Selling USD, Buying T-Bills

The markets seem to have decided that ‘Trumponomics’ is working and after a period of reflection, with traders selling USD and buying treasuries, we can see that the reflation trade is seemingly back on.

There has been some hesitation to push markets higher in the overnight US session, though, with most of the moves taking place on Wednesday night. The US 10-year treasury is back at 2.50%, moving up from 2.30% on 12 January and eyeing a move into the recent highs of 2.63%. The S&P 500 has broken out of the recent consolidation pattern and even poked its head above 2300, and on the weekly chart is looking ominously poised to print a bullish outside week reversal (where price traded below last week’s low and closes above last week’s high). US banks are finding buyers, amid the move higher in bond yields (and the translation effect of higher net interest margins). The SPDR S&P Bank (NYSE:KBE) ETF (US bank sector ETF) is testing the top of its recent range as well of $44.50.

Weekly chart of the S&P 500

Of course, the Dow breaking 20,000 has been widely noted and the deafening sounds of households staging wild Dow 20k party were heard amid yesterday’s Australia Day celebrations. Hardly…it is merely a round number, and if market participants exposed to US equities are going to celebrate anything it would be the S&P 500 at all-time highs and the fact is the bulls are in control here. As mentioned before a market trading at all-time highs is undeniably bullish and must be traded as such.

US earnings have been generally supportive and a nice tailwind to the optimism that perhaps Trump can generate higher nominal growth. Some 30% of S&P 500 corporate having released numbers and we can see 75% have beaten on the earnings line and 52% on sales. For those that have reported the aggregate (year-on-year) earnings growth has been 4.9%, with 2.4% revenue growth.

All eyes on earnings from Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) shortly after the close.

The leads for Asian markets are clearly positive, with S&P 500 futures 0.7% higher than the ASX 200 close on Wednesday (or from 16:00). For traders who focus on the bigger picture Japanese national inflation data is due at 10:50, and then we get the core read later at 16:00 (expected to print 0.1%), which is read the Bank of Japan look at. Further ahead, US Q4 GDP is released at 00:30 AEDT with the market expecting 2.2% annualized growth, so the USD could be fairly sensitive to this given the view of rising inflation expectations. For what it’s worth, the NY Fed’s Q1 2017 GDP model is running at 2.66%.

Most of the focus though is firmly on Trump and while the headlines have been on signing executive orders on voter fraud and relations between the US and Mexico, where we are now hearing proposals that the US want to implement a 20% border tax on imports from Mexico – USD/JPY and USD/MXN spiked on this news, but price has come back to pre-headline levels. The focus now turns to Trump's relationship with UK Prime Minister Theresa May, where the two leaders will hold a joint press conference (no set time).

The market likes what they have heard from Trump and his administration, though, perhaps not from a wider humanitarian perspective, but certainly on Tuesday and Wednesday where the rhetoric and actions highlighted a sheer urgency, purpose and drive to push the US economy forward and this has traders putting risk back on the table.

Our call then for the ASX 200 sits at 5700 (+29 points) and it won’t surprise that SPI futures are up 30 points from the ASX 200 close at 16:00 on Wednesday. One should expect support for the banks, but the open for mining stocks will be interesting with BHP (NYSE:BHP) down for the past two sessions in London and the ADR suggesting an open 2.4% weaker. We have seen slight weakness in copper futures, with spot iron ore closing up 1% and iron ore futures closing up 1.1% yesterday, although the Dalian futures exchange is now closed for Chinese New Year. If the BHP’s ADR is correct and we do see weakness this morning, it will be interesting to see if the buyers step back in. Gold stocks are also likely to find sellers, as will REITS (given the move in bond yields)

On the FX front, GBP/USD will be of interest given the May/Trump meeting and notably a close tonight above $1.2775 (the neckline of the double bottom pattern) would suggest a stronger rally into $1.3500. I am skeptical of this move though and we are seeing better flow from the sellers. AUD/USD has traded in a range of $0.7585 to $0.7516 and seems happy to oscillate around current levels with no clear trend.