Copper, Gold And Aussie Dollar Lower On Fed's Comments

Originally published by AxiTrader

Market Summary

Stocks are mixed but fairly stable this morning but off their lows in the US after the FOMC left rates on hold and said in the statement after the decision to leave rates at 0.75%-1% was announced that the economic weakness in Q1 was “transitory”.

The Dow Jones Industrial Average rose a tepid 0.04%, the Nasdaq 100 lost 0.37%, and the S&P 500 lost 0.12%. In Europe prices were mixed with London down around 0.2% while the DAX was up about the same amount as Theresa May brought Europe front and centre of the election campaign.

The washup is that the SPI is up a couple of points after yesterday’s big falls.

But while stocks are calm there was absolute carnage on other markets. The Australian dollar was pole axed, the kiwi wasn’t so bad but got hit with a hammer regardless. Bulls in sterling and euro were chased away and the Bulls retain the upper hand in USD/JPY. And that’s the theme of forex markets, the US dollar cutting a swathe through developed and EM markets.

I’m watching the price action in USD/SGD closely as the canary for the big US dollar turn.

There was also carnage on commodity markets. Copper dropped 4.4%, gold is at $1238 and oil is down again. So maybe SPI traders are a little bit optimistic.

On the day Australian trade and HIA home sales will be interesting as will RBA governor Lowe’s speech at lunchtime. Across the globe its services PMI day and we’ll here speeches from ECB president Draghi and his Canadian counterpart Poloz.

NB: Facebook Inc (NASDAQ:FB) shot the lights out with its report after the bell.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 -3 (0.12%) 2388 (7.07 Sydney - change since previous day)
• Dow +8 (0.04%) 20957
• Nasdaq -23 (0.37%) 6,072
• SPI 200 -5 (0.08%) 5,873
• AUDUSD 0.7419 -1.5%
• Gold $1238 -1.5%
• WTI Oil $47.55 -0.23%

International

FOMC

• The Fed has doubled down on its confidence that the US economy is still on track for more rate rises and growth will bounce back from the first quarter’s moribund pace. I’ll get to the statement in a sec, but what that means is that the CME’s Fedwatch tools estimates there is a 71.6% probability that the Fed will be hiking at its next meeting in June.

• To the statement and the key excerpt for markets is:

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.”

• So it’s pretty clear that the Fed expects 2017 to again be a year of weird and inexplicable weakness in Q1 to be wiped away across the rest of the year. Indeed the Fed additionally addressed the weakness in consumption we saw in Q1 saying that “Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid”.

• IMPORTANTLY, none of this is unexpected from the Fed this morning. AND markets seem to agree with the Fed as I pointed out in this piece yesterday which looked at the chart of US stocks and their relationship with the Citibank economic surprise index. BUT, what it does mean is that the data needs to start to pick up a little and cycle back into stronger territory. On that note it’s worth highlighting the Citi Eco Surprise index for the US had a small uptick to 19.5 overnight. Friday’s non-farms result is hugely important in this context.

• Oh…and the Fed didn’t really mention the Taper of the balance sheet. That’s something we’ll see in June I think when chair Yellen has a chance to explain. Assuming the data flows as the Fed expects.

• On US stocks. It’s hard to look at this chart and not think prices are going to head lower. I keep saying on my videos that prices have looked like a murder of crows sitting on a fence and likely to fall off. It hasn’t happened yet but much is baked into the cake. It fits with my longer term view of a top in the 2400/50 region also.

Elsewhere

• President Trump is working the phones and trying to get the bill to change Obamacare enough votes to pass the House. Note I haven’t said repeal. That’s because the new push to help those with existing ailments means it retains some of the original intent. Anyway, this is worth watching because a political victory could re-invigorate expectations around the tax plan and the Administration’s ability to implement it. Not to mention the timing.

• The battle continues in France with presidential candidates Le Pen and Macron currently squaring off in a marathon televised debate. Latest polls show centrist candidate Emmanuel Macron still has a 20 point lead.

• Theresa May is really turning this UK election into a chance to bash Europe. Overnight she accused EU politicians and officials of trying to impact the UK’s upcoming election. “Britain's negotiating position in Europe has been misrepresented in the continental press, the European Commission's negotiating stance has hardened, threats against Britain have been issued by European politicians and officials," May said. "All of these acts have been deliberately timed to affect the result of the general election,” May said.

• China is trying to de-escalate tensions on the Korean peninsula saying that the parties should “stop irritating each other”. Chinese Foreign Ministry spokesman Geng Shuang said, “the urgent task is to lower temperatures and resume talks”. With president trump’s more conciliatory tone earlier this week and this intervention there is a strong chance that the back channels are working.

Australia

• The local market, and the Aussie dollar, both had an awful day in Asia yesterday. The S&P/ASX 200's 58 point, 0.98%, fall to 5892 came as the banks and financial stocks came under pressure after a broker downgrade build on the previous day’s results induced selling. The miners also took a hit in was looked very much like a big “SELL Australia” trade (the AUDUSD was off 0.6% to 0.7489 around 5pm).

• That move continued overnight, at least for the Australian dollar which has been hit with an axe and is down another 70 odd points at 0.7427 as I write at 5.53am.

• SPI traders seem less troubled than forex traders and have actually marked prices up a couple of points just before the US market closes. That suggests we won’t repeat yesterday’s awful trade. The NAB’s report will have some say in that today as will the overall trendline support sitting just below market – a little way below – in the ASX200. That level, 5857, is both the trendline and my slow moving average. Any approach should hold, but if it breaks watch out.

• On the economy, the atmospherics for a consumer strike in late 2017 but particularly 2018 are growing. It’s behavioural of course but the tone of articles in the media and discussions about housing reinforce my view that households will turn the focus from wealth accumulation to debt reduction and this in turn will lead to lower consumption growth in the economy.

• The latest warning that prompted the above comment is an article in the SMH today on a Citi call that housing will fall 7%. I haven’t seen the full report just the story in the press but the Citi economists say that APRA’s moves to rein in housing will be more successful than previous measures and that this will in turn lead to lower house prices.

• I’m on board with that. But I’m interested in the 2nd derivate of falling house prices which is the impact on consumer and household behaviour. It is a good thing that business surveys remain upbeat and that employment looks like it might – might – have begun to turn up again as a result. That’s because it can act as an important salve to the consumer awakening to the mountain of debt that must be paid back. I strongly believe that once housing prices stop rising, and perhaps fall, consumers will be nudged toward debt reduction which means less spending.

Forex

• The US dollar has had a generally stronger day making gains across the G10 in various degrees after the Fed reaffirmed a commitment to higher rates and a stronger US economy. Euro (1.0890) lost about a third of a per cent, the Pound (1.2872) lost around half a percent while the yen continues to climb toward 113 overhead resistance with USD/JPY at 112.67 up 0.6%.

• Here’s the USD/JPY chart showing the trendline resistance:

• Aussie, Aussie, Aussie – oh my Lord! What a beautiful thing trendlines can be and what a sucker punch the rally to 0.7550 has turned out to be. The Aussie’s high yesterday was around 0.7545 and the low overnight was 0.7419 – 126 points of almost relentless selling over the past 20 hours. It looks overcooked on a very short term time frame but 0.7385/90 is not an unreasonable target still. It’s both the bottom of the current channel and the 61.8% retracement level of the 2017 rally.

• The Kiwi also was hammered last night and lost close to 1% at 0.6872. The price action reinforces my long term outlook piece I wrote earlier this week suggesting the Kiwi is biased back toward 65 cents against the US dollar.

• And it’s worth noting the US dollar is also stronger against most EM currencies I watch. The Korean Won has lost about 0.4% with USD/KRW at 1132, the Mexican peso is off a similar amount with USD/MXN at 18.82. And the USD/SGD which I believe could be the bellwether of the turn of the US dollar more broadly is just breaking out of the 2017 downtrend after building a base for some time. Watch this space.

Commodities

• Copper collapsed last night losing 4.4% as traders suddenly decided to focus on potential falls in Chinese demand and stockpiles. In my video yesterday I noted I thought prices would fall and said that the previous night’s bounce on the back of the Grasberg strike reminded me of the spike to $2.82 which was swiftly reversed. “we’ve been to this rodeo before” I think I said. So I’m not surprised copper reversed. But the magnitude of the reversal in one day is staggering and gets me closer to my $2.45 target.
• UGLY

• Crude remains under pressure from all the things I’ve been talking about. So I won’t rehash them. It’s about price now. So far $47 is holding. But if it goes I have a technical target of $44.51.

• Gold had a shocker last night as the US dollar strengthened and the Fed doubled down on growth. It fell through the $1245 region I’ve talked about and at $1238 this morning is through the bottom of the downtrend and off 1.5% day on day. $1233 is the nmext fibo support and then we have $1218/20 and $1194.

Have a great day's trading.