Originally published by AxiTrader
Market Summary
Wall Street found some succour in the weaker than expected CPI print Friday (1.7% yoy) as traders bet that the chances of another Fed hike this year are now even lower than previously thought, given inflation is comfortably below the Fed’s target. That data point seemed to outweigh the increased rhetorical fight between President Trump and Pyongyang
That helped the Dow Jones Industrial Average, S&P 500, and Nasdaq all finish a little higher and it should – hopefully – help support stock prices in Asia during today’s trade. At the close the S&P was up 0.12% to close at 2,441. But that’s still down 1.4% on the week. The Nasdaq was 0.64% higher Friday, and the Dow rose 0.07%. Those recoveries should help European stocks when they open this afternoon after what was another poor days trade Friday where the FTSE, CAC, and DAX were all lower.
The washup is that after the local market had a poor close Friday to end a rough week SPI traders are still cautious with prices down 3 points on Friday’s close after the S&P/ASX 200 ended the week off 68 points, 1.18%, at 5,693 as Asian bourses came under heavy selling pressure. .
On foreign exchange markets moves higher in the pound, euro, Swiss franc, and Canadian dollar Friday suggest the easy money has been made by US dollar bulls and perhaps that recovery has already lost traction. That’s certainly the case against the euro, and the Aussie held in pretty well last week – it’s at 0.7892 this morning and looking relatively strong.
On commodity markets oil prices collapsed and then recovered while the tensions on the Korean peninsula, and the bond market rally helped gold to trade to $1,291 Friday, its highest level since June. Gold is at $1,288 this morning. Copper was lower again.
Today’s Chinese data dump, including July retail sales, industrial production, and investment is going to be important as is Japanese Q2 GDP.
Looking at the week ahead has some important minutes traders will be focused on from both the RBA and the FOMC’s last meetings. CPI in Europe might be an interesting data point for forex markets. North Korea appears to have set itself an artificial deadline for a plan to shoot missiles to Guam tomorrow, and of course, we have joint US-Korean exercises next week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Tensions between the USA and North Korea escalated again Friday and over the weekend. President Trump appeared to draw an easily crossed red line when he said that if the DPRK event threatened America or its allies there would be a response which was “locked and loaded”. But cooler heads might have got involved with the President later saying at a news conference flanked by Rex Tillerson, General McMaster, and UN Ambassador Nikki Haley that they hoped for a positive outcome.
- We all do. But this week has a couple of potential flash points. First is the North Korean’s own deadline for mid-August for the plan to shoot the missiles toward Guam to be delivered. Then we have scheduled South Korean – US military exercises looming next week.
- President Trump spoke to President Xi of China with the latter again reiterating the message we heard from China last week. “Concerned parties must exercise restraint and avoid remarks and actions that escalate tensions on the Korean peninsula”, the Foreign Ministry said Xi told Trump during their conversation. Russia’s foreign minister Sergei Lavrov is getting involved as well saying China and Russia have a plan to de-escalate tensions which includes the cancellation of Military exercises on the US side of the equation.
- And speaking of President Trump and China. In what could be a poor piece of timing, or part of the strategy to ramp up pressure on China to intervene in North Korea, reports are President Trump is going to investigate Chinese trade practices – with a specific focus on intellectual property – this week.
- And the President, who seems to thrive on multiple theaters of engagement, has also said a military option in Venezuela is not off the table.
- But it seems traders were happy to bet that central banks still trump geopolitical tensions. Or at least that’s the inference I have to take from the fact that US stocks were a little higher on the night after the weaker than expected CPI print for July of 0.1%. Markets had been expecting a 0.2% print and 1.8% year on year not the 1.7% which was released. Core inflation at 1.7% was as expected. But both rates are still under shooting the Fed’s 2% target and even though there are plenty of one off factors to help explain the dip and undershoot is an undershoot meaning the Fed is likely to stay its hand a little longer, traders are betting. So US 10’s closed the week at 2.187% - the lowest close since late June.
- But perhaps I have a better explanation for the move higher in US stocks Friday – a simple one. The S&P 500 found support at a trend line I’ve had drawn in since earlier this year which stretches back to the December 30 low. It’s hard to see on the chart – but the low was a perfect test of the trend line.
- And here is an interesting one on the short side of stocks. Reuters reports this morning that “US mutual funds that attempt to profit in falling markets attracted $413 million in new investments during the second quarter, the funds' largest inflows since the height of 2013's "Taper Tantrum" selloff, according to Thomson Reuters' Lipper research unit.
Australia
- RBA governor Phil Lowe was pretty upbeat Friday when he and his team faced the House of Representatives Economics Committee. There were no real surprises in what he had to say in either his opening statement or the answer to questions. He stuck to the message of the SoMP and his statement earlier this month after the board meeting that growth looks pretty healthy.
- One thing that was interesting was that in response to a question about the level of the Australian dollar at current levels and what the RBA would do about it he said that intervention was a possible tool available but that he didn’t see any need to use it at the moment to restrain the Aussie dollar’s price. Naturally , he AUD/USD low was in once he said that.
- Unfortunately, there was nothing in Lowe’s positivity which could dissuade the bears from selling the ASX down Friday. The fall of 67 points and close at 5693 took the 200 index out and below the wedge we’ve been watching in the physical market recently. But in SPI terms – and I prefer the SPI as the real indicator of the Australian market because it trades most of the clock not the 6 hours of the physical market – it is the 5,590/5,600 level which is the bottom of the range and the level that would need to break to get too bearish.
- As you can see in the AxiTrader CFD below that range bottom remains intact. ON the physical the 5,625/30 lows from early June is a level to watch.
Forex
- The US dollar lost ground Friday. Whether it’s the euro back above 1.18, the Aussie breaking the August downtrend, a key reversal day for GBP/USD and USD/CAD, the signs are that the easy money in this US dollar recovery is – or has been – made.
- Naturally how the rhetoric, tensions, and heaven forbid action, flow in around North Korea will remain a key and critical factor for forex traders this week. But there is some chance that maybe EU inflation could remind traders the ECB is not yet likely to materially change course? But then again the market remains more convinced than me that the ECB will announce changed policy for 2018 at its September meeting. We’ll see.
- In the mean time though we’ve seen the emergence of a reversal in US dollar strength across the board. But the fact that we also saw the range hold in USD/JPY suggests the initial moves in currency markets in relation to the heightened tension on the Korean peninsula have been made and traders are waiting for the next shoe to drop.
- I also find it interesting that even though USD/CHF was lower Friday it did bounce from the lows. That suggests, along with all the other moves we are seeing right now in forex markets that this is not a singular narrative about the US dollar overall. The other side of the cross is important. It’s why the Aussie has retained support, why the euro is doing well – across the board – and why the yen is strong but yet to break the range.
- Here’s the USD/JPY chart - I’m watching this range closely.
Commodities
- Gold is edging toward what looks like very important overhead resistance. It’s buoyed by the geopolitical tension as well as – strangely – the absence of inflation. I say strangely because many see gold as an inflation hedge. So when gold is rally – in part – because of a lack of inflation it could seem strange. But the nexus is the relationship with bond rates we’ve been seeing in the way gold trades for a while now. US and other bonds rallying (rates falling) takes the pressure off gold and has allowed it to rise to $1,288 this morning.
- $1,295 is the trendline – top of the wedge – you can see in the chart below. A break would be decisive. But I’ll respect this level unless or until it breaks. As I wrote last week though at $1,259/61 gold was a snip. Like the US dollar the easy money has been made. Now we’ll see how bullish the bulls really are.
- Crude was higher Friday night after the EIA recalibrated its forecasts for demand growth higher. Prices were shaprly lower at one point with WTI trading down to $47.96 before bouncing back to close at $48.82. Brent closed at $52.10.
- Copper, like oil, dipped sharply before recovering. It’s at $2.91.
Have a great day's trading.