Originally published by AxiTrader
Welcome to my daily Markets Musings.
This is essentially my little black book, the diary of market moves I’ve been writing for myself since that day back in April 1988.
It’s not supposed to catch everything – just the things that help me build the fundamental narrative I need around what’s happening in the markets I watch, and which then readies me to take the technical signals when they come.
Greg
Market Summary
Red. Yes red. That’s the colour of the screens this morning as US stocks dipped overnight after making fresh record highs early in the day. That ended another nice little run of wins for US stocks and at the close the S&P 500 was down 0.4% at 2564, the Dow Jones Industrial Average was off 0.23% and the Nasdaq 100 was 0.76% lower.
It’s a busy earnings week with 200 companies reporting. So there is still plenty of water to flow under the bridge for stocks.
Europe had a quiet night although all the major indexes had small gains. Locally after knocking 13 points off yesterday SPI traders have subtracted another 9 points overnight. It’s another sign the market looks like it’s topping to me.
US rates were a tiny bit lower with the 2’s at 1.5583% and the 10’s at 2.3755%.
The US dollar was mixed. Up 0.14% in US Dollar Index terms (93.82), 0.33% higher against the euro, which fell to 1.1746 and is looking vulnerable, but 0.1% lower against the yen with USD/JPY at 113.34 after it traded above 114 at one point over the past 24 hours. The kiwi stabilised, the Canadian dollar is on the back foot as traders await this week’s BoC decision and perhaps fear a weak inflation outcome in Australian tomorrow as the battler remains offered at the moment. AUD/USD is at 0.7806, down 0.15%.
On commodity markets gold dipped but recovered back to $1280 an ounce. Copper is up at $3.16, iron ore is also higher and crude oil is mixed below recent range tops. Worth noting though I picked up a potentially bullish news item long term which is worth noting (see below).
Highlights today are a speech from the ECB’s Nuoy and aa raft of “flash” PMI’s for October.
Here's What I Picked Up (with a little more detail and a few charts)
International
- President Trump said overnight that he supports a new top tax rate for the wealthy. This is important because it reconciles his views with those of House speaker Paul Ryan who said last week that he didn’t want to see “a big drop in income tax rates for high-income people”. The FT reports President Trump said “This is about the middle class. It’s really about the middle class and about jobs. And if I feel that the middle class is not getting what I want them to get, and that’s going to be a lot, because I want them to get really a lot. Then I’m going to do a fifth bracket, which will give them more”.
- And on tax cuts a new Reuters pool shows that economist think the Fed will raise rates in December but only twice next year because of low inflation. The poll also showed that 40 of the 50 economists polled said the US economy doesn’t need the extra stimulus the tax cuts will bring. Now I ask you to reconcile that with the more dovish view on rates. Just saying.
- President Trump also said he’ll make the decision on next Fed chair “very shortly, pretty shortly”. He’s loving the attention. Just saying, again.
- The Chicago Fed’s national activity index is something I used to watch before we had the NowCasts of GDP available. It’s a look at how the economy is tracking and is “a monthly index designed to gauge overall economic activity and related inflationary pressure” the Chicago Fed says. Anyway, it rose rose to 0.17 from a downwardly revised -0.37 in August. That was better than the markets -0.1% expectations with the rise on the back of production-related indicators, as well as higher sales, orders and inventories, along with employment-related indicators. But personal consumption and the housing category were a drag, though less than in August.
- It’s not hard to see why BoE deputy governor Cunliffe said the November rate hike is an open question overnight. The CBI reported that business optimism in the UK collapsed from +5 to -11 for Q4 2017. The key drivers of the move were falls in domestic orders, output growth, and sentiment around export prospects. Investment intentions are also down with spending plans for building at the lowest levels since 2009. “I am not going to try and anticipate the meeting, but for me the economy has clearly slowed this year," Cunliffe said. Yup, Brexit uncertainty folks. Business hates uncertainty just as much as traders do.
- Something to file away under “keep an eye on China’s reaction” for the long term is news yesterday that after his big electoral win Japanese prime minister Shinzo Abe is going to push ahead with reform to the country’s pacifist constitution. He said he wants to build consensus among his ruling coalition and opposition and then he aims “to win the understanding of the people, so that we can gain a majority in a referendum”.
- And while I’m on geopolitics, British Foreign Secretary Boris Johnson said the DPRK is holding a “nuclear sword of Damocles” over the human race. Delivering a speech at Chatham House Johnson said the US President has an “absolute duty” to protect Americans from Nuclear attack. Johnson said that “It is this increased tempo of nuclear testing, coupled with florid outbursts of verbal belligerence, that have reawakened, even in this country, those forgotten fears”, of nuclear attack. He added “I am afraid that the US President — whoever he or she might be — will have an absolute duty to prepare any option to keep safe not only the American people but all those who have sheltered under the American nuclear umbrella”.
Australia
- The topping pattern continues on the S&P/ASX 200 with early strength yesterday giving way to a fall of 13 points, 0.22%, by the close as the ASX200 ended the day at 5,893. The warning signs were there over the weekend when Europe failed to really follow the US market higher. It’s simply a function of that which buoys the US market – tax cuts stimuli – not being a factor in other markets right now. So While Europe and Australia, among other markets, remain elevated, that kicker was absent.
- And after such a steep rally on the ASX, the balance of probabilities – and history of these types of moves across many markets and many times frames – is for a consolidation. That can either be in time – sideways trading – or in price which would see a fall back below 5,800. That’s my favoured option based on the setup that has emerged. Worth noting though, while I note the topping pattern I’m yet to receive a sell order signal. Maybe tonight, or if the physical breaks 5870. Here’s the SPI chart where the relevant level is 5845.
- One thing worth noting however for the economy and for stocks is that Federal treasurer Scott Morrision is trying to reinvigorate tax and economic reform. The SMH reports this morning that “Treasurer Scott Morrison has declared business tax cuts are "urgent" as productivity growth dwindles and competitor economies prepare to slash company tax rates in a bid to attract capital and accelerate economic growth”. I’ll leave you read the article and wait on the official announcement today. But this could be good news for the economy.
- One thing worth noting though “The price of a generation of Australians growing up without ever having known a recession is that reform comes more stubbornly and incrementally…We also need to understand that many Australians are now far more sceptical of change. Whenever governments mention the word 'reform' or 'productivity', they get nervous” the SMH says Morrison will say. Yes and Yes they do.
Forex
- The US dollar is gaining traction as traders reprice a hawkish Fed and perhaps take a little short US dollar positioning off the table in the run up to this week’s ECB and BoC meetings – among others. It remains the case for the moment however that the US dollar – whether in DXY terms or against the Euro – has still not broken recent ranges. But a break of 94.25 in the DXY and 1.1660 for the euro would be a signal that the next leg of the US dollar’s recovery has begun.
DXY Futures Daily (Source: Investing.com)
- Looking at the euro specifically it’s been an interesting down day as separatist tensions in Catalonia have continued and the votes in northern Italy over the weekend have highlighted that many regions of the Eurozone would like more autonomy and self-government. It’s not the existential threat to the EU that the French election posed earlier this year. But uncertainty in any form often weighs. Especially when it’s a convenient excuse to buy dollars at a time it’s on the rise anyway. As I said above 1.1660 is the key for the euro.
- USD/JPY climbed to 114 at one point. But it’s back at 113.36 this morning actually down slightly – 0.1% - on the day. GBP/USD is up 0.1% at 1.32 as competing forces of weak data and a little more positivity about the Brexit process have the sterling bulls and bears at a standstill. The fact the pound has gained 0.34% against the euro though is worth noting. EUR/GBP is at 0.8899.
- On the commodity bloc the Canadian dollar continues its pre-BoC weakness and is down 0.15% with USD/CAD up at 1.2642. The kiwi stabilised over the past 24 hours. After falling to a low of 0.6933 yesterday it is sitting at 0.6969 this morning up 0.1%.
- The Aussie dollar is a little weaker though. At 0.7807 the AUD/USD is off 0.14% this morning but off the lows of the past 24 hours at 0.7797. Copper was higher, as was iron ore. Risk assets are higher and investor risk appetite looks healthy. Yet the Aussie dollar is a little lower over the past two trading sessions. Certainly that’s in large part as a result of the US dollar’s move. But it is interesting nonetheless.
Commodities
- Crude is in the middle of a messy period of price moves and competing forces at the moment. But as it ekes slowly toward the top of the recent range in both WTI and Brent terms I saw an article which is possibly the most bullish long term look at crude I’ve read in some time. The FT reports US investors are tired of the “growth at any cost” model. It quotes Doug Suttles, CEO of US/Canadian oil and gas producer Encana, who says the industry has moved on from “resource capture” to “value maximisation”. As a result the discussion at company level and with investors is about returns on capital invested and cash generation. OPEC secretary general Mohammed Barkindo will be doing cartwheels.
- The story fits the narrative of lower rig counts in the US over the past few weeks. More importantly thought it also fits OPEC, and Russia’s, narrative that prices need to rise back to levels that generate a better return for producers. While US shale could never join the production cut as OPEC would like, perhaps the forces of capitalism will ultimately prove the constraining force on production and thus help prices rise through time.
- For the moment though both Brent and WTI are sitting below recent range highs and need to take these out to kick to the next levels which are $59.22 and $55.06 respectively. Time will tell.
- Gold is still drifting but largely unchanged this morning at $1280 or thereabouts after trading down to a low of $1272.50. My daily system is now short.
- News yesterday that China’s refined copper production was at its highest since late 2014 didn’t hurt prices with copper prices still holding above $3.11 and rising half a per cent to $3.169. National Bureau of Statistics data showed China produced 774,000 tonnes in September up from 749,000 in August.
Have a great day's trading.