Redback
Key themes and stocks discussed today:
Wall Street continues to bide time and consolidate after the big gains in recent weeks. Bonds are doing the same, while the US dollar is showing some big cracks. Will the “redback” be the spider that bites the market next year? I think so, especially given the ubiquitous bullishness towards the world’s reserve currency.
Oil rebounded sharply off support after Saudi Arabia reaffirmed production cuts will be extended into January. The correction in the oil and the energy sector might now be complete.
American housing data showed industry resilience despite waning confidence. The scarce inventory offers critical support.
Friday was a chillaxed day for the Australian stock market, absent major economic releases. PMIs are due later in the week, along with a speech from RBA Governor Michele Bullock.
China will be hoping recent efforts to thaw diplomatic relations with the US (and other countries) will bolster investor interest.
Japan Inc. is printing record profits, lifted by the weak yen. The tone from BOJ officials is tilting more hawkish.
UK retail sales disappointed, while the Eurozone reported the biggest current account surplus in more than two years.
Notable mentions include US$, WTI Oil, Gold, SPDR Energy ETF, GAP, Ross Stores, Halliburton, Expedia, Disney, Alibaba, Hong Kong Exchanges & Clearing, Nomura, London Stock Exchange, Xero, Panoramic Resources, Australian Agricultural Co, SRG Global.
Good morning,
Wall Street’s three major benchmarks treaded water again on Friday. Markets almost have indigestion from Fed Char’s Jerome Powell last week as to the cloudy outlook on rates and, more pertinently, exactly when they will commence cutting. While stocks and bonds churned, the US dollar resumed a sharp decline.
Not much attention is being paid to the dollar’s latest misfortunes in the financial press, but I see this as a serious development. The US dollar is, in my view, on the cusp of a serious decline, which will have major repercussions for financial markets, not least commodities and gold. The redback (as I think the dollar will soon be known) broke below key technical support last week. The secular bear market for the dollar may well have begun.
The greenback is in technical trouble and could soon be monikered as the “redback”. The US dollar index was lower by 0.5% on Friday. One takeaway from last week’s conference in Singapore was the singular bullishness on the US dollar. Another was the ubiquitous bearishness about Chinese stocks.
I have often found these conferences to be contrarian tipping points. Last year, it was China bullishness just ahead of the reopening. I came away from the conference this year galvanised in my bearish outlook for the US dollar. Financial markets do not see a weaker dollar coming. The breakdown below technical support on the chart below is bearish. I see the dollar being on the very edge of an important decline and will write more about the bearish narrative this week.
One door closes, and another one opens. If the sun does set on the US dollar, then gold could well find a decent set of legs in the coming months. A powerful breakout is coming for US$ gold, in my opinion. Wall Street doesn’t see this one coming. But a handful, including Paul Tudor Jones and Stanley Druckenmiller do. I also expect the next round of 13F SEC filings from Berkshire Hathaway to reveal Warren Buffett is also on board. Gold stocks are still cheap, with the train having not quite left the station.
The S&P 500, the Nasdaq and the Dow Jones registered the third straight week of gains. The Dow Jones rose 0.01%, the S&P 500 gained 0.13% to 4,514, and the Nasdaq Composite added 0.08%. Energy was the best performer of all the 11 major sectors, finishing up 2.1%. Oil rallied over 4%. The small-cap Russell 2000 index rallied 1.4% on the day, outperforming broader markets, but this made up for what was a lacklustre week.
OPEC+ leaders are set to convene in Vienna on November 26 to discuss oil prices and any further potential cutbacks in production. An additional OPEC+ cut of a million barrels a day could take shape due to the conflict. Kuwait, Algeria, and Iran, are the OPEC members most agitated by the ongoing conflict in Gaza. One anonymous comment from an OPEC member over the weekend said “you should not underestimate the level of anger there is and the pressure leaders in the Gulf feel from their populations to be seen to respond in some manner.”
WTI oil staged a powerful upward dynamic on Friday, rebounding off key support at the breakout level. This reinforces the technical case that the correction is now complete. I anticipate a resumption of upward momentum and a retest of the September highs around the mid $90s over the coming three months.
Moving on, housing data topped expectations, with new starts increasing by 1.9% month-on-month to a seasonally adjusted annualised rate of 1.372 million in October, well above the forecast of 1.35 million. Meanwhile, the forward indicator of building permits increased by 1.1% to a seasonally adjusted annual pace of 1.487 million. Building permits seem to have been buffered by the small inventory of available homes on the market, even as borrowing costs have surged.
Housing starts
Mega caps were mixed on Friday as the 10-year Treasury yield was little changed. Advances for Amazon +1.65%, Tesla +0.3%, Meta Platforms +0.25% were offset by declines from Microsoft -1.7%, Alphabet -1.3%, and Nvidia -0.4%, while Apple was flat.
GAP jumped +30.6% after a strong fiscal third quarter, surpassing profit and same-store sales expectations, setting off a short squeeze. Management was cautious about the looming holiday season.
Revenue decreased by about 7% to $3.77 billion, but same-store sales only fell by 2%, much better than the 8.7% decline anticipated by analysts. Net income for the quarter was $218 million, or 58 cents per share, a drop from $282 million, or 77 cents per share, a year ago. Excluding restructuring costs, adjusted earnings were 59 cents per share, crushing the 19 cents consensus estimate. The gross margin improved notably due to lower commodity costs, fewer promotions, and other ongoing cost-cutting measures. GAP faces challenges with the underperforming Banana Republic and Athleta brands, leading to a conservative forecast for the holiday quarter with expected flat to slightly negative sales growth.
GAP fully inflected on Friday, and has cleared the primary downtrend in place since ’21.
Off-price retailer Ross Stores also had a good day, rising +7.2% after revenue, comparable store sales and earnings topped estimates as the retailer benefited from consumers seeking bargains. The company lifted the full-year outlook for EPS of $5.30 to $5.36, up from the previous guidance of $5.15 to $5.26. Revenue was up 8% to $4.9 bn while comparable store sales increased 5%, driven by higher traffic. Earnings per share jumped 33% from a year ago to $1.33 well above the consensus.
Retailers have mostly beaten muted expectations when reporting, although a cautious outlook from Walmart -0.4% earlier in the week dampened sentiment somewhat.
The energy sector was the best performer
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