Wednesday November 23rd 2016

 The Trump Bump

 Wednesday November 23^th  2016

Overview

President-elect Trump campaigned on promises of “massive” tax cuts and spending of as much as $1 trillion over a decade to rebuild the nation’s infrastructure. His unexpected victory in the Nov. 8 election spurred a rout in bonds, a surge in the dollar, and gains in stocks. All four major U.S. equity benchmarks climbed to records highs. A rate hike “could well become appropriate relatively soon,” Fed Chair Janet Yellen said last week. As always, it is all about inflation expectations. US 10-year yields have already risen a percentage point since falling to an all-time low of 1.318 percent in July (now at around 2.4 percent). “When rates pop up really fast like this, people who have some cash may want to start to put some money to work” buying longer-term bonds, said Schwab’s Jones. And “we think rates will rise further.”

Pension funds, which for years have struggled to keep up with their obligations as yields plumbed new lows, are now in line for a $100 billion reprieve as interest rates increase. Savers may finally see the interest they get from Treasuries rise after more than a decade of declines. And for banks, higher yields could also mean billions in extra income. Traders have described it as a bloodbath and a seismic shift, the Trump Bump. My personal opinion is that this is exactly what we needed (as a global economy) because sooner or later such big injections of cash from the Central Banks had to create inflation. Now the big question mark is, will Trump deliver and push not only US but the global growth higher? At the moment, everyone is betting on him and the recent moves in the different asset classes could extend further.

The EUR/USD caught everyone by surprise and despite a quick appreciation at 1,13 the morning after Trump election, we are now trading at 1,0550 with a multi-month low touched at 1,0526. I do not see a consensus view within the analysts and the movement has been quite sharp already. It is also difficult to judge form a pure technical point of view as the move is driven by strong fundamentals expectations. Having said that though, I would stick to historical data for the long term view which tell us that US dollar should depreciate after the FED start the hiking cycle and inflation picks up. On the shorter term we may see volatility bring the market further down to 1,0500 (first level) and 1,0430 (2015 low). If we go through here we may see the parity pretty quickly; some analysts already call for a “now or never” referring to the EUR/USD 1,0000.

The oil market was probably one of the few major products not affected at all by the Trump effect. As a matter of fact, oil traders are looking at the OPEC talks and grew more confident that OPEC will reach a deal to curb global oversupply next week (Nov. 30) as delegates said talks on assigning quotas to individual countries made good progress. (The Organization of Petroleum Exporting Countries in September proposed limiting the 14-member group’s output to a collective 32.5 million to 33 million barrels a day, which would be its first cut in eight years). Hurdles to a firm deal remain, however. Most importantly, Iran has sought special treatment since it’s newly free of international sanctions, and Iraq has contested OPEC’s production estimates. Today’s meeting, alongside intensive diplomacy among member states, is aimed at resolving those differences. “Oil fundamentals have weakened sharply since OPEC announced a tentative agreement” and the current glut will increase to about 700,000 barrels a day in the first three months of next year unless OPEC acts, according to the analysts. Any cut would have to come primarily from Saudi Arabia, Kuwait, the United Arab Emirates and Qatar, with other members keeping output steady at current levels through the first half of 2017, it said. Oil rose 4.4 percent to close at $48.90 a barrel in London on Monday, the highest in three weeks, as Goldman Sachs Group Inc. said the likelihood of a deal next week meant the bank was bullish on oil prices in the short term. Prices extended gains on Tuesday, climbing as much as 1.1 percent to $49.45.

Metals

The base metals complex was also boosted by Trump triumph, in particular funds with renewed risk appetite focused on the Copper market. We saw a wild move that brought Cu from 5200$ (price before Trump) to 6025$ in just few days after the US elections for then retracing back around 5500$ handle. What is more, during the days before the election Copper already went from 4630$ to 5200$. In total we had a 1400$ move in around two weeks which caught many by surprise. Looking at the reasons we see as the main catalysts being: infrastructure spending by Trump, China better than expected economic data, rising inflation (more risk appetite), balanced supply and demand in the Cu market for 2017. Further, Copper prices did not move during the whole 2016. By the end of October the year-to-date gain was at 0,5%. Therefore many cite also an adjustment with the whole complex growth.

Where from here? We are now trading at around 5700$ and my view is that we are still a bit too high and we should go and test the 5200/5100$; timing is difficult to judge. This level should hold and, at least in the short term, will be difficult to see it again below 5000$ (everything else unchanged). As a matter of fact, the technical picture changed a lot as we have now entered into a new trading range. To this regard we need to acknowledge that we have broken on the upside a very strong downtrend which was in place since 2011. In turn, this could prompt dip buying and therefore I expect the downside to be supported and market to trend higher over time (everything else unchanged). In order to sell it I would wait for the classical volatility explosions in order to make quick gains (from 5800/5900 onwards; stops above 6025$).

Trading ideas

Let’s now look also to the other metals:

Aluminium: Nothing really changed fundamentally on Ali but we saw a normal positive correlation with the complex (it is defined generally as <<broad-based upward pressure across the industrial metals thanks to improved global risk sentiment>>). The range is definitely changed at least for the time being: 1650$ - 1780$. LME are still declining despite and market looks ready for a push to test 1800/1820$ which I think could be a good sell. Buyers should step around 1680/1650$.

Lead I feel like lead is following the complex as well as I don’t hear of any particular demand increase or supply tightness for the moment. As a matter of fact is still struggling with respect to Zinc and the spread is opened up again to 440$. Given the general mood I would yet be careful selling it and wait for the 2300$. Buyers for a quick gain could step in at 2150$.

Nickel I would still play the upside game that so far worked Ok. It did not appreciate as much as Zinc or Tin but given also the positive mood on base metals we could see the 13’000 relatively soon. Be aware that 13’000/13’200 is a strong resistance level and we should definitely incur in some profit taking up here. Buyers could step in at 10810$.

Zinc broke above the 2420$ and we are now trading at 2665$ behaving ordinate from a technical perspective. Next good level is 2700/2710$ with stops above 2730$. From here I expect a good correction which could take the market down to 2400$ again. For buyers is yet difficult to pick a level as any level really looks like as a good buy for now.

Tin confirms again the “buy the dip” strategy. After a brief pullback at 20’000$ we are now already back at 21’400. No reason to give up now; available stocks are VERY low and fundamentals remain strong. Careful selling it.

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