Weaker than expected US Payrolls (+154k) still-benign earnings growth (3.1%) and an unchanged 3.7% unemployment initially drove US bonds yields and the US Dollar lower Friday (while a much stronger than expected Canadian labour market report and, later, higher oil prices drove Canadian Dollar outperformance against all other G10 currencies). Progressive weakening in US stocks throughout the session – NASDAQ ending -3% – ensured that bond yields stayed down, while the USD drew support from its safe have attributes (VIX +2 to 23) to end just 0.1% lower (DXY), pushing the Australian Dollar back down in the process . Meanwhile the EUR/USD finished the week unchanged at 1.1380.
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For anyone following my Platinum Service it made 275 points on Friday and is still ahead by 802 points for December, having made 1541 points in November, 2094 points in October, 1279 points in September, 599 points in August, 1074 points in July, 994 points in June, 1927 points in May, 1657 points in April, 1760 points in March and 2256 points in February. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points
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The Huawei affair that over the weekend has seen China summon the US ambassador – related worries about the fate of Sino-US trade talks, concerns about growth now both in the US and the rest of the world, is plaguing stocks at a time when year-end book closings are now effectively no more than two weeks away. Lael Brainard is the last FOMC official to weigh in the comments that are consistent with the notion that while a December rate hike is still pretty much a done deal, but that thereafter data-dependency takes over from the ‘’auto-pilot’’ that has been running the Fed show for the last couple of years.
Equities
In sharp contrast to Thursday when US stocks recoupled almost all of their +/-3% intra-day losses, it was pretty much one-way traffic down for US Indices on Friday and which all closed near the lows – S&P and Dow down by about 2.25% and the NASDAQ by just over 3%.
So the Huawei affair and what it means for the tech. sector in particular and more broadly the fate of trade talks after last weekend’s Trump-Xi bromance, is weighing heavily on technology stocks.
Broader growth concerns (US and, increasingly, concerns over what signs of weaker global growth means for US growth and corporate earnings) are leaving few sectors untouched. Ironically, home builders were one of the least worse performing sectors Friday despite the fact that housing is about the only sector of the economy to show any obvious weakness just at the moment. The impact of lower bond yields on mortgage rates and hence housing affordability is the reason.
Incidentally, the Atlanta Fed’s latest GDPNow estimate, post payrolls, is down to 2.38% from 2.7% and below the current market consensus, though note this is really doing no more than suggest growth is coming back closer to trend after unsustainably strong growth in the last couple of quarters. I should also note that consumer confidence remain increasingly strong, printing an unchanged 97.5 in Friday’s preliminary University of Michigan December reading.
NASDAQ has been the worst performing major index globally on the week, off almost 5%. Shanghai and the recently underperforming ASX are the only indices up on the week:
Currencies
Very mixed FX performance Friday, CAD and NOK the winners on the OPEC+ production news and higher prices, but this not benefiting AUD where risk aversion dominated after the mid-week domestic data-related hit. This also saw NZD weaker. AUD/USD made a low of 0.7198 (versus 0.7192 on Thursday) and ended in NY at 0.7208.
AUD has restarted the week near 0.7175, so almost half a percent down, following Saturday’s China trade numbers for November. These show both sharply weaker exports and imports (imports 3.1% yr/yr down from 21.4% in October and 14% expected, exports +5.4% y/y from 15.6% and 9.4% expected. Weak imports means the trade surplus blew out to $44.7bn from $34bn in October.
The bilateral balance with the US printed a new record surplus of $35.6bn. So proof positive that numbers prior to November have been heavily distorted by front loading ahead of US tariffs and China???s retaliation to them, while the US numbers tells you that the world’s largest economy has a lot more trouble sourcing alternative supplies from outside China than the world’s second largest economy does from outside the United States.
Sterling lost 0.4% ahead of what promises to be a tumultuous week ahead for Brexit developments. On the week, NOK is the clear winner and the AUD the biggest loser (the latter also seeing a two-cent hi/lo range, already extended this morning).
The dollar is overall lower but is still comfortably ensconced inside prevailing ranges, drawing safe haven support as well as from a view that even if the Fed is now close to hitting the pause button on further rates rise, the timing of monetary tightening elsewhere in the world risks being pushed out alongside. Whatever is happening to the US economy at present, it is still far and away the least ugly duckling.
Bonds:
Treasury yields initially recovered from the immediate post-payroll release slide but then proceeded to leak lower as stocks wilted. 2s and 10s both finished the session 4.6bps lower and pretty much on the lows of the session. Most of the decline in 10s was in real yields, break-evens off only 0.5bps and presumably held up by the bounce in oil on the OPEC news. On the week the 2/10s curve is about 7bps flatter ending at 13.5bps (back from an intra-week low of about 10bps).
Supporting the bond market rally were comments from Fed Governor Lael Brainard said that the U.S. economic momentum is strong and a gradual approach to interest-rate increases remains appropriate ‘’for now’’ (significant in so far as of late Brainard has been suggesting that gradual rate rises should continue through 2019.
The gradual path of increases in the Federal Funds Rate has served us well by giving us time to assess the effects of policy as we have proceeded, Brainard said Friday at a conference at the Peterson Institute for International Economics in Washington. ‘’That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.’’
Commodities:
Notwithstanding mounting US and global growth concerns and re-elevated trade worries post the Huawei CFO arrest, the combination of a slightly softer USD and Friday’s OPEC+ agreement to reduce oil production by 1.2mn barrels a day, made for a positive day and week for most commodities, led by oil. The exception though has been base metals, with the LMEX index lower on the day and week. Dr Copper is the worse performing commodity on the week, -1.0% and perhaps the best expression of these global growth concerns:
This morning on the Economic Front we have UK Industrial/Manufacturing Index, Trade Balance, Index of Services and GDP at 9.30 am. Next we have Euro-Zone Sentix Investor Confidence at 10.00 am. Finally we have the US JOLTS Job Openings at 3.00 pm.
December S&P 500
The S&P having traded to a high of 2710 shortly before 3.00 pm spent the rest of the day selling off to close nears its lows at 2635. This was a brutal week for the US Stock Markets with the S&P losing almost 5% of its value. After the S&P traded the whole of my buy range for an average long position of 2655 the market rallied to a rebound high of 2666 which enabled me to cover this long position at my revised 2663 T/P level and I am still flat. The Futures market plunged lower again on the re-open of the market at 11.00 pm last night with the S&P finally trading lower to my aggressive buyer level at 2614. I just covered this position at my revised 2624 T/P level and I am now flat. The reason I covered is I want to narrow my buy range from Friday’s level. The S&P has strong support from 2580/2595 and today I will be an aggressive buyer on any dip to this area with a 2568 stop. The S&P has strong resistance from 2675/2690 and I will be a seller on any rally to this area with a 2702 stop.
EUR/USD
I am still flat the Euro which now looks like is finally breaking higher. If the Euro can close above today’s 1.1425 break then this is a new buy signal with a target price of the recent 1.1815 high print. Today I will now raise my buy level to 1.1340/1.1380 with a 1.1315 stop.
December Dollar Index
I am still flat the Dollar and I will now lower my sell level to 96.95/96.35 with a 96.70 stop.
December DAX
After the DAX sold off to my 10770 buy level I emailed my Platinum Members to exit any long position at 10800 and I am now flat. Subsequently the DAX got hit hard with the market trading below 10650 this morning. The DAX is now severely oversold and will not be helped by the renewed strength in Sterling. Today I will again look to buy the market on any dip lower to 10570/10630 with a 10515 stop.
December FTSE
The FTSE just missed my 6700 buy level overnight and I am still flat. Today I will continue to be a buyer on any dip lower to 6665/6705 with a 6630 stop. Given how oversold the market is trading I still do not want to be short the FTSE at this time.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my aggressive 24350 buy level late on Friday. Subsequently the market rallied 120 points and as I did not want to have a position on board over the weekend I emailed my Platinum Members to exit any long position at 24410 and I am now flat. Overnight the Dow traded to the bottom of Friday’s buy range at 24150 before rallying to trade at 24350 as I go to press. The Dow has strong support from 24020/24180 and today I will be an aggressive buyer on any dip to this area with a 24325 stop. This is a key support area as a break and close below 24000 for a few days is further evidence of a major top in the market.
December NASDAQ
The NASDAQ just missed my 6540 buy level with a 6554 low print overnight and I am still flat. Today I will continue to be a buyer on any dip to 6480/6540 with the same 6420 stop. I still do not want to be short the market at this time.
March BUND
No change as I am still a seller on any rally higher to 163.80/164.20 with the same 164.55 stop.
Gold Rolling Contract
Gold finished the week on a strong footing helped by a combination of a weaker Dollar and plunge in equity markets. I am still flat and today I will now raise my buy level to 1224/1232 with a 1215 stop.
Silver Rolling Contract
I am still flat Silver and today I will now look to buy the market on any dip lower to 14.20/14.50 with a 13.85 stop. Remember the last three Decembers has seen a strong rally into the following new year.
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