Originally published by AxiTrader
Market Summary
US stocks were down again overnight led lower by tech stocks as the Nasdaq 100 lost 0.47%. But the market overall recovered a long way from the overnight lows with Dow Jones Industrial Average closing down just 14 points when it had been off more than 100 at one point. The S&P 500 finished at 2432, down 5.5 points for a 0.2% loss.
European stocks were lower. But SPI traders are uncertain with futures price up 1 point overnight after yesterday’s heavy selling and reversal of the a large slab of this week’s rally.
No such caution in forex markets where the US dollar was almost universally strong. It’s gained more than 1% against the yen as traders await the BoJ meeting today. Euro has lost about half a percent, and the Aussie has given up all of yesterday’s strong employment data related gains and is back at 0.7580 this morning.
The pound is holding out however against the tide of US strength after the BoE’s MPC announced a 5:3 split vote to hold rates steady at 0.25%.
On commodity markets crude is slipping again with WTI off 0.76% as traders fret about the supply glut. Gold is lower as the US dollar strengthened, copper dipped and then recovered most of its losses, and iron ore was up a little overnight – but it’s still weak.
Oh, and in unrelated but important for markets news, president Trump went on a mini tweet storm over the latest leak about him be investigated by special prosecutor Mueller. These leaks are out of hand.
On the day the BoJ is the big one before EU CPI tonight.
Here's What I Picked Up - in a little more detail
International
- The Bank of England was more hawkish than I expected last night with the MPC vote a 5:3 split decision in favour of keeping rates on hold. That vote split caught traders on the hop in bond and foreign exchange markets with GBP/USD trading up to 1.2795 from around 1.27 just before the announcement.
- Of course the key driver of the MPC vote is concern over the uptick in inflation (the most recent data printed at 2.0% yoy), which the BoE said is expected to increase above 3% this year. That’s worrying the bank especially at a time of low unemployment which, the BoE said “could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation”.
- But, the economy in the UK has weakened as last night’s May retail sales show. The fall of 1.2% for the month was worse than the 0.8% expected. That’s pushed the Citibank Economic Surprise Index for the UK down even further to -26.6 – the lowest since May 2016
- On the continent ECB policy is again in the spotlight as Germany heads toward the September election. Overnight a senior member of chancellor Merkel’s party followed up comments this week from finance minister Wolfgang Schaeuble comments that the ECB needs to wind down QE.
- Werner Bahlsen, head of the economic council of Merkel's CDU conservatives, said “the ongoing purchase of government bonds has already cost the European project a great deal of credibility and has damaged it…The ECB can only regain trust with the return to a sound monetary policy."
- And while I’m in Europe while there have been olive branches offered to the UK over Brexit, and even BrEnter, Reuters is running a story citing an EU official “close to the matter” who says a softer Brexit approach from the Brits would be welcomed but also they need to work the financial parts of the divorce before they can work on a trade deal.
- US jobless claims last night reinforced why the Fed is still pushing forward on its plans to hike rates. Weekly jobless claims fell 8,000 to 237,000 against expectations of a 242,000 print. That continues the run of prints below 300,000 for jobless claims to 119 weeks. That’s the longest stretch since 1970 Reuters reports. Continuing claims printed 1.935 million.
- It is worth noting that this week’s NFIB survey really showed the impact of the tight jobs market in the US as labour quality continues to rise as the single most important problem for US business. That suggests to me with associated indicators that the Fed is right to be worried that wages inflation is coming down the line and the Phillip’s Curve is not dead (chart via WSJ Daily Shot).
- And just quickly import and export prices last night in the US were much lower than expected for May at -0.7% and -0.3% respectively – highlighting the Fed’s dilemma but also its apparent conviction at the moment.
- You can really feel president Trump’s frustration over the Russia investigation. In so many ways he’s blundered into this mess like a bull in China shop with the way he has handled the whole “Russia thing”. The latest leak is that special prosecutor Mueller is actually investigating the president for obstruction of justice. This is an important new part of the puzzle if true and one that could/is weigh on markets if the leaks keep coming or if there is actually fire among the smoke. Which is of course why I am writing about it.
- I have no way of knowing what the end result is. But I do know this is derailing the president’s agenda and that is important for the US economy and markets. Anyway here’s last night’s tweets.
Australia
- I can’t help but want to write what comes easy goes easy when it comes to the moves on the ASX in the past few days. After a solid couple of day’s rally the market was hit with an axe yesterday as the S&P/ASX 200 gave back 1.2%, 70 points, to close at 5,763. Financials, Energy, and Basic Materials led the slide and it was the big caps in these sectors that really were hit hard.
- As I say – easy come, easy go. The rally was explainable technically but not else. So it was with the heavy selling, and where the ASX200 found support, yesterday.
- On the day today SPI traders have futures up 19 points from yesterday afternoon. I'm not entirely convinced given basic materials and energy were the worst performers on the S&P 500 and financials were lower as well. Technically as long as 5,750/52 holds though on the physical and 5,740/45 on the SPI we might see a positive end to the week.
- Anyway, to something positive. Yesterday’s stonkingly good May jobs data for Australia is exactly the salve I need to ease my concerns about the outlook for Australia’s domestic economy and consumption. Jobs increased 42,000 in May with Aprils rise upgraded to 46,000 from the previously reported 37,400. Unemployment fell to 5.5% from 5.7%.
- The RBA will be pleased. Especially with the unemployment rate which is at its lowest level in 4 years and in what looks like a bit of a down trend.
Forex
- The US dollar is close to confirming a turn after a solid move higher followed the Fed induced bounce yesterday. In US Dollar Index terms the dollar just need to get back above 97.80 (currently 97.46) to suggest to me that a bottom is in place. If it does, if it can best this level then a move back toward 9820 then 98.50 opens up. The latter level is important and a break could suggest a run back toward 100.
- The corollary of this US dollar recovery is naturally a weaker euro and Swissie, a much weaker yen, an Australian dollar that has been hammered back from yesterday’s post jobs high, and generalised increases in the US dollar against emerging markets.
- Looking specifically, the pound has resisted this US dollar strength holding its ground (1.2760 as I write) after the surprise 5:3 split vote of the Bank of England’s Monetary Policy Committee suggests the bank might be much closer to a rate hike than many – myself included – though likely.
- The euro hasn’t been so lucky falling half a percent to a low of 1.1130ish before recovering to around 1.1150 as I write. It remains the case that from a technical perspective I see the 1.1100/10 region as the key level euro needs to hold with a break likely to lead to cascade toward 1.10.
- But the big mover of the night has been USD/JPY which is up 110.86 as traders ready for the Bank of Japan’s meeting and decision later today. Japan is recovering. But the data has started to roll over a little recently and the BoJ is unlikely to want to threaten that by changing policy at this juncture. So while I expect them to be positive on the outlook for growth the still low level of CPI inflation should keep them circumspect when it comes to monetary policy. As a result, they are likely to reiterate the 10 year target at 0%.
- Looking at the Aussie now, yesterday’s aborted rally is a sign that the sellers still lurk. The Aussie’s high just above 0.7530 was the second failure in a row below the 0.7540 region I’d identified (being the 138.2% projection of the recent rally) as resistance for the Aussie dollar. That the Aussie is back at 0.7577, down 0.12% on the day, leaves it with a very ugly candlestick on the daily charts. As I wrote in my daily Aussie note yesterday with commodity prices and interest rate differentials undermining the Aussie dollar it was only really the US dollar’s weakness that supports. So with the dollar stronger and looking bid as the Fed charts a hawkish trajectory that leg of the chair could be about to be kicked out. For the moment AUD/USD has support at the old resistance level of 0.7466 which also provided support in the hours immediately after the Fed. A break would suggest a move toward 0.7515/20.
Commodities
- Oil is down again this morning with WTI testing the bottom of its current down channel around $44.40 while Brent is at $46.81. Clearly, if prices fall much further we’ll be talking about the impact of low prices on the US shale oil industry. But for now the discussion topic is still OPEC and the efficacy, or lack thereof, of its attempts to rebalance the markets and force down inventory levels.
- The negative price action last night is a result of this concern that the oil glut continues. Traders were still musing over the previous day’s smaller than expected draw in crude and the unexpected build in gasoline stocks which were reported in the weekly EIA data. It’s still my base case that inventory drawdowns are required to get crude sustainably higher.
- Gold has taken out support in the $1,255/58 region and is trading at $1,254 this morning and looking wobbly as the US dollar strengthens and short US rates rise a little. $1,239 is where the 200-day moving average sits right now and perhaps gold needs to retest that level after its second test and failure of the $1,295/$1,300 region recently.
- Copper traded down to $2.55 overnight before recovering a little to $2.566 for a loss of 0.2% overnight. Base metals overall were mixed and iron ore has had a better night.