Global Markets Ahead Of Trump

A largely quiet night, but we have seen a number of reversals in the moves we saw yesterday, although very little has changed fundamentally. It all 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 though through November into December (i.e. short bonds and gold, long USD and financials), then everyone realized they had got a little too excited and that perhaps many of the policies were going to take some time to filter through, if they even were implemented. Then after a reasonable position unwind we find ourselves at a fairer juncture.

US equities are lifeless and we are seeing very tight range (the S&P 500 has traded in a seven-point range, the Dow 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 0.8%. The KBE ETF KBE 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 Sachs (NYSE:GS) were probably the highlight of the session and while the EPS print of $5.08 was nicely above consensus estimates of $4.83, with strong trading revenues, the bar was set super high and was the stock priced accordingly. Goldman’s shares are currently 0.6% lower.

On the data front, we have seen a fairly upbeat Beige book, showing 8 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% (see Bloomberg chart below). The trend in headline inflation is clearly higher and of course, this is largely driven by energy, and 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 number was to buy US treasuries and sell USD’s, but that didn’t last long and the USD reversed fairly quickly.

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Perhaps the most telling aspect of the session was Fed Chair Janet Yellen’s speech (currently still speaking). Her comments, in a prepared speech, 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 (and effectively two hikes over 12 months), the fact she feels she and most colleagues expect ‘a few rate hikes this year’ are a touch more hawkish than expected.

In the wake of her speech, and the move seen in the fed funds future the chance of a hike in March has pushed up modestly to 33% and to 73% for June. We can see a renewed push to sell bond and buy USDs here.

Locally, we face a flat open in Australia, with our call sitting at 5680. 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 and 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 stabilization 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 and I would be surprised to see any move in equities. AUD/USD has traded in a tight range overnight of $0.7567 to $0.7504, and like in any release 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.

Written By: IG