Fed raises but Dollar falls

From The Age:

The Federal Reserve raised its benchmark lending rate a quarter point and continued to project two more rate increases this year, signalling more vigilance as inflation approaches its target.

“In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range for the federal funds rate,” the Federal Open Market Committee said in its statement on Wednesday. “Near-term risks to the economic outlook appear roughly balanced.”

Dollar Index

Surprisingly, the Dollar Index fell sharply on news of the announcement. But selling was mainly traders who had anticipated a more hawkish stance on future rate increases.

Investors had anticipated the tightening. In fact, Treasury yields had climbed with the dollar on speculation the central bank might signal a faster pace of rate rises. But those trades unwound quickly after the announcement.

Source: Fed raises benchmark rate as inflation approaches target

Why Robert Shiller Is Worried About the Trump Rally – Bloomberg

According to Bloomberg, Nobel Prize-winning economist, Robert Shiller, says he is not buying stocks at present:

….One factor that makes him cautious on American shares is the S&P 500’s cyclically-adjusted price-earnings ratio: While the metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash.

“The market is way over-priced,’’ he says. “It’s not as intellectual as people would think, or as economists would have you believe.’’

Robert Shiller’s CAPE compares current prices to a 10-year moving average of inflation-adjusted earnings. That is likely to be distorted by losses incurred in 2009 which are more of a (hopefully) once-in-a-generation event.

Source: Why Robert Shiller Is Worried About the Trump Rally – Bloomberg

Australia: Don’t expect a repeat of the last boom

Gerard Minack, courtesy of Macrobusiness, explains why the recent rise in commodity prices will not result in a repeat of the last boom.

There are two main ways the last commodity boom boosted domestic activity. Neither seems likely to be repeated now. The first is that the mining sector lifted its investment spending as commodity prices increased (Exhibit 5). Now, however, mining investment is likely to continue to fall (although most of the declines have been seen).

The second way the mining boom filtered through to domestic activity was via fiscal policy. The boom provided a windfall for governments. For the Federal Government the windfall was several percent of GDP….Almost all the revenue windfall was used to fund a discretionary loosening of fiscal policy….. With the budget now in deficit I expect the Federal Government to trouser the latest windfall. (Yes, there will be political pressure on a behind-in-the-polls-government to spend more, but the countervailing political fear is that to spend the windfall now would lead to a politically damaging downgrade to Australia’s sovereign rating.)

The unforeseen consequence of this government profligacy was a spectacular rise in the Aussie Dollar and subsequent decimation of the manufacturing sector.

Source: Minack Special Report: Forget rate hikes – MacroBusiness

Australian miners and the PBOC

I mentioned on Friday that the ASX 300 Metals & Mining Index is falling, with declining Twiggs Money Flow warning of long-term selling pressure.

ASX 300 Metals & Mining

The reason is not hard to find. China’s PBOC is tightening monetary policy to force a slow-down in real estate and construction. Money supply (M1) growth contracted over the last 6 months, with a sharp drop in January 2017.

ASX 300 Metals & Mining

Bulk commodity prices are expected to ease.

Equities Could See a Setback, But This Bull Market Isn’t Over | Bob Doll

Sensible view from Bob Doll at Nuveen:

….Given evidence of stronger economic growth, we could see the Fed become slightly more aggressive about its rate policies, but probably not to the point that it would derail the equity bull market.

On balance, we think the risks are skewed to the upside for stocks. While we could see higher volatility and a near-term correction, we expect equities to move higher over the coming year.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

Government, CBA in landmark $230m solar deal

Mathew Dunckley from The Age reports on a new $230 million solar project:

The backers of three large solar farms have locked in the final piece of their funding puzzle after securing debt financing from a group including the federal government and Commonwealth Bank of Australia.

Local developer Edify Energy and its German investor, Wirsol, will now look to begin work on the farms in Queensland and Victoria and have the first power flowing by early next year.

….The combined project will add 165MW of renewable energy capacity to the national electricity grid by the start of next year and generate enough electricity to power an estimated 87,000 households.

The Clean Energy Finance Corporation (CEFC) will provide $77 million, taking its total large-scale solar commitments to $281 million across seven projects.

….The lending consortium brings together the CEFC, Commonwealth Bank and Germany’s NORD/LB.

CBA’s managing director and global head of infrastructure, Michael Thorpe, said the bank was proud to support the “landmark” transaction.

“The strong risk profile and expertise of both Edify Energy and Wirsol contribute to excellent project fundamentals of the Whitsunday, Hamilton and Gannawarra solar farms,” he said.

This infrastructure project ticks all the right boxes:

  • private-public partnership
  • leading international expertise
  • renewable energy
  • short delivery time

The big question is whether electricity delivery will be at competitive prices.

Source: Government, CBA in landmark $230m solar deal

Crude falls below $50

June Light Crude fell sharply last week, ending below $50/barrel in response to rising US inventories.

June Light Crude

Respect of the lower trend channel would suggest that this is a secondary movement and the primary up-trend is intact. Breach of the lower channel would warn that the primary trend is weakening.

India: Sensex resistance continues

India’s Sensex continues to meet resistance at 29000. Twiggs Money Flow now displays a mild bearish divergence. Breakout above 29000 would find resistance at the 2015 high of 30000 which may prove stubborn. Reversal below 28000 is less likely but would warn of another test of primary support at 26000.

Sensex Index

Europe advances

Dow Jones Euro Stoxx 50 represents the 50 largest blue chip stocks (Volkswagen, Bayer, Allianz, L’Oreal, Phillips, Unilever, etc.) in the Eurozone, in terms of free-float market capitalization. Breakout above resistance at 3330 signals an advance to 3500*.

Dow Jones Euro Stoxx 50

* Target: 3300 + ( 3300 – 3100 ) = 3500

The FTSE 100 is testing support at its former resistance level of 7350. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Respect of support is likely and would confirm an advance to 7500*.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

Long-term target is 8000: 7000 + (7000 – 6000).

Gold bears grow as Fed hints at rate hike

The Fed is expected to hike interest rates next week. 10-year Treasury yields broke resistance at 2.5 percent, signaling an advance to the 2013/2014 high of 3.0 percent. Breakout above 3.0 percent is still a way off but would complete a large double bottom signaling the end of the 30-year secular bull market in bonds. Rising interest rates are bearish for gold.

10-year Treasury Yields

The Dollar Index rally continues to meet resistance, with tall shadows on the last four weekly candles signaling selling pressure. Rising interest rates could strengthen the advance, with bearish consequences for gold, but Chinese sell-off of foreign reserves (to support the Yuan) is working against this.

Dollar Index

Spot Gold is testing support at $1200/ounce. Recovery above $1250 would indicate that the recent down-trend has ended. But breach of support is more likely and would warn of another test of long-term support at $1050/ounce.

Spot Gold