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MACRO MORNING NOTE January 24, 2017

SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland

Via FT: Dollar rout intensifies, taking momentum from stocks

  • Broad and intensifying dollar weakness takes euro above $1.23
  • Sterling and yen both strengthen by 0.6%
  • US Treasury secretary speaks favorably of a weaker dollar
  • With attention on the weaker dollar, stocks bull run takes a breather
  • European bourses slip after lacklustre showing in Asia
  • Wall Street indices expected to rise

“The currency’s depreciation has come about precisely because of the strong relative European and Japanese earnings growth in the first place and let’s not forget that it is helpful for Wall Street. The European Central Bank might very well warn about the impact of the strong euro this week, but that is unlikely to push out market rate hike expectations from their already dovish setting,” said Koon Chow, strategist at UBP.

Asian indexes closed mostly higher, European stocks mixed, and S&P futures up +.21% at 2,842 near year-end targets in the first month. The upward slope of world stocks in recent weeks has steepened, which indicates the move is in the latter euphoric stages. Take, for example, world stocks <faw>, on a weekly timeframe has an RSI (14) printing at 94.22, this is an extreme level that at some point will reverse. The rout in the dollar has sent the currency to 89.70 down -.45%, which could go lower to the 87.50 area. The US Treasury Secretary Steven Mnuchin said a weaker dollar is “good” for America’s trade and opportunities, despite during the election Trump wanted a stronger dollar.

As per ZeroHedge,

Mnuchin shocked Davos participants because while it echoed Trump’s own doubts over a strong currency, the Treasury Secretary’s “mini QE” came as U.S. officials confront the global elite with their “America First” agenda. As Bloomberg notes, on the eve of the Davos meetings, the U.S. slapped tariffs on solar panels and washing machines. Commerce Secretary Wilbur Ross, speaking alongside Mnuchin, said more measures are in the offing. And there is naturally no way to accelerate trade wars than to slam your own currency, making foreign exporters suffer. The only question is how will everyone else respond. And speaking of trade wars, Wilbur Ross said that “Trade wars are fought every single day… So a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart.” It’s a message Trump is likely to send in person on Friday when he becomes the first American president in 18 years to address the Davos gathering of corporate executives and investors.

Ahead of this weeks ECB meeting, traders “recalibrate their expectations for monetary policy tightening from central banks ahead of a meeting this week of the ECB’s governing council, the euro’s rally for the month is close to 3 percent, after a gain of 0.4 percent taking it to $1.2340,” said FT. Strengthening Eurozone currencies have cooled equity markets in the region. The DAX and IBEX35 are flat on the session, as the UK100 is down -.34% at 7,708.

Over in Asia, regional equity markets closed somewhat higher on Wednesday as the dollar declined against most fx. The Nikkei225 slid -.76% to 23,940 one-day after the index hit a 26-year high. Further, the decline comes at a time where the Yen is strengthening, as the USD/JPY dips to the midpoint of the 109 handle. Major exporters in Japan suffered on Fx shift.

In Korea, the KOSPI closed flat at 2,538, as the technology sector was mixed. Down under, the ASX200 gained +.29% at 6,054. Most industries gained in the session with higher financials. Over to China, on the mainland, the Shanghai composite advanced +.40% to 3,506 at multi-year highs. The Shenzhen composite advanced +.51% at 1,960. In Hong Kong, the benchmark closed higher for the sixth consecutive session and is trading +9% on the year.

As the Trump administration slams the dollar lower and sparks another trade war. The projections on the dollar is an S2 87.79 level.

In commodities, precious metals compress, industrial metals stall, and CRB index tests neckline.

The first batch of CME bitcoin futures contracts will expire on January 26. As wall street has slammed Bitcoin lower since the 20,000 mark to cover. Now, there could be bottom forming…

Three Drivers Pattern spotted in Bitcoin

As the Trump administration slaps tariffs on China and blows out the deficit with tax cuts. UST10Y has been sharply accelerating breaking above 2.64 handles clearing it for further upside. Pressures on the yields could come from reverse QE via Fed, China not buying US debt, BOJ tapering plans, and other Central Banks attempting to reverse, which by the way is basically impossible. Yields would shoot up so quickly that it would stifle the economy, then more QE and rate cuts to suppress rates. Meanwhile, as rates surge, the dollar gets smoked.

Weekly <faw> world stock index has an RSI at 94…

Long term view of SPX500 with major test of decades long RSI

EEM/SPY Ratio

UST10Y bottom bump and run reversal

BCOM and CRB remain bracketed

SPY/VIX Ratio at extremes

SPX500 (weekly) RSI (14) ATH at 94

Year-end targets hitting at SPX500

WTI testing 200sma monthly at 65

API bearish will build prior session first time since Nov’17