet Yellen tempered the Fed's tightening outlook. Naturally, the dollar weakened on a slower interest rate hike path. The greenback reached its last support before a 10-month low. The biggest beneficiary was the loonie after the BoC hiked interest rates for the first time in 7 years.
The Dow Jones Industrial Average opened on a 0.28 percent rising gap yesterday, registering a fresh all-time high at 21580.79, and beat its pre-Independence Day all-time-high by 18.04 points, or 0.08 percent. It also recorded a new record close of 21532.14, beating its earlier record, set on June 19, by 3.15 points, or 0.01 percent.
Asian markets followed the US lead. Sourth Korea’s KOSPI made an even more impressive record than the Dow’s. The index opened with a gap of 0.58 percent higher than yesterday’s close and 0.47 percent higher than yesterday’s high, extending its gains to a total of 1.07 percent. The Bank of Korea provided investors with three reasons for optimism: (1) as expected it kept its record-low 1.25% interest rate, but went further by saying that the BOK doesn’t have to respond to other central banks, thus delaying a hike (2) it raised its growth forecast to 2.8 percent and (3) the country's growth is likely to be higher after President Moon Jae-in’s $9.8 billion fiscal stimulus package, focused on job creation, is implemented. However the bill has made little progress in parliament.
Hong Kong’s Hang Seng opened with a second consecutive gap—after rising on mainland blue-chips—opening 1.25 percent and closing 0.85 percent above yesterday’s high. However, unlike the KOSPI, it hadn’t extended gains after the gap, but pared 0.2 percent of its rising divide. Still, the index reached its 2-year high since June 29, 2015, up 6.65 percent from its April 20, 2015 record close and 8.65 percent above its April 27, 2015 record high. Chinese exports beat forecasts, making the case for resilient global demand.
Yellen’s Congressional testimony provided equity traders with two gifts. First, a slower pace of rate increases allows for cheaper liquidity, which will continue propping up high valuations. Second, it kept focus away from the latest installment of the Trump-Russia saga, while inserting yet another nail into the coffin of Trump’s proposed tax reforms and spending.
The biggest question on investors’ minds should be: how would slower tightening affect the leadership rotation out of tech and into financials? This switch was apt to occur before any economic kickstart could take place. Indeed, on June 9 Goldman Sachs warned that big tech stocks were overvalued, spurring a 2.43 percent selloff, with an intraday low of 3.85 percent in the sector.
On June 14, the Fed raised rates, a move whose biggest beneficiary were financials. On June 26 the second tech selloff started, which advanced after all the big banks passed the Fed stress test with flying colors—the first time all were declared healthy since the Great Recession—helping secure Fed approvals for generous buybacks.
Yesterday’s hike path slowdown may have turned the wheel back on the leadership rotation. The NASDAQ 100 Technology Index gapped up 0.89 percent and kept going up to a total gain of 1.41 percent—crossing above the downtrend line from the June 29 and June 26 selloffs, opening the door to an upward reversal. The S&P 500 Financials Index on the other hand, declined 0.66 percent, raising the possibility of a double-top reversal.
It turns out that, as things stand, bond traders were right to doubt Fedflation all along.
Australian sovereign debt followed gains in Treasuries on Yellen’s more tepid tightening outlook, making current yields proportionately more attractive.
The dollar weakened on the slower rise of the interest rates outlook, today reaching 5 pips above its June 30 low, the last support before the USD's lowest point since September 30 2016.
The biggest winner was the loonie, extending yesterday’s 1.27 percent gain to 1.43 percent today. The surge occurred after the Bank of Canada raised the interest rate for the first time in 7 years to 0.75 percent, and suggested it will begin shrinking its balance sheet, saying Canada no longer need strong stimulus.
The last Canadian rate change was down to 0.5 percent, to support the country's economy after the collapse of oil prices. Therefore, this rate hike is a clear signal that its economy has recovered. On Monday, we forecast the likely loonie correction downward will be followed by a rally. Even after the rate hike, there is still a long opportunity for trading strategies.
Oil jumped yesterday to a high of $46.68, after a bigger-than-expected drop in US crude stockpiles, falling 7.6 million barrels in the last week, more than double the 2.9-million-barrel estimate. However, oil couldn’t hold on to those gains and settled near its low of the day at $45.40, but still above the $45 key level.
Today crude is flat, but still above the key $45.20 level.
Goldman Sachs' head of commodities research, Jeff Currie, said yesterday on CNBC the problem isn’t too much oil but too much money. After the 2014 crash, US producers learned to be more efficient and cost effective. On top of that, Wall Street financiers helped them become even more capable, enabling them to be profitable at ever lower prices. It seems to us that Currie’s statement is saying that there is an excess of oil because too much money is invested and focused on keeping production high.
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