Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day
As you know the Republican party won control of both House and Senate. US dollar has moved higher on the news and our Euro short position up again to $2500+. Euro needs to close below 1.2500. The ES rose as expected with a single party ruling Congress. Last night we discussed an event trade on ES, which is now up $400+ as I write.
Going forward, history shows the market rises when a single party takes over in the mid-term elections. Therefore, we have another back drop for higher stock price expectations. This bias does not negate the fact that markets will continue responding to events around the world. The bias simply says if the world does not edge into war or surprise terrorist action on a Western nation, we should continue seeing stocks supported.
A few predictions…
- The new congress will expand the export of US crude and natural gas.
- The defense sector historically does well with Republicans in control and Republicans control the power of the purse. We should expect tougher rhetoric against Russia from the new congress if history is any guide.
- The Republicans have two years to improve the economic finances of the average USA voter. This was a big reason so many folks voted against Democrats. For example, three states heavily Republican favored voted for increases in the minimum wage. I expect a large blow-out jobs creation bill focusing on infrastructure in every state. This is the single largest program to help the party position for 2016 presidential elections, help the average voter, and increase tax rolls bringing money into the government as more folks have disposable income. What’s not to like?
- Tax code revision – Both parties are loathe to improve the US tax code regardless of decades of political rhetoric. However, I do expect some kind of lower tax rate on corporate assets held over-seas in order to bring that money back to the USA with political spin the money will see USA investment. On paper it sounds good. In reality, it likely means special dividend pay outs beneficial for stock prices.
- I expect a 2015 will see a huge stock market lift due to the above.
- The deficit will continue taking a back seat in the name of economic turn-around. But then again, reducing the deficit has never really been a priority in as much as a sound-bite.
- Mitch McConnell will lead the senate. This election has rubbed his face in the declining coal industry woes of his own state. We should expect he will make an attempt to assist the coal industry…either through a weakened EPA, export sales assistance for US coal, or both. Watch coal stocks.
- Money is power and banks have both. We should expect a potential of reduced financial over-sight as “pay back” for political contributions. Watch bank stocks and XLF.
These predictions are based on 2015 time-table when the new congress takes office. Just start watching affected sectors now.
One thing we know about politicians of both parties is US taxes rarely go down along with the US deficit. It will be an interesting social experiment if the new congress decides to defund portions of the social safety net now used by more Americans than ever before.
The easiest cost savings are achievable through defunding areas that do not directly affect the voter pocket book, yet help the large campaign donors…i.e. cut EPA along with financial regulation funding.
I am going out on a limb here to suggest the Republicans will do something to attract younger voters in 2016. This means addressing the one trillion dollar student loan debt bomb.
No political party…Republican or Democrat can stop the manufacturing job erosion due to worker cost differential in less developed nations taking American jobs. Remember this when the rhetoric starts flying. This is one of the reasons of sustained high rates of unemployment in Europe. Congress, in 2015 will likely realize only a gigantic infrastructure boom can do the trick of putting thousands of people back to work.
Congress has all along had the ability of a jobs explosion. This time, I think they will take action or demonstrate “out of touch” image, yet again if they do nothing.
Around the world…
Chinese HSBC Services PMI (October) at 52.9 vs. 53.5 prev., lowest since July (BMO Capital Markets).
The ECB releases new monetary policy guidance on Thursday morning with Draghi press conference later. We will hold the Euro short through this event. If the ECB does nothing new, this is positive for the Euro and we expect knee-jerk move higher for Euro price taking away our profits. If the ECB announces additional stimulus, the Euro should fall hard. Anyone trading this educational trade using multiple contracts should consider lightening up banking profits and working with runners as a suggestion for your testing.
Reuters reports Euro zone business growth picked up less than expected in October with weakness in both services and manufacturing after release of flash PMI. Deflation is firmly rooted (and has been). A chief economist at Markit says “The Euro zone PMI makes for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life.”
Draghi is under attack internally for his communication style calling his communication methods secretive and erratic. If true, no doubt Draghi is tired of policy leaks.
From the Bank of Japan: “There are no limits to our policy tools…in order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms,” says Kuroda. (Seeking Alpha as reported by CNBC). My interpretation – Expect continued Yen depreciation followed by dramatic increase in the Yen carry trade as large hand global investors borrow or short Yen investing proceeds in the USA. Kuroda is an “all or nothing at all” type of manager…these kind see the world in absolutes and end up as hero or dismal failure wandering the earth wondering what went wrong?
The problem with Yen falling is the idea Japan imports oil and other basic goods including food. The falling Yen will increase the price of imports hitting the Japanese consumer. And then we have the white elephant in the middle of the room no one is talking about…China. If China devalues their currency we should see an erosion of Japanese export orders.
Today’s Reports and FED Activity
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
8:30 Gallup U.S. Job Creation Index
8:30 Treasury Refunding Quarterly Announcement
9:45 PMI Services Index
10:00 ISM Non-Manufacturing Index
10:30 EIA Petroleum Inventories
Overnight / Pre-Market
- Equity index futures are higher. Any pull-back on the open (if we get one) is likely an opportunity for setting up a new long. A move to 2023 possible on ES today.
- US dollar stronger on US mid-terms and weak globally weak PMI reports.
- Euro lower, yet 1.2500 remains a tough sticking point for the currency.
- Crude incrementally higher.
- Natural gas tests resistance.
- Gold and Silver another large whack down.
- Copper lower, yet $3.00 holds regardless of global slow down.
- Grains resume downward motion as all those who ramped up Soybean meal have taken profits.
- Softs are, well, soft in price action.
- All major currencies lower against US dollar.
Think About This! Markets remain volatile in the face of continued negative news from global PMI flash reports juxtaposed to the stronger USA economy. The mood of the day is higher US equity index futures.
Have a great trading day!
To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.