by Eli Wright
The US dollar tumbled more than one percent yesterday and continues to trade a bit lower today, global stocks are down, US equity markets have fallen in pre-market trading, commodity prices have jumped, while Bitcoin tumbled and additional 14-percent.
The main reason for much of the above?
Disappointment at Donald Trump’s speech, as well as trader reaction to price activity on FX markets. Investors were expecting the press conference to provide details on the timing and scope of the incoming administration’s policies, including infrastructure spending, tax breaks, and trade agreements. Unfortunately for markets, the President-elect’s freewheeling speech failed to provide any clarity.
Overnight in Asia, markets reacted negatively to the dollar's decline after the speech. A stronger yen, which makes Japanese exports more expensive, sent the Nikkei lower. It closed down 1.27%, at 19,118.00. A similar effect was seen in China and Hong Kong; the Shanghai Composite fell 0.55% to 3,119.46, while the Hang Seng dropped 0.46% to 22,829.02.
In Europe, the FTSE is down 0.31% this morning, to 7,267.75; the DAX has declined 0.67% to 11,569; and the Stoxx 50 is 0.5% lower, at 3,290.50.
On Wall Street yesterday, stocks dipped in mid-day trading, but returned to finish the day slightly higher. The Dow closed up 0.5%, at 19,954.28; the S&P 500 rose 0.27%, to 2,275.32; and the NASDAQ gained 0.21%, to close at a new record high of 5,563.65.
In pre-market trading today, however, all three majors are lower: the Dow is down 0.17%; the S&P is down 0.21%; and the NASDAQ is down 0.25%.
US Treasury yields are down across the board. The 2-year yield declined to 1.153%; the 10-year yield is down to 2.318%; and the 30-year yield is 2.911%.
Forex
The US Dollar Index dropped more than one percent yesterday, down to 101.05, after Trump’s press conference. The negative tailwinds have continued today, it's down further, currently at 100.85.
Based on the President-elect's vague promise to "make America great again" after the election the dollar climbed to a 14-year high on trader optimism that Trump would deliver on this vague promise. However, as Priya Misra, the head of global rate strategy at TD Securities said:
“The market has been questioning this Trump Trade. We were looking for specific details on tax reforms and other pro-growth ideas that people have been pricing in since the election. The burden of proof is on the policies, and we haven’t seen any of that. The big Trump trade is on pause, stuck at this ’show-me-the proof’ type of level.”
Without plans for or evidence of growth, the Dollar Index could fall further—to 98-99.50. Fed Chair Yellen is speaking later today; it's hoped her comments will shed some light on the actual state of US economic affairs and the possibility of future rate hikes.
Virtually all of the majors have gained against the dollar. The euro is up to $1.0657, sterling advanced to $1.23, while USD/JPY has fallen to ¥113. Commodity currencies, including the Canadian dollar and Aussie have spiked higher, while the Chinese yuan has bounced higher as well.
The yuan appreciation comes just before China’s trade balance figures are due out later today, and at the same time that the country's central bank seeks to crack down on money flowing out of the country.
In a related move, the PBoC announced plans to inspect Bitcoin exchanges in an effort to curb market manipulation and money laundering—driving the volatility and price declines of the digital currency. Since 95% of all Bitcoin trading occurs in China, these developments – as well as an investor flight to safe-haven gold – has had a devastating effect on the currency. It’s down even further this morning, currently trading at $773.04.
Though the US President-elect tried to put a positive spin on the allegations about his relationship with the Russian president by saying “If Putin likes Donald Trump, guess what folks, that is called an asset, not a liability,” currency traders aren't seeing the upside for the USD. Since the US election, the ruble has been one of the few well-performing emerging market currencies, climbing steadily since early November.
Commodities
The lower dollar has pushed commodity prices upward.
Gold surged 0.6% this morning, back over $1,200, a price not seen since November 23, while silver jumped 0.77% to $16.960, close to a four-week high for the precious metal.
Oil and natural gas prices both moved up approximately three percent yesterday. Crude is currently trading at $52.34 while Brent is at $55.37. Natural gas is at $3.327.
Despite the lack of details regarding planned infrastructure spending in Trump’s speech, copper and iron ore prices have joined the commodity breakout, rising 1.24% and 0.5%, respectively.
Stocks
The S&P 500 edged up 0.27% yesterday, led by the energy sector, which saw gains of 1.18%.
Source: Fidelity.com
Reacting to higher oil and natural gas prices, ConocoPhillips (NYSE:COP) rose 3.14%; while Anadarko (NYSE:APC), Southwestern (NYSE:SWN), FMC Technologies (NYSE:FTI), ONEOK (NYSE:OKE), and National Oilwell Varco (NYSE:NOV) all gained more than two percent on the day.
The S&P’s worst-performing sector was health care, which declined 1.07% after Mr. Trump lashed out at drug companies.
“Our drug industry has been disastrous,” Trump told reporters, emphasizing the need to increase drug manufacturing in the US. “And the other thing we have to do,” Trump continued, in perhaps the only thing he has ever said that Senator Bernie Sanders would agree with, “is create new bidding procedures for the drug industry, because they're getting away with murder.”
Specialty pharmaceutical companies Endo International (NASDAQ:ENDP) and Mallinckrodt (NYSE:MNK) saw shares plummet 8.49% and 6.16%, respectively; over-the-counter drug manufacturer Perrigo (NYSE:PRGO) fell 6.9%; while Bristol-Myers Squibb (NYSE:BMY) dropped 5.3%.
Merck (NYSE:MRK) swam against the tide, gaining 2.85% after US regulators agreed to fast-track a review of their combination Keytruda drug/chemotherapy treatment for advanced lung cancer patients.
A lack of clear direction during Trump’s press conference yesterday means markets are still looking for a reason to keep the post-election rally going, which may explain why pre-market trading today is lackluster.
Ahead of the presidential inauguration in just eight days, we will get some perspective on the veracity of stock price valuations as earnings season momentum kicks off tomorrow when major banks, including JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and PNC Financial (NYSE:PNC) report.