Buy The Dip

Originally published by AxiTrader

Market Summary

Buy the dip?

That seems to be the theme permeating through markets overnight with stocks higher in Europe and the US, the CBOE Volatility Index lower, bonds rates a little higher, the US dollar bid, and gold off a bit.

It's all good. Nothing to see here, move along. How the worm turns, from worries about a Trump presidency to a belief maybe tax cuts are still coming.

Of course the alternative theory is this is a market lacking any big potential catalysts till Jackson Hole at the end of the week so we are simply ebbing and flowing within a range.

So at the close the S&P 500 is up a solid 24 points, 0.99%, to 2,452 (and back above the trendline it broke last week), the Dow Jones Industrial Average is up 0.9%, and the Nasdaq 100 has risen 1.36% to 6,297.

That rally came after a strong showing in Europe, especially among the miners and despite the weakness German business morale the DAX rose 1.35%.

So this morning after a pretty good rise yesterday of 24 points on the S&P/ASX 200, SPI traders have marked prices up another 31.

On Forex markets the bid tone in the US dollar - which stated pretty much from the moment European traders put their feet under their desks yesterday afternoon Australian time, has pushed the Australian dollar lower to 0.7910. But it has outperformed among G10 currencies – save for the Canadian dollar – as metals and risk appetite remain strong. The euro and yen have lost ground and sterling continues to struggle.

On commodity markets oil is a little higher as traders were expecting another big draw in the API inventory data due this morning at 6.30am my time. Copper surged to the highest level since 2014 - but finished lower. Similarly gold is off as buy the dip in risk assets and the US dollar translates to sell gold.

Breaking: API Crude data shows a draw of 3.59 million barrels over the past week

Here's What I Picked Up (with a little more detail and a few charts)

International

• President Trump’s Afghanistan announcement yesterday is important for markets. Not directly, but I’d argue that it shows the Administration is still set on the business of government. Sure it changed the narrative away from the discussion about the President’s comments on Charlottesville. But the news cycle is so short these days it allows the White House to shift gears pretty easily.

• But that’s not my point. Rather in jettisoning his previous statements about the Afghanistan war as a candidate, and in directly acknowledging that change, the President has shown a level of pragmatism that might suggest his administration can still work with Capitol Hill to move toward tax cuts and infrastructure spending. Listening to the many podcasts I do over the past week I’ve been struck by the Republican resolve in the interviews to actually deliver on the agenda they have been promising for years. Maybe Greg Valliere of Horizon Investments is right and stuff will simply get done and placed on the President’s desk for signing. My bet – something will get done on tax.

• EDIT: I completely missed the Politico article last night when I was doing my research that made this point. But this is the point that Greg Valliere, and many Republicans, have made over the past 4 or 5 days and on which I based the above comments.

• And on pragmatism. Secretary of State Rex Tillerson said overnight that even if the US can’t win a battle field victory neither will the Taliban in Afghanistan so some sort of negotiated settlement needs to be made.

• But I must say I wonder about the administration’s penchant for opening multiple battlefronts. Last night we heard that the US is specifically targeting Chinese and Russian firms who the Treasury Department said were helping already-designated individuals supporting North Korea's nuclear and ballistic missile programs and its energy trade. China is not happy and released a statement saying it “opposes unilateral sanctions out of the U.N. Security Council framework, especially the 'long-arm jurisdiction' over Chinese entities and individuals exercised by any country in accordance with its domestic laws”.

• And on stocks, it seems you can’t keep a good bull market down. The S&P 500 has surged 24 points and is back above the trendline it broke last week. The BTD crowd are still in control it seems. It reinforces to me that we can’t get too bearish unless 2,400 breaks.

• German investor confidence has been harmed by the emissions scandal it seems. That’s the takeaway from the release of the latest ZEW economic index which fell to 10 in August against expectations of a 15 print and from 17.5 in July.

• While I’m in Europe it’s worth noting that investors are also getting nervous about the upcoming Italian election. Last night the spread between Italian and German bonds blew out again after news that Silvio Berlusconi’s party is now a supporter of a parallel currency to the euro being introduced in Italy. Many traders may have thought that Macron ended political uncertainty in the EU. To a large extent he did. But the Italian election – due by March – remains a possible disruptive force for markets, and the euro.

• Canadian retail sales undershot in June data released overnight showed. The print of 0.1% was well below expectations of a 0.3% rise during the month. But the fact that sales hit a new record of $48.99 billion emboldened those who believe the Bank of Canada is still on track to raise rates. Naturally, that helped the Canadian dollar buck the US dollar’s strength overnight even if it is off the lows.

Australia

• Yesterday I highlighted that Ray Dalio, founder of Bridgewater - the world's biggest hedge fund - had written that politics was now more important for markets than at any time in our life time. For economics that's always been the case as we were reminded again yesterday with the release of the ANZ-Roy Morgan weekly consumer confidence survey. While the big fall in confidence over recent weeks - from 118.3 at the start of August to a below average 109.2 this week - seemed to reflect concerns about family my sense, and a tweet I put out, was that it had to do with politics.

• That's something that ANZ (AX:ANZ) economist Cherelle Murphy confirmed with her own tweet shortly after mine. Murphy highlighted how consumer confidence seems to map reasonably well against the movements in the governments two party preferred vote in Newspoll. Here’s the chart.

• Message to Canberra - specifically the government - get your stuff together and get this citizenship uncertainty sorted out soon if you don't want confidence to effect the economy and even further dent chances of re-election.

• Looking at stocks now and after a 24 point (0.42%) rally yesterday SPI traders are betting it will be another solid day today with a 29 point rally overnight to 5742. That takes the SPI up toward the top of the recent trading range which comes in at 5,778. On the physical market last week’s high around 5,806 is the key short term resistance within what has been a tough zone to break between 5,800/5,840 over the past few months.

• Surely this has to be one of our best opportunities to at least break toward the top of the range given the moves in metals markets, and the recovery in US stocks overnight. We’ll see.

Forex

• Pretty much from the moment European traders got to their desks yesterday afternoon Australian time the US dollar caught a bid. What specifically was behind that is hard to know other than perhaps a recognition – finally – that Mario Draghi is not about to announce a new policy prescription at this week’s Jackson Hole conference.

• Or perhaps, as is more likely, this is just a continuation of the tooing and froing of sentiment toward the US dollar, and the Euro, as traders work through the difficult questions about the outlook for this pair and the US dollar in general. Realistically forex pairs are mapping out a range and we need either Central Bank statements, economic data, or both to drive prices outside the recent ranges.

• For the moment though the ranges are holding and the US dollar is a little stronger.

• So this morning the US dollar index is up 0.44% to 93.50. Naturally the corollary of that is a EUR/USD fall of 0.47% to 1.1760. The yen is a little weaker still with USD/JPY up 0.55% to 109.58, while the pound is down 0.64% and looking like that head and shoulders pattern I drew in my Forex Today column yesterday might be the way prices for the pound are headed. GBP/USD is down 0.62% at 1.2820. It looks like a run under 1.26 could be on the cards for GBP/USD.

• For the commodity bloc the Canadian dollar is thee stand out as highlighted above after that solidly unspectacular retail sales data for June. The kiwi is down 0.61% at 0.7278 while the Aussie dollar is still clinging to 79 cents at 0.7910 down 0.33%.

• The Aussie relative strength remains in no small part related to the strength in metals and iron ore over recent sessions. The strength of the local economy doesn’t hurt, nor does the surge in risk appetite which drove stocks sharply higher and the VIX lower overnight. So on balance a stronger US dollar has pushed the Aussie down but it’s outperformed because the other drivers of valuation remain strong.

Commodities

• We are waiting for the first of what I think will be critical US inventory reports for US oil this morning. But the mild rally in WTI and Brent overnight suggest that traders are betting that the data will show another big draw in stocks. WTI on closeout day for the front contract is up 0.57% to $47.64. Brent is up 0.48% to $51.91.

• What the data shows, and the market reacts, will be an important tell to the overall outlook for oil in the days and week’s ahead.

• The rally in Chinese metal markets continued yesterday. But copper pulled back from its highs at $3.01 in US futures (it was a similar small pullback on the LME and in Shanghai) to sits just a few cents a pound lower at $2.98. Iron ore and base metals were also sharply higher in trade yesterday.

• Gold is down today as bond rates rise a little, the US dollar strengthened, and stocks rallied. At $1,285 it’s down 0.43%

Have a great day's trading.