by Pinchas Cohen
Key Events
Every day it seems, a new catalyst appears that has the ability to override previous marketplace triggers. North Korean threats and US political scandals have now been drowned out by the Fed’s confirmation of a faster path to higher interest rates and the introduction yesterday of US President Donald Trump’s tax cut plan framework.
Investors, like piranhas, raced against each other to take advantage of the recent risk-off buying dips in order to acquire risk assets; they also used selling 'rallies' to dump defensive securities.
As a result, global bonds have been sold off, as has gold, in yet another sign of renewed optimism over the health of the US economy, propelling yields and the dollar. The greenback received an added boost on the prospect of capital inflows of companies with overseas assets taking advantage of a proposed one-time repatriation tax, what has been termed a “tax holiday”—as investors oscillate back to risk-on.
Perhaps a more apt way to visually describe this Jekyll & Hyde market, where investors run in circles, would be to characterize it as a cuckoo clock that keeps jumping from closed to open.
Yesterday, seeking risk as well as higher future rates, investors sold off Treasuries, including the 10-year, pushing yields up above their downtrend line since March 13. But will it extend this rally and overcome the March-August peak-resistance?
The dollar rally stopped yesterday at the channel-top in which range it has been trading since April. Today, the index rallied again, then peered above the top...and fell back down. Additionally, the August peak-resistance 94.00 level will be a test for the current rally.
Global Financial Affairs
Global stocks opened mixed. Yesterday, we pointed out that while the dollar and yields took off after the Yellen-Trump bullish combo provided a boost, equities didn’t get on board and actually closed lower. It seems that investors in Asia can’t make up their minds if the news is good for global stocks or not.
As for a December hike, a few things to consider:
- Seeing is believing; some investors just don’t think Yellen can pull it off if inflation won’t help her carry the economic burden of higher rates.
- Will an artificial, forced hike—by something rarely seen recently, a divided Fed—without the inflation counter-balance help support economic growth, or perhaps repress it? As we said last July, Yellen may feel compelled to raise rates, irrespective of an inflation justification, before the Fed finds itself chasing inflation that’s getting away. Yellen conveniently side-stepped FOMC member arguments regarding the inflation trajectory and vaguely explained that she feels that in this environment of inflation uncertainty, raising rates now seems like the right course of action. For those dismissing this possibility by assuming that her term is nearly up so why would she care, recall former Fed Chair Alan Greenspan. In his day he was considered a market god, but his reputation has been assailed and diminished by a barrage of insults, pinning the blame for the real estate bubble to his chest; it's likely Yellen wouldn't want hindsight to get the better of her, and her legacy, either.
- Will a tightening cycle, after the most accommodative monetary policy in market history, help keep prices up or send them to more earthly levels?
Japanese stocks rose, even as the yen pared earlier gains and a very small part of its two-day sharp decline. Equities in Hong Kong declined while the rest of Asia remained flat. Japanese investors might be focusing on an overall weaker yen, as opposed to rates and taxes, as they challenge the September 21 high, before the August 2015, 1,700 level, the highest before the financial crash.
European equities kept their gains, as the banking sector advanced, making up for a mining sector retreat. Oil and metals declined; gold fell to its lowest in a month.
Bitcoin received a rare nod of approval from the mainstream investing community when Morgan Stanley CEO James Gorman said of the cryptocurrency, it's “certainly something more than just a fad” after it extended its rally this week by 15-percent.
The focus ahead will be on central bankers—including from the US, UK and Australia—due to speak at today’s Central Banking conference in London, as investors hope to formulate an opinion on the policy path and subsequent appropriate, cohesive investment strategy.
One thing is all but certain, investors will no longer be able to float on their backs in calm market waters. Expect high, choppy waves going forward.
Up Ahead
- U.S. data on GDP and personal spending, released on Thursday will provide further clues as to the potential Fed policy path.
- Japan's August industrial production and retail sales figures are due Friday as is South Korea’s current account balance for August.
- The euro-area inflation rate may have accelerated a touch to 1.6 percent in September from 1.5 percent but the core will probably remain at 1.2 percent. The data is out on Friday.
Market Moves
Stocks
- Japan’s TOPIX advanced 0.7 percent as of 12:56 Tokyo time (23:56 EDT).
- Australia’s S&P/ASX 200 Index was little changed as was South Korea’s KOSPI .
- The Hang Seng slid 0.4 percent in Hong Kong while Chinese stock benchmarks fluctuated.
- S&P 500 Futures are flat. The underlying guage rose 0.4 percent to 2,507.04.
- The Russell 2000 soared 1.9 percent, the most in six months, to reach another record on Wednesday.
- TheMSCI Asia Pacific Index fell 0.2 percent, slightly eroding a gain in the third quarter. The index is set to complete its third quarterly advance, which would be its longest stretch of such gains since the first quarter of 2013.
Currencies
- The Dollar Index is little changed after earlier climbing 0.25, maintaining its highest level in more than a month, as the currency extended gains against all major peers. The index advanced 0.6 percent in the previous session.
- The yen rose 0.1 percent per dollar, paring an earlier 0.30 advance, after it dropped 0.5 percent in the previous session.
- The euro crawled higher, after a 0.45-percent shift on volatility and having declined for three straight days.
- The New Zealand dollar lost 0.2 percent to fall to 71.89 U.S. cents. The kiwi fluctuated as the Reserve Bank of New Zealand signaled it will keep rates on hold for some time on a weaker economic growth outlook and slowing inflation.
- The Aussie declined 0.25 percent, paring a 0.4 percent loss.
Bonds
- The yield on 10-year Treasuries gained about three basis points to 2.34 percent. It jumped seven basis points on Wednesday to 2.31 percent, the highest in two months.
- Australia’s 10-year bond yield climbed six basis points to 2.85 percent.
- Japan’s benchmark 10-year yield rose 1 basis point to 0.065 percent.
Commodities
- West Texas Intermediate crude fell 0.4 percent to $51.96 after climbing 0.5 percent on Wednesday.
- Gold was at $1,281.32 an ounce after climbing 0.1 percent.