It’s important to remember that no trend goes straight up.
Today we’re seeing a continuation of profit taking in the dollar and a move up in benchmark U.S. oil prices on bets for a short term bounce.
The dollar is now down 2% in December as traders who made money from the strength in the dollar earlier this year sell. With the Federal Reserve’s December 16 increase in interest rates behind us, there really isn’t a big event to push the dollar higher until the market starts to anticipate the next interest rate increase from the Fed. The U.S. central bank signaled a potential four rate increases in 2016. Right now the consensus in the market says that the first of these won’t take place until April. That leaves plenty of time to take profits now, avoid any weakness in the dollar in January and February (maybe even short the dollar) and then get back on the long side in late February and March.
The reverse is true for oil. After West Texas Intermediate broke below $35, the best short-term trade is likely to be to the long side. The danger is, however, that any bounce will be very, very temporary if inventory numbers due for release tomorrow show a build in inventories. A survey of oil sector analysts by Bloomberg shows that they’re expecting an increase of about 1 million barrels in Wednesday’s report from the U.S. Energy Information Administration. That would leave inventories about 130 million barrels above the seasonally adjusted five year average. Anything more than that could quickly erase any upward move in oil prices.
I don’t see much conviction in either move today. This is the time of year when trading volumes start to dry up and traders close profitable positions ahead of Christmas and New Years.
On my paid site CURRENCIES week has ended with a post “3 strong dollar, weak euro (and Brazilian real) picks”
For the last week or more on my paid site JubakAM.com I’ve been writing about currencies.
How long will the dollar rally go on?
What’s the bottom for the euro and what route will it take to get there?
Is the biggest looming danger in global markets right now a potential devaluation of China’s currency?
Today, I ended this string on currencies with a post giving three picks for a strong dollar/weak euro market. You’ll recognize one of the three–it’s the iShares Hedged Currency MSCI Germany ETF (HEWG) that’s in my Jubak’s Picks portfolio. The other two are Luxottica (LUX), a member of my long-term 50 stocks portfolio and (surprise) BRF (BFRS), a Brazilian producer of chicken and beef and packaged foods. The post offers some timing advice on when to purchase and, of course, much more detail on why these picks make sense to me now.
For that, though, you’ll have to subscribe to my JubakAM.com site. Tomorrow on that site I’n going to take a brief trip through the banking sector–remember bank stocks are supposed to do well when interest rates are going up, and then I’ll start a string on oil (with an explanation of what the Saudis were thinking when they led OPEC to do away with production quotas.)
That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.
Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more detail on my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
Today’s strong jobs report moves the market from Will they? To “How fast? will the Fed raise interest rates
Ready to move on?
Today’s stronger than expected jobs report for November has sealed a Federal Reserve interest rate increase on December 16.
The market already seems ready to look beyond the will they/won’t they of the last few months to the issue of how fast the U.S. central bank will move to increase rates after the initial increase.
The U.S. economy added 211,000 jobs in November. Economists were looking for a 200,000-job gain. In addition the Labor Department revised its estimate for October up to 298,000 for that month.
Average hourly earnings rose 0.2% in November after a 0.4% gain in October. That puts the yearly increase at 2.3% after October’s annualized 2.5% rate. That doesn’t qualify as run away wage inflation by any means but it is strong enough to bolster the arguments of those at the Fed who are worried about losing control of future inflation if the central bank doesn’t move soon.
As you’d expect after a jobs report that showed the U.S. economy stronger than any of its developed economy peers, U.S. stocks and the dollar both jumped. The Standard & Poor’s 500 climbed 2% and the dollar climbed to $1.0877 against the euro from yesterday’s close at $1.0940.
Reading between the lines both gold and U.S. Treasuries cast a vote for a very gradual increase in interest rates by the Fed. Gold rose by 2.16% to $1084 an ounce. The yield on the 10-year U.S. Treasury slumped slightly to 2.27% sending the price slightly upwards.
All of these moves might seem rather restrained on a day when a surging labor market put an end to speculation about a December interest rate increase from the Fed. But that’s only reasonable since Janet Yellen and company have signaled this move for weeks and it’s hard for me to imagine that there remain very many traders who don’t have their bond market positions in place.
I expect a relatively calm run up to the December 16 decision with the dollar tracking gradually higher against the euro and most other currencies in that period. After that period I expect volatility to increase as we start to play the game of how fast is gradual.
On Thursday December 3 the European Central Bank will send deposit rates even further into negative territory, increase the amount of bonds that it buys each month, extend its program of asset purchases, and expand the range of assets that it buys—or maybe all of the above.
The financial markets will be waiting to see if central bank President Mario Draghi throws the kitchen sink at the EuroZone’s combined problems of slow growth and even slower inflation or if he keeps some policy options in reserve.
You should watch to see how the currency markets—especially that for the dollar and the euro—behave. Will we see the euro rally and the dollar drop on a sell on the news reaction? Or will the dollar keep climbing against the euro on a belief that a strong dollar is about to get even stronger after the U.S. Federal Reserve raises interest rates?
The euro fell another 0.3% against the dollar today to close at $1.0565. The EuroZone currency fell 4% in November and finished the month down 12.65% for the year.
To me it looks like the market has priced in much of the kitchen sink program and if that’s the case I think it’s likely that we’ll see a bounce in the euro here. There’s strong support for the euro near $1.04, a level that marks the March low for the euro. If Draghi gives traders much of what they expect on December 3, I’d expect to see the euro move up slightly on the theory that all the likely news is priced into the currency pair and that the move to $1.04 isn’t enough to stick around for.
That makes sense to me in the short term, but in the medium to longer term a euro bounce assumes that Draghi’s new dose of the same medicine that hasn’t worked very well to increase inflation and or growth will work this time. That seems questionable to me at best—why should more of the same work now when it hasn’t done much of anything over the last six months?
I’d expect to see a renewed downward trend in the euro not too long after any bounce as the dollar resumes its climb after the Federal Reserve finally raises interest rates in December (current odds better than 70%) or in early 2016.
If you’re looking to put on weak euro/strong dollar trade, I’d wait to see if we get a bounce on the news after Thursday and then look for a resumption of the euro’s decline and the dollar’s rise.
Call it “Whatever it takes” II.
Today, European Central Bank President Mario Draghi said that the EuroZone central bank “will do what we must to raise inflation as quickly as possible.”
I don’t expect that this promise, made in a speech in Frankfurt, will have the same electric effect as “Whatever it takes” I in July 2012. That promise reversed a plunging euro, pulled the bonds of Spain and Italy back from the brink, and set the stage for a significant recovery in the prices of euro assets.
This time I think the likely market reaction will be positive—that is the euro will move lower as the bank wants (it closed at $1.0656 down 0.68% against the dollar today) and financial assets will move higher (the German DAX is up 0.31% today)—the move will be much more modest. The likely actions from the bank are relatively modest in contrast to past proposals and the problems the central bank faces have proven to be very resistant to the bank’s solutions to date.
After today’s remarks by Draghi pretty much everyone has concluded that the bank will move at its December 3 meeting—even though hardline members of the bank’s board of governors such as Germany’s Jens Weidmann are saying no changes are needed now. The bank’s inflation target of 2% remains a distant dream with the current inflation rate in the EuroZone at just 0.1%.
The policy menu in front of the bank includes an expansion of the current program of bond buying from 60 billion euros a month to 80 billion or so; an extension of the life of the program beyond the current September 2016 limit, and a further drop in the bank deposit rate. In normal times the central bank pays a modest rate of interest on money that banks leave on deposit over night. These days the central bank charges banks that leave their money overnight 0.2%. It’s just about certain that the European Central Bank will take that negative deposit rate even lower to, say a negative 0.3%. Bond yields across the EuroZone are already falling even further into negative territory in anticipation of the central bank’s move. The yield on 2-year German government bonds fell to a record low of a negative 0.389% today.
There is a good possibility that rather than choosing from this policy menu the European Central Bank will implement all of these items. That would still fall well short of a “shock and awe” response to the current mix of extremely low inflation and tepid growth, but at this point it might be the best the European Central Bank can do.