Markets Rebound: Is it all over?

Markets Rebound: Is it all over?

There was more volatility on Friday in New York with the three main benchmarks opening higher and extending gains through early afternoon when news of the indictment of a Russian troll farm and 13 Russian nationals related to interference in the 2016 US presidential election took the wind out of the rally's sails.

While the Dow and the S&P 500 managed to eke out small advances on the day, the Nasdaq slipped. The profit taking was taken in stride and did little to stall the rebound from the correction earlier this month.

Each of the three measures were solidly higher on the week: the Dow added 4.3 per cent, the S&P 500 4.3 per cent and the Nasdaq 5.3 per cent. The VIX held below 20 as volatility continued to steady.

For local investors, the focus this week is squarely on the December quarter wage price index on Wednesday.

Risk Off: Bonds and Shares Selloff Simultaneously

Risk Off: Bonds and Shares Selloff Simultaneously

Expectations are that the Federal Reserve will accelerate its pace of interest rate hikes this year which has caused a leap in volatility.

The Australian dollar snapped back in line with most other major currencies as the greenback rallied and US Treasury yields spiked.

The Reserve Bank of Australia will hold a policy meeting tomorrow, governor Philip Lowe will give a speech on Thursday and the bank will release its quarterly statement on monetary policy on Friday. The RBA is seen as holding fast at 1.5 per cent for at least several more months. That's simply because there's no need for the RBA to respond yet.

Markets Not Phased by US Government Shutdown

While a shutdown of the US government began at the weekend, and uncertainly is rarely market-friendly, investors appeared too focused on earnings gains and the promise of tax-cut bolstered dividends versus the latest round of political brinkmanship. 

A recent review by LPL Financial senior market strategist Ryan Detrick found shutdowns have been "a non-event historically for equities. Going back nearly 40 years, the median return during shutdowns has been exactly flat. Not to mention the last shutdown in 2013 saw an impressive 3.1 per cent gain in the S&P 500".

For local investors, it's looking to be a relatively quiet week with markets shut on Friday for Australia Day

Time is Now for Rising Global Interest Rates

It's the prospect of higher global rates, and the prospect that the pace of increases could accelerate, that has put investors on notice over this past week, reflected in part in the spike in US government yields; the 10-year yield hit a 10-month high last week and over the weekend the yield on the 2-year Treasury topped 2 per cent, its highest since the 2008 depths of the Global Financial Crisis.

Of course, the week ahead brings China back into sharper focus as it's set to report December quarter GDP. Moody's is forecasting growth at 6.8 per cent year over year, so unchanged from the third quarter, and putting 2017 growth at 6.85 per cent.

Other Australian data this week: MI inflation today, monthly consumer confidence and housing finance on Wednesday, and inflation expectations on Thursday. The inflation gauge may be worth paying attention to ahead of the official fourth quarter CPI report on January 31, perhaps opening the door for a slightly more hawkish lean by the RBA.

US inflation stirs global rate rise bets - Global investors are positioning for higher central bank interest rates as firming US inflation and robust consumer spending pushed the yield on the two-year US Treasury bond above 2 per cent for the first time since the 2008 global financial crisis.

Santa Clause Rally Still Touted

It's still a little early to bet on a Santa Claus rally, however, the trading week is poised to begin on a positive note nonetheless.

Australian shares appear set to lift at the open after Republicans agreed on the details of a bill that will cut taxes for businesses and individuals. A vote on the bill is expected in the next few days and there's an expectation that President Donald Trump will sign it into law ahead of Christmas, securing his first legislative win as the sun sets on the first year of his presidency.

While the overall impact of the tax cuts on the US economy are seen as modestly positive at best, investors are continuing to position for an extended rally in stocks. All three major US benchmarks closed at record highs over the weekend and the US dollar advanced for the ninth time in 10 sessions. ASX futures were up 29 points or 0.5 per cent. The Australian dollar slipped 0.3 per cent to US76.46¢.

Also bolstering optimism at the start of the week were gains in commodities and a bump in the US listed shares of Rio Tinto, up 2.2 per cent, and BHP Billiton, up 1.8 per cent. The spot price of iron ore rebounded 2.2 per cent, gold edged higher. In London trade, both copper and aluminium were higher.

US Rates and Bitcoin in Focus

RBA officials likely reiterate that there will be no rush to lift interest rates here even as investors begin to position for them.

In contrast, the US Federal Reserve is expected to lift its key fed funds target by 25 basis points this week, early on Thursday AEDT, in keeping with its plan to gradually lift rates. It would be the third increase this year, and fourth in the current cycle.

Bolstering optimism about the US economic outlook was a 228,000 hiring spree last month.

Investors are keen to see how often Fed policymakers expect rates to rise in 2018 —any revisions to their Dot Plot — and to hear chair Janet Yellen's perspective at her final post-meeting news conference. Dr Yellen is to retire from the board early in the new year, as long as the Senate confirms Jerome Powell as her successor.

The other focus will be on the Fed's outlook for inflation. Despite an extended hiring boom in the US, the pressure on employers to pay their workers more has failed to materialise.

In the background, Bitcoin continues to rocket with the direction mostly up, though it pared some of its recent surge over the weekend. The debate about cryptocurrencies appears set to ratchet higher as futures trading begins this week.

Commodities to Boost ASX

Commodities outperformed even as private data released by China on Friday showed sighs of a coolin economy. That's generally in keeping with expectations that China's economy is gradually gearing down, and that the nation's demand for raw materials will ease but not stop.

Key to how the domestic trading week ahead unfolds will be what Wednesday's third-quarter GDP report says of the state of the domestic economy.

Optimism though about the global economy continues unabated, a reason why global equities have proved adept at extending their bull run.

Last week Wall Street showed its resilience to a rotation out of some of the high-flying tech stocks of the past year and the intensifying investigation into Russia's interference in the 2016 US presidential election which was attributed to economic expectations.

This week's November US payrolls report is expected to show employers are still hiring in droves and that wages are slowly but surely rising.

Fed in Focus

In a shortened, post-Thanksgiving Day session, Wall Street edged higher and the S&P 500 closed above the 2600-point mark for the first time. The CBOE volatility index slid 2 per cent to 9.67.

A mix of tech and retail stocks bolstered optimism that Black Friday — the day as well as the weekend — was on track to break sales records.

For local investors the focus is likely to be on resources with copper topping $US7000 a tonne in London and the spot price of iron ore edging higher, extending its November rally. It's now at $US67.94 a tonne amid reports that steel output in China is continuing at a relatively high pace in anticipation of production halts as winter bears down on the country and amid intensifying efforts to check pollution.

Overseas data: China industrial profits October; US new home sales October, Dallas Fed manufacturing activity November. Key US data will be Wednesday's third quarter GDP and Thursday's PCE core inflation (the Fed's key price measure).

US Fed Watch: Neel Kashkari and William Dudley speak on Tuesday; Jerome Powell on Wednesday at his Senate nomination hearing; Janet Yellen on Thursday in her final testimony to a joint economic committee of Congress; Randal Quarles, Robert Kaplan on Friday; Kaplan and James Bullard on Saturday.