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Trump’s Fed pick looms

Trump’s Fed pick looms, Bank of England hike expected, and a veritable metals mania. Here are some of the things people in markets are talking about.

The Real Fed Decision

The Federal Reserve upgraded its assessment of U.S. growth in its Wednesday decision and left rates unchanged at 1 to 1.25 percent, keeping the central bank on track for a December hike. Economic activity was described as “solid” for the first time since January 2015 — a meeting at which the two most recent GDP figures policy makers had seen showed growth of 4.6 and 5.2 percent. But the real Fed decision comes on Thursday, when U.S. President Donald Trump will announce his pick to lead the central bank. Trump said Chair Janet Yellen is “excellent, but that doesn’t look like enough to get him to reappoint her. The president plans to nominate current Governor Jerome Powell as her replacement, three people familiar with the decision have told Bloomberg News.

Unreliable Boyfriend?

The Bank of England is widely expected to deliver its first rate hike in a decade Thursday despite the overhang of Brexit uncertainty. The pound’s plunge has fueled a pick-up in inflation, while the the nation’s longer-term growth outlook has dimmed. If Governor Mark Carney doesn’t follow through with an increase, it’ll affirm his reputation as an “unreliable boyfriend,” a moniker bestowed upon him by a U.K. lawmaker. The British Chamber of Commerce has urged the central bank to hold off on a hike for now, joining a chorus of commentators who fear monetary tightening would constitute a policy mistake. At the Bank’s last meeting, two monetary policy makers dissented in favor of higher rates.

Commodities Comeback

marginal retreat in West Texas Intermediate futures belied the positive news for crude on Wednesday: one of the most concrete signs that the effort to rebalance the oil market has borne fruit. The six-month spread for WTI futures is now in backwardation, a move which should deter shale producers from locking in production for 2018 via futures contracts, as these longer-dated contracts are now also lower-priced.  Metals remain on a tear, with nickel up more than 9 percent in the past two sessions. Whether these raw materials can maintain such lofty gains in the face of a moderation in Chinese manufacturing growth — historically a leading indicator for the space – is an open question.

Tax Rollout Delayed

The Russell 2000 Index slumped on Wednesday as Congressional Republicans delayed the release of their tax overhaul plan, while the S&P 500 Index and Dow Jones Industrial Average moved higher. House Budget Chairman Diane Black said the rollout will come on Thursday. A pair of high-profile tech companies reported earnings after the close of trading. Tesla Inc. was forced to push back production targets for its Model 3 sedan amid record quarterly cash burn, sending shares as much as 5 percent lower in the after-hours session. Facebook Inc., for its part, soared to fresh all-time highs after posting a big top-line beat. More major reports are on the way, with Apple Inc. and Alibaba Group Holding Ltd.’s results due out on Thursday.

Futures Up

Nikkei 225 and S&P/ASX 200 futures are trading to the upside ahead of the open after both benchmark gauges rose on Wednesday. Over in China, policy makers have managed to quell recent market angst linked to soaring domestic bond yields with a series of injections to boost liquidity. A fairly light day for economic data in the region awaits, with Australia’s trade surplus forecast to swell to A$1.2 billion in September while building approval contracts by 1 percent on a monthly basis. We’ll also get the weekly update on Japanese international securities transactions.

 

And finally, here’s what David’s interested in this morning

Oil prices haven’t been a headwind for airlines stocks — because they’ve been asleep and stuck in a range for about two years. But with Brent breaking above $60, coinciding with Asian airline stocks looking to break out of their own range, crude prices have become an annoyance at the very least. The chart below tracks the Bloomberg Intelligence Asia Full-Service Airlines Peer Group, Brent crude, and the 150-day correlation between the two. The correlation flipped into negative this year when Brent pushed into the high 50s. That inverse relationship deepened into the summer as airline stocks rallied and oil fell, naturally. And as you’ll notice, those equities haven’t broken through resistance levels since oil bounced from the mid 45s to where it is now.

To say oil is the primary determinant of airline stocks is reckless and inaccurate. We are just talking swings in correlation between +0.2 to -0.2 (as seen in the very bottom panel). But that’s exactly what you’ll want to watch from now on. When oil prices move into new ranges, that is typically when correlation ranges shift as well. Put simply, oil gains sector prominence in relative extremes like right now. Fittingly, the last time were these two were negatively correlated was when Brent was trading above $60. For a sense where prices move from here, here’s how traders are positioned across the oil curve.

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