Central Bankers Move Markets Again

Originally published by AxiTrader

Market Summary

More new records for US stock indexes – and higher bond rates – overnight as the reinvigoration of the Trump trades gains traction and more followers.

That saw the S&P 500 finish up 0.14% to 2,503. The Dow Jones Industrial Average was 0.28% higher at 22,331 while the Nasdaq 100 closed at 6,454. European stocks were also higher with the FTSE 100 recovering half of Friday’s fall to be 0.5% higher. The DAX and CAC 40 were 0.3% higher.

Here at home SPI traders have built on yesterday’s 25 point gain and added another seven points overnight. We’re still stuck in a range but financials could look better again given interest rate moves.

On forex markets it was about central bankers again with comments from BoE and BoC speakers hitting both the pound and Canadian dollar hard. Euro was fairly quiet, the yen is under pressure in the current environment and the Aussie likewise given traders have other fish to fry. The Aussie is at 0.7961, down 0.51%.

On commodity markets, gold is still under pressure, just like the yen. Copper found some support and oil had an aborted rally.

Today we get the RBA minutes. Will they be upbeat or reflect Ian Harper's concerns? That matters for local markets today.

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

International

• North Korea and the Hurricanes have been good for President Trump. Not just his image – because he’s done pretty well – but also his tone. To me they have shown he really is playing table stakes these days. We saw another sign of him growing into the job overnight when he went to the UN and said he thought the place could be reformed and improved but was nowhere near as aggressive as candidate Trump – who appeared to want to gut the UN – appeared. Throw in the hands across the aisle, and the associated reignition of the spluttering Trumponomics rally in stocks and upward pressure on bonds and it’s clear markets sense this change as well.

• And on that front – at the very real risk of hubris - regular readers might enjoy this. You’ll recall a couple of weeks back when President Trump reached across the aisle I posited a hypothesis that this would reinvigorate notions of the Trump trade. It seemed like the natural behavioural response to me and an overnight article in Business Insider has confirmed that is a big part of what's driven US stocks to these new records for the three major indexes you can read “The Trump trade is coming back from the dead as investors anticipate a tax cut plan” here. And this is the chart showing the move.

• And while I’m talking about the US Administration, General Mattis, Secretary of Defence, said this morning that there options in Korea that will not endanger Seoul. That’s something I also read in some politico strategy columns this morning. My guess is the thinking goes the US does not want, nor is seeking regime change. Nor does the US have any interest in killing millions of North Koreans, endangering its allie's citizens, or getting in a face off with China. Thus a surgical strike to take out Kim Jong-uns capability could be the appropriate and perhaps palatable – saleable – resolution for the international community. We’ll see, diplomacy is not dead yet. But this isn’t far from it.

• Mark Carney clarified the Bank of England's message on interest rates in a speech overnight. He said rates would rise sometime soon as the bank addresses inflation. But Forex trades attached themselves to the tone of gradual tightening Carney said was likely given the uncertainties around Brexit or the economy. He noted that “any prospective increases in bank rate would be expected to be at a gradual pace and to a limited extent”. That is a slow and shallow path of higher rates not the level of rates an inflation rate likely moving above 3% in the next couple of month might imply. As a result the pound came under heavy selling pressure and gave back more than 1% to sit at 1.3494, down 0.74% since 7am yesterday, and well off Friday's highs.

• A Canadian central banker – deputy governor Timothy Lane - finally addressed the impact of the Canadian dollar's strong run against the US dollar saying. “We will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar”. One thing he did not say, and something that is truly important for markets at a macro perspective, is that Canadian business is doing well because of the “global economic expansion that is becoming more synchronous”. Yes it is.

• ECB governing council member Ardo Hansson said overnight the bank needs to go beyond just the decision on asset purchases. “What I would advocate is a somewhat broader recalibration," Hansson said noting “we have a range of instruments already under implementation. And maybe a few that we could in addition bring to the table for consideration." Interestingly he appeared to want to push the ECB to a move overt forward guidance on rates.

• Bond, Bonds, Bonds. There is no inflation in the developed world right now. At least not the type that has central banks or bond holders overly worried. That’s kept bond rates very low, and well below the highs of the year in many jurisdictions. But bond rates are rising again across the globe. Gradually, and without aggression. But rising nonetheless. That’s important because if falling rates on the back of central bank QE were such an important part of the stock market surge and global economic recovery from the crisis then what impact does the withdrawal of emergency stimulus across the globe have on rates and, by extension, other assets? That’s especially important as the Fed will this week announce the start of its balance sheet taper. Is it negative QE? I kind of think it is. And I think it eventually drives bond rate higher.

Australia

• It was a better day in the local market yesterday as traders reacted to the lead from the US and mixed to positive price action in metals markets during our time zone. Indeed when you look at the rise in stocks, bonds, and the Aussie dollar yesterday it's clear we had a mini risk-on move during our day.

• That left the S&P/ASX 200 off its highs but still 25 points to the good to close at 5721. Overnight SPI traders have added another 7 points and the fact that we have seen a better day on Wall Street for the financial and basic material (where the miners are ) sectors suggests we may have an even better day that that.

• Technically yesterday was an inside day – that is yesterday’s price action was inside the range of the previous day’s trade. That, and the fact that we were off the highs at the close tells me traders are still cautious. But with rates rising across the globe - even slightly but likely a trend – and with expectations of an and RBA rate hike being priced closer in time the beaten down financials might be the engine of growth for this market. Certainly, we are still in a range but we may at least be able to head back toward 5,800 – the top of the range.

• I say that because I do think the time for an RBA rate hike is nearing – or at least more aggressive market pricing anyway. Yes I have concerns about households ability to continue spending. Yes back when we had that weak data run at the end of the first quarter I wondered if those geese were coming home to roost. But the uptick in the economy since then, the strength of the NAB business survey and the associated strength in the labour market mean the economy is heading in the direction the RBA has told us.

• That was a long-winded way of saying if rate rises get priced into interest rate markets it will also see a repricing of expectations about bank Net Interest Margins (NIM) which is usually positive for financials.

• Today’s RBA minutes might be very interesting – and not just for forex traders.

Forex

• As discussed above the Canadian dollar and pound were the big movers overnight on the back of central bank comments which seemed to mitigate some of the excitement forex traders had for these pairs. That’s seen the pound lose 0.7% to around 1.35 now while USD/CAD is up 0.8% at 1.2289. It’s ready for a run unless the Fed releases its inner dove this week.

• Elsewhere the euro is hanging tough at 1.1957 up 0.11% after data showed EU inflation is starting to trend a little higher once more. That move was against a generally stronger US dollar which is back above 92 in US Dollar Index terms up 0.17% to 92.03.

• The yen’s weakness continued and USD/JPY sits at 111.53 this morning up 0.62%. Dollar Yen is very sensitive to interest rate differential and with the reduction in tension over the Korean peninsula – at least in markets – it has a double whammy of drivers higher. My target is the 200-day moving average at 112.25.

• The Aussie dollar is down around half a percent this morning with AUD/USD at 0.7964. After rallying up to resistance at Friday night’s highs around 0.8030/35 in our time zone yesterday, the Aussie came under selling pressure that knocked it down to a low around 0.7934 – just above the bottom of the little four hour uptrend channel. My hypothesis remains the same. The Aussie is in for a period of underperformance to the US dollar – and some crosses – as the rally in stocks, sell off in bonds, and retracement in metals sees traders focus elsewhere. I have 0.7850 pencilled in as my target at present.

Commodities

• Stocks hitting record levels, bond rates rising, risk aversion waning, and concerns about a conflict in North Korea receding is a potent cocktail of negativity for gold. As a result gold has broken down through its 3 month uptrend channel and is now falling toward vital - but also garden variety - support which come in around $1299. That's the level I highlighted in my technical outlook for gold yesterday. You can read that here. And here is the latest update of the chart showing the level.

• Oil prices continue to hold near, but below, important resistance at $50.50 on a day close basis. The front contract - which expires Wednesday - closed largely unchanged at $49.91 while the second contract is sitting at $50.34 after a run to $50.80/85 overnight. These couple of days either side of the roll each month often throw up interesting moves. But for me it's the break of $50.50 I'm watching. It would be an important technical signal for higher prices in time once we see a close above that level.

• Copper is up a little this morning at $2.9455 for a 0.6% gain. I saw an interesting story on Reuters this morning which might help explain – ex poste and fundamentally – the recent move lower. Reuters reports that banks don’t want to fund copper inventories or warrants held in South Korea. As a result this has led to selling which has led to selling. I hadn’t thought of that – didn’t need to, the charts told me when copper was going to fall. That said though, one trader explained the mechanism to Reuters, “Bank risk committees have decided they don't want this business because of North Korea stepping up its nuclear bomb tests…People who can't finance their own warrants in South Korea have to push the metal back into the market. It's a vicious circle because the next person probably has the same problem,” the trader said.

Have a great day's trading.