Originally published by AxiTrader
Market Summary
Stocks and bond rates are higher in the US this morning but the dollar has lost ground as the Fed begins its two-day meeting that is widely expected to leave rates on hold but announce the start of the run down – taper – of the Fed’s $4.5 trillion balance sheet.
The S&P 500 finished up 0.1% to 2,506 while the Dow Jones Industrial Average rose 0.18% to 22,370. High fives for new highs. The Nasdaq 100 was 0.1% higher at 6461 while stocks in Europe were universally higher. That in turn, has lifted the SPI by 12 points suggesting abetter day today on the ASX after yesterday’s disappointing fall of 7 points.
On forex markets the US dollar is on the back foot as traders await the Fed decision tomorrow morning. Euro is back near 1.20, USD/JPY seems to have stalled, and the Aussie dollar is back above 80 cents this morning as metals rally and despite the weakness in Chinese steel and iron ore prices.
On commodity markets, oil rallied and retraced. Gold is finding some support as is copper.
US 10's are up again at 2.25%
Today we have a speech from RBA assistant governor Luci Ellis, the Westpac leading index of economic growth, and Japanese trade data. Retail sales in the UK will be interesting tonight, as might German PPI. But the Fed is the big one at 4am AEST tomorrow morning.
Here's What I Picked Up (with a little more detail and a few charts)
International
- President Trump spoke at the UN overnight issuing warnings to North Korea and Iran but otherwise much more conciliatory to the supranational body than many thought possible just a few months ago. On North Korea, Trump said the unanimous vote on new sanctions was a good thing, warned nations that trade with the DPRK and attacked the regime saying “the United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket Man is on a suicide mission for himself and for his regime”.
- What’s important about this for traders is that a day after Defence Secretary Gen. Mattis said there are military options Trump is again warning of conflict on the peninsula as he tries to ramp up pressure on the regime. Most experts I read say action to follow this rhetoric is still unlikely – and that’s certainly the way gold, the yen, Swissie, and other risk assets are trading. But we all need to keep a weather eye on the peninsula. For me I like the optionality that gold offers in my portfolio down here near $1300.
- Back to the markets now and the Fed started its two-day meeting overnight. The market doesn’t expect anything earth shattering from the meeting but there are risks on both sides depending on the asset class being traded, what the dot plot suggests about a December hike and then the 2018 moves, and of course the tone and language Janet Yellen uses in her press conference tomorrow morning.
- The dollar seems most vulnerable to a reaction – in either direction. Currency markets overnight moved as though the Fed is going to be both benign and somewhat dovish in its outlook for rates. If that is the case we could see new highs in the euro and a resumption in the overall US dollar weakening trend. Yet equally if Yellen reasserts a tightening labour market, highlights the recent inflation data, or that rates still need to rise the dollar could find a bid. We’ll know tomorrow morning.
- More critically, and on a longer-term basis, is the impact the actual balance sheet taper will have on markets, specifically US interest rates. The Fed’s QE programs – one, two, and three – were a big part of recovery on Wall Street and the associated recovery in the economy and Main Street. To a large extent the continuing bond buying operations of the ECB and BoJ will mitigate this change in US bond markets as the Fed runs down its balance sheet. But if QE was important in suppressing the risk-free rate and supporting stocks then what impact negative QE – the unwind – will have must be managed and monitored carefully so as not to cause dislocation. That will be the Fed’s goal, and certainly, the US economy has self-sustaining momentum. So it’s a risk, not a fact. But bond and interest rates impact many markets and important global capital flows meaning this next phase of the Fed’s post-GFC monetary experiment can have a big impact on markets, traders, and relative asset performance.
- That’s something the ECB clearly understands. It’s clear in statements from hawks like Weidmann and Lautenschläger which conflict and contrast with those like Praet, Constancio, and to a lesser extent ECB boss Mario Draghi himself, that there is a battle over the path ahead for ECB monetary policy. At the forefront of that debate is the strength of the euro and the ECB’s disquiet with the impact of it on growth and inflation. Overnight we heard again – via a Reuters story – that the Hawks and the Doves are battling hard. The wash-up is the ECB may not announce the hard end to QE next month that many traders – especially forex ones – thought likely.
- Just quickly on the data front overnight. US housing starts fell again (-0.8%, v +1.7% exp). But for me the data that caught my eye was the export and import prices for August. Import prices rose 0.6% during the month after the July’s fall of 0.1% and against expectations of a 0.4%. That saw the year on year print jump from 1.5% to 2.1%. Likewise, export prices leapt in August (+0.6% v 0.2% exp) taking the year on year rate to 2.3%. At least in this part of the US economy it seems inflation is not dead and is back with a vengeance.
- Also out last night was the ZEW sentiment data for Germany and the EU. Both prints were higher than expected with prints of 87.9 and 31.7 respectively.
Australia
- A disappointing day for the index yesterday with the S&P/ASX 200 ended in the red down 7 points to 5,713. It was another day which highlighted the maelstrom of sectoral and specific company performance which sits below the surface of the overall index. The property sector was the culprit yesterday, which is a nice change from the Bank/Mining cohort which usually drives the index performance. But it again underlies, and reinforces, the range trading nature of this local stock market which simply lacks the types of companies, and drivers, which continue to power the US stock market to new highs.
- Overnight SPI traders have taken a positive slant again, adding 12 points to the close of the physical market at 5,713 yesterday. Whether or not that can be maintained across the day is an open question given recent price action. Again we’ve got a decent lead from the US and Europe but we’ll have to see as trader balance out metals strength with steel and iron ore falls, not to mention positive moves in US financial stocks after yesterday’s weakness for the majors in aggregate.
- Levels to watch on the physical S&P/ASX 200 are 5735/40, 50, and then 75 with support at 5700 and 5685. On the SPI it’s 5680 and 5730 as the inside range within this overall range.
- Just quickly on the minutes to the RBA’s September board meeting. I thought they were pretty upbeat really. They again suggest the RBA is confident that growth is indeed heading back toward potential - which by the way is where inflation should start to accelerate – and that the growth in employment is the salve for low wages growth. “Solid growth in employment was expected to continue, which would support household incomes and thus spending in the period ahead,” the minutes said.
- That’s it in a nutshell. I’ll keep watching the data and especially the NAB business survey for signs that things are about to change. Otherwise, if the economy continues to go ahead as the RBA expects it won’t be long before traders are more enthusiastically talking about the RBA’s first rate rise in 2018.
Forex
- Sometimes it’s just about price action and the narrative is written to fit that price action. Last night, the past 24 hours, where the US dollar has weakened a little across most of the forex board looks like one of those. With no incentive for position traders to do anything before the FOMC announcement at 4am AEST tomorrow morning shorter-term traders were, and are, free to find the path of least resistance. And that was a weaker US dollar.
- That makes obvious sense because the last round of Fed speakers we heard from before the blackout period were very much on the dovish side of the equation. So there is some risk that we see a dovish start to the balance sheet taper in the Fed’s words, its “Dot Plot”, or Janet Yellen’s press conference. I’m not convinced though. I believe the Fed is still on the correct path of policy normalisation and higher rates. Hurricanes Harvey and Irma have complicated things a little by dragging growth out of Q3 but there is likely to be give back in Q4. We’ll know in the morning.
- It’s clear that euro traders are not listening to the ECB leaks and comments. At least the doves that is. EUR/USD is up another 0.36% this morning to 1.1995 as the rally for the last 4 or 5 days continues. Like everything else the outlook depends on what the fed does and says tomorrow morning. But it’s clear in the price action traders have the disposition to buy euro until something hits them in the face and persuades them otherwise.
- USD/JPY is largely unchanged at 111.54 but printed a most intriguing candle. It could be a short-term sign the top is in, or just a pause in the rally. The Nikkei did well yesterday because of Yen weakness, and somewhat counter-intuitively, increased expectations of a snap election. And as bonds rise and risk aversion wanes USD/JPY still looks biased to at least test the 200 day moving average. But while below it this is just a counter-trend rally.
- Sterling is up 0.24% after surging earlier on speculation that Boris Johnson was going to resign. I know, go figure. GBP/USD is at 1.3525 this morning.
- The commodity bloc are all higher. The AUD/USD is back above 80 cents after yesterday’s local data and RBA minutes. The metals rally didn’t hurt either though traders paid no heed to the fall in Chinese steel and iron ore prices. Technically it’s still a lower high though so I’m still cautious on the Aussie though its clearly mapping out a range. It’s up 0.62% at 0.8009.
- The kiwi is up 0.69% at 0.7315 and the Canadian dollar is basically flat with USD/CAD down 0.1% at 1.2281.
Commodities
- We’re waiting on the inventory data but overall crude had an interesting night and another failure to hold the break above resistance. That’s the second night in a row that WTI has had a pop and then retracement. It suggests there is some selling as prices rise closer to $51 than the $50.50 level I had penciled in. Overall though both the first two contracts ar down 0.7% with contract two, the front from tomorrow sitting at $50 a barrel. Brent I down 0.5% at $55.21. NB – there is an OPEC/non-OPEC meeting at the end of this week.
- Gold is largely unchanged but a little better bid at $1310 while Copper sits at $2.95 and still hold support – as is gold which needs to stay above $1294/$1300.
Have a great day's trading.