Originally published by AxiTrader
Good morning, and welcome to my first look at the markets in a couple of weeks.
Much has happened since I went on holidays so this morning’s missive can’t go close to summarising all the moves across multiple markets. Nor can this note adequately summarise exactly where we are right now. But I’ll have a pop as usual.
Let’s begin.
Market Summary
The US dollar is at a low ebb presently with the dollar index collapsing and the euro surging. That’s a two-fold response to traders ignoring a reasonably dovish Mario Draghi last week and the continuing presidential conflagration over Russian meddling in the US presidential election last year and the ongoing investigation.
But with euro at 1.1665, the Aussie at 0.7910 and currencies broadly stronger across the board the moves in forex markets are starting to reverberate in other markets. Bonds rallied as traders bet that stronger currencies equal slower growth while stocks in Europe were also lower as investors bet that company earnings could suffer if the euro’s strength persists.
You could go so far – looking at the charts – as to say that Friday’s 1.66% fall in the DAX, which took it to the lowest level since April, confirms the German market is on a downtrend.
In the US the recovery in the Nasdaq since I went on holiday’s has been remarkable. New record highs! But the run of rises ended Friday with the composite index off a tiny bit to close at 6387. The S&P 500 and Dow Jones Industrial Average were also marginally lower finishing at 2,472 and 21,580 respectively.
Here in Australia the S&P/ASX 200's struggles continued while I was away. Friday saw the market close down 38 points for a 0.67% loss to close at 5,722. That’s 61 points below where it was when I last reported on July 5. Much has happened and the economic recovery looks to be taking hold here in Australia. Just don’t tell Australian investors.
Elsewhere gold is stronger on the back of a weaker US dollar, copper is relatively well bid, iron ore is up almost $9 a tonne from early July prices, but crude oil collapsed 2.5% Friday after news broke that OPEC’s compliance is slipping and output is rising.
And so the new week begins. It’s a big one here in Australia with the release of Q2 CPI on Wednesday the highlight along with the speech from RBA governor Phil Lowe. Australian dollar traders beware.
Offshore the FOMC decision and statement is the highlight on what is a pretty packed week of releases with preliminary Markit PMI’s, UK GDP, and Japanese CPI some of the highlights.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Donald Trump is the president who just keeps on giving. For 5 seconds I thought that his appointment of Anthony Scaramucci as communications director at the White House might have changed the narrative and the President’s Twitter behaviour. Perhaps, but not yet as the weekend Twitter tirade from President Trump showed. His assertion that he has “the complete power to pardon” as president has set the hounds running again.
- This is more than a sideline for markets. Sure stocks don’t seem to care – about the data or the President – at the moment. But I’d argue strongly that a big part of the US dollar's weakness right now is about the political situation in Washington and the inability of the president to move his agenda forward. That’s something he also tweeted about Saturday.
- But speaking of US stocks the question I wonder about is whether we are now getting to a point where we’ve moved from everyone hating stocks and being under invested to the opposite situation. Take a look at this little screen grab from the Wall Street Journal over the weekend. Short sellers giving up, the CBOE Volatility Index at incredibly low levels, and investors are still piling into stocks.
- It’s this last idea that’s worth discussing because BAML analysts, via the Wall Street Journal, says that investors put another $9.9 billion into global equities in the week ending last Wednesday. $3.5 billion went to active equity managers – the highest in the past two-and-a-half years according to BAML. Cash at BAML private clients is now down at a record low as a percentage of assets with exposure to stocks up at 60% - just a little below the March 2015 high of 63%. You can’t fight this market and the psychology of it at present. But 2,485 is the level to watch.
- Late breaking, president Trump is at it again.
Australia
- While I was away both the NAB business survey and the jobs report confirmed the economies swoon in April May is behind us and the economy is back on a reasonably solid footing. That being the case it’s really no surprise the RBA retains an upbeat outlook. And in the clearest sign that traders get this the focus on the discussion of where the neutral rate in Australia now is at the recent board meeting – as revealed in last week’s minutes – caught the attention of forex traders and drove the Australian dollar higher.
- That was an overreaction, as RBA deputy governor Guy Debelle pointed out on Friday, because just as rates in Australia didn’t need to go as low as they did in other nations so – as policy rates normalise globally – Australian rates are not under the same pressure to rise as they are elsewhere.
- Debelle also said that, “No significance should be read into the fact the neutral rate was discussed at this particular meeting, Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.” But the fact that the neutral rate’s fall to 3.5% has been discussed is a significant signal about the path of rates when the RBA does in fact decide it needs to raise them again in the future. It means a lower amplitude of the rate cycle and likely a slower pace of rate hikes.
- Now to stocks and it’s clear the Australian market continues to languish relative to the moves in the US recently. I’d argue the market satisfied a technical target in May with the rally to 5950 or thereabouts but got ahead of itself relative to the fundamentals of the local economy and outlook for local earnings.
- But with the economy looking good the question is now whether there is a chance of a break higher out of this wedge prices on the S&P/ASX 200 are in. I’ll naturally run with the price action with the current parameters of this wedge 5,789 and 5,681 at the moment.
- CPI this week is going to be a big one for the market. Will it reinforce Guy Debelle's message and knock the Aussie lower or will it surprise and drive the Australian dollar above 80 cents? We’ll know Wednesday at 11.30am. And then we'll hear from RBA governor Lowe who is likely to be positive on the economy but dovish on rates and the Australian rates.
Forex
- The data just hasn’t supported the Fed’s notion that the US slowdown was transitory. That’s something neither the market or the Fed could miss. It’s no doubt why there was a little dovishness sneaking into speeches while I was away. Certainly thee Citibank US economic surprise index has improved – it’s the orange line on the chart below. But at -52.6 it is still incredibly weak. Sure the Atlanta Fed GDP now says Q2 GDP will print 2.5% but markets aren’t sure.
- So, the path of least resistance has been for the US dollar to fall and euro, Aussie, and Canadian dollar in particular to rise. The question for me as my feet get back under my desk – it’s a stand up so more like adjacent to my desk – is whether the US dollar has now fallen enough. Again looking at the relationship between the EUR/USD and the CESIUSD it’s likely this argument can begin to be made. When I look at the EUR/USD chart I see 1.1735 as significant resistance. So we are in the topping region if that’s what euro is doing.
- I’ll talk more about forex markets in my daily forex piece a little later this morning. But it would be remiss of me not to mention the Australian dollar’s stellar rise over the past couple of weeks. Guy Debelle really gave the bulls something to think about Friday when he highlighted the RBA wasn’t signalling a change in policy and didn’t need to follow other banks higher at present because Australian rates didn’t fall as far as other nations. Effectively he’s saying Australian rates fell to levels relevant to the economic circumstances not to emergency levels of other nations. So there is no need to normalise.
- Debelle also noted the Aussie – which ran to 0.7988 last week – is complicating the recovery and transition. I haven’t received a sell signal yet on my system (which in fact generated a buy at 0.7615 on July 7) so I won’t get bearish yet. But 79 or 80 cents is probably the extent of the RBA’s tolerance right now.
Commodities
- Crude and gold have had a wild couple of weeks. Gold has benefitted from the weak US dollar and is back at $1,254 this morning after making a low of $1,204 while I was away. $1,261/64 looks like resistance from trendline and fibo levels.
- Oil fell 2.5% Friday after a consultancy suggested that OPEC output has risen materially. I reckon thee OPEC-non OPEC meeting today might also have contributed to a little bit of the selling as well. Reuters reported that Daniel Gerber, chief executive of Petro-Logistics, said in an email that "OPEC-14 supply is expected to exceed 33 million bpd in July which represents an increase of 145,000 bpd over June, driven by higher supply in Saudi Arabia, UAE and Nigeria,". $44.82 is the current level of support in WTI terms.
Have a great day's trading.