Market Analysis - 09-JAN-2018

Market Analysis - 09-JAN-2018

1) Australian Dollar, Japanese Yen Gain, Asian Stocks More Mixed

2) Yen Gains May Fizzle as BOJ Stimulus Withdrawal Hopes Fade
3) US Dollar Unimpressed as Consumer Credit Hits Record High
4) How longer the tired bull will keep running?

1) Australian Dollar, Japanese Yen Gain, Asian Stocks More Mixed

The Japanese Yen and Australian Dollar got a lift from domestic factors in Tuesday’s trading session.

A fairly modest trim of bond-buying from the Bank of Japan saw the Japanese Yen climbing against most rivals. This wasn’t easily explicable. On the most basic level the BoJ had withdrawn some of its economic stimulus but it’s very doubtful that that had been its aim or that broad monetary policy has changed in any way. Still, the Yen reacted. The Aussie’s gains were more straightforward. They came in response to a blockbuster set of building-permit data which blew forecasts away. It’s worth bearing in mind that this can be a highly volatile series but, all the same, it looks as though Australian construction companies had plenty of work on their books as the old year faded out.

The Euro lost some steam against the Dollar and was probably hit even harder than the greenback by the Yen’s gains.

Asian stocks were mixed in a session which saw no huge moves either way. News that North and South Korea had started talks was greeted with bullish approval, but the Kospi failed to hold its gains. The Nikkei added 0.6% with the ASX 200 up by 0.1%. Gold prices inched down, reportedly as investors looked to more US rate hikes this year, while crude oil prices rose to their highest levels since 2015. Markets saw bets on further price rises thanks to production cuts and a reduction in operating US drilling rigs.

The rest of the session is not replete with economic numbers but data watchers will await Eurozone employment and Canadian housing starts.

2) Yen Gains May Fizzle as BOJ Stimulus Withdrawal Hopes Fade

The Japanese Yen led the way higher in Asia Pacific trade, rising against all of its major currency peers after the Bank of Japan soaked up a smaller amount of local government bonds than in its previous buying operation. That spooked traders ever watchful for signs of stimulus withdrawal.

Cooler heads may yet prevail however, with the Yen reversing gains. The BOJ’s shift to targeting a specific bond yield level rather than an amount of assets to purchase means the size of uptake is subject to fluctuation. That means today’s smaller uptake need not signal any policy regime change whatsoever.

The Australian Dollar likewise pushed higher following an impressive set of building approvals data. The currency rose alongside front-end bond yields, hinting that the stellar outcome fueled speculation on a sooner RBA interest rate hike. Still, traders don’t expect to see a rise before October.

Looking ahead, another quiet day on the European data front offers little that might produce FX market fireworks. An assortment of Swiss and Eurozone releases are unlikely to mean much for near-term SNB and ECB policy trends and so seem likely command attention from the Franc and the Euro.

3) US Dollar Unimpressed as Consumer Credit Hits Record High

The US Dollar was rather mute towards a record consumer credit outcome in November 2017, a month before the winter holidays of gift-giving. Borrowers stacked up $27.951 billion in credit from $20.532 billion in October. This outperformed estimates calling for a decline to just $18 billion. The previous record was set in September 2015 at $27.514 billion.

While this was a remarkable outcome, percentage change rates tell a slightly different story. Looking at the chart below, the increase from September to November was a 36.13% gain. This pales in comparison to the 107.35% jump witnessed back in late 2015 and is slightly slower than the 76.52% improvement two months ago.

US growth is mostly driven by consumer spending, making credit growth an important barometer of overall economic health. Higher credit expansion can translate into faster economic growth which may in turn cause the Fed to raise rates to prevent inflation from running too high as a result. However, as DailyFX Chief Currency Strategist John Kicklighter mentioned, the trend in monetary policy speculation has shifted out of the greenback’s favor.

4) How longer the tired bull will keep running?

Led by Wall Street, global equity markets continued to enjoy one of their best starts in eight years. The Japan’s Nikkei 225 marched to a new 26-year high after the S&P 500 and Nasdaq Composite set record closes in the previous session. In Europe, the FTSE 100 made a new high on Monday before retreating slightly to close 0.36% lower, meanwhile the German Dax is only 1.2% shy of its all-time peak reached in October last year.

There’s no reason not to be optimistic when global growth is expected to run above average; inflation remains muted, and U.S. tax reforms are driving up U.S. corporate profits forecasts at the fastest pace in more than a decade.

Many skeptical equity investors are not willing to call the end of the bull market, given that contrarians who challenged common market beliefs in 2017 missed the rally. However, this doesn’t necessarily mean there is no reason not to be worried.

From a valuation perspective, few can argue that stock valuations, particularly in the U.S. are overstretched, despite the upgraded earnings forecasts. When looking at the cyclically adjusted price to earnings multiple “CAPE” it is currently above 33, a level last seen during the dot-com bubble. However, this indicator has been suggesting that stocks are expensive for the past two years, but there are still no signs of the bulls giving up. This is due to the low-interest rate environment, which wasn’t the case in 2000 or 1929.

The 45% rally in the S&P 500 during the past two years has driven down dividend yields to below 1.9% which is now lower than the returns on 2-year treasury notes. At the moment it appears that investors are not too worried about rising short-term interest rates, but the outlook will likely change when yields in the longer term start to increase.

Today the Bank of Japan announced a reduction of buying JGBs by 20 billion yen. Although it’s considered a slight tweak in monetary policy, this may mean that further tightening is on the cards, despite BoJ’s Kuroda signaling at December’s meeting that no monetary policy tightening was imminent.

I expect to see further actions from major central banks to tighten policy through reducing stimulus and raising interest rates, as low inflation will not last forever. Such actions will likely lead to rapid appreciation in bond yields across Europe and the U.S. which could be the first signal of an equity market correction.

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