Originally published by AxiTrader
Market Summary
The US dollar and copper were the big movers overnight with the dollar catching a bid as traders seem to finally be recognising that the stimulatory impact of the tax cuts could indeed put pressure on the Fed to raise rates a little faster – or indeed not worry as much about low inflation.
Bond markets seem to be listening with the front end of the curve rising sharply, while the 10-years remains well bid presently. US 2-year rates are now at 1.83% while the 10's are at 2.36. That means the curve is now the flattest its been in a decade.
If forex traders are right, assuming they persist or the fed doesn’t disabuse them of the notion next week, then 2018 could be a big surprise for 10 and longer rates in the US.
Turning to copper now and a combination of poor technical and inventory growth on the LME hit prices hard last night with copper falling more than 4% and hitting my long held target of $2.93. Worryingly for the Australian dollar, even though its back near 76 cents, it has materially outperformed copper's fall. Which would suggest a move back toward the mid 75 cents. Today’s GDP will be important.
And while I’m on copper and commodity currencies, we saw a sea of red across global metals markets last night with nickel, zinc, and aluminium all down sharply. The washup is that with the US market drifting and metals looking ugly SPI traders have knocked 24 points off prices from yesterday’s close.
In the US yesterday’s Nasdaq weakness seems to have excited the tech BTD crowd and the Nasdaq 100 is up 0.4% to 6,287. The Dow Jones Industrial Average on the other hand is off 0.3% to 24,217 while the S&P 500 is down just 0.1% at 2,636. That’s the second say of falls…Santa selloff looming?
Elsewhere on forex markets the pound is still getting buffeted by the apparent breakdown in Brexit talks. It’s at 1.3433, but off its lows. The euro is at 1.1811, USD/JPY is at 112.61, and the Canadian dollar is a little stronger with USD/CAD at 1.2693. The kiwi is also up at 0.6875 while the Aussie is stronger day on day at 0.7606 but well off the highs overnight a little above 0.7650.
Oil is up with WTI at $57.67 and Brent at $62.90, while gold is collapsing in a fit of irrelevance. It’s down $10.50 at $1265 and at risk of a big break toward $1223.
On the day today we get GDP in Australia, ADP employment in the US and then the BoC’s interest rate decision.
Here's What I Picked Up (with a little more detail and a few charts)
International
- A raft of non-manufacturing (services) PMI’s were released across the globe in the past 24 hours. China’s Caixin releases yesterday were better than forecast and a lift over the previous month while European PMI’s were a little mixed. The Overall EU wide PMI’s were unchanged with Germany down a little and France up a little. But with the EU composite PMI at 57.5 and services PMI at 56.2 things are still looking good in Europe. In the US the ISM non-manufacturing slipped a little to 57.4 but that’s still a strong result – the Markit version of US PMI’s were largely unchanged with the services PMI at 54.5.
- The washup globally though remains healthy with JP Morgan accumulation of the global PMI’s showing that global growth is holding steady at a two and a half year high.
- The pound came under pressure overnight as the UK/EU Brexit deal hit the skids over the Irish border as the DUP leadership digs in. Effectively the DUP is accusing the Irish Prime Minister of seeking to move toward a united Ireland and as such Nigel Dodds the DUP deputy leader accused thee Irish PM of “aggressive” tactics in his approach to the border issue warning “the integrity of the United Kingdom comes first”. Elsewhere, Arlene Foster, the DUP leader told Fox that “the Irish Prime Minister can be as unequivocal as he likes; we’re also unequivocal in relation to these matters”. So the battle lines are drawn and the chance that this window to move to the next stage slips into 2018 appear to have grown materially.
- President Trump has signaled he’ll recognise Jerusalem as the Israeli capital. That’s upset a few in the Islamic world but none more so it seems than Turkey, whose President warned the move was a “red line” that should not be crossed. It’s not material for markets at present. But with the many moving parts across the Middle East right now it’s important to watch what is going on here, in Yemen, against Qatar, the corruption purge in Saudi Arabia, and between Iran and Saudi Arabia just in case. Oh, and Lebanon’s PM rescinded his resignation overnight.
- Apparently Deutsche Bank (NYSE:DB) has received a subpoena from the Mueller inquiry for President Trump's accounts, Reuters reports this morning.
Australia – HUGE today
- Australian retail sales were better than expected in October with the ABS data yesterday showing a seasonally adjusted increase of 0.5% against expectations that sales would rise 0.3%. It’s the first headline increase in 4 months although the September result was upgraded to a 0.1% increase in yesterday’s release.
- We were due a bounce back after that data. Indeed I was long the Aussie dollar on that estimation. And while we can’t extrapolate this data point into a solid trend it is at least a sign that many of the pressures that seemed to be gripping households may have lessened a little in October. Or, perhaps, Australian households are saving up before they spend – certainly the bounce in café, restaurants and takeaway’s may suggest that.
- Also out yesterday was the current account and government data which feed into today’s Q3 GDP release. Where the market had been expecting net exports to add 0.25% to the quarters growth the actual outcome was for no net addition to growth as imports grew largely as expected but exports undershot. That was a big negative surprise. But that was balanced by the increased level of government spending (public demand) which rose 1.2% during the quarter as the G part of the GDP = C + I + G + (X-M) increased investment more than 5%. So, net on net it seems like most forecasters are happy with their 0.7% or 0.8% forecasts. That said there is often still volatility in the GDP release even when we think we know all the data.
- And of course we had the RBA decision to keep rates at 1.5% and accompanying Governor's statement. I summarised my thoughts in a couple of tweets yesterday afternoon when I said, “Just back from the gym and have read #RBA Governor Lowe's statement...Very positive and not a man, or a central bank, contemplating easing...Indeed if things go as they expect, the OECD might be right about rate hikes”. Naturally so as not to confuse folks who know of my concerns for households I added in a follow up tweet “This does not mean I am not still worried about households...just simply that if the RBA is right then the atmospherics in the #Ausecon will - or should - forestall household retrenchment”.
- Folks love to wring their hands and say the RBA is wrong. But over the past 34 years they have done a very solid job for this small open economy, on an island at the bottom of the world, and with a floating currency subject to the whims and vicissitudes of traders and investors. I’m not always in agreement. But I generally find they have a good handle on the outlook. And when they get it wrong they simply change their mind and act. Something they have done many times over my career and something they hardly ever get credit for.
- DEEP BREATH, and now for the ASX and SPI. About the only good thing I can say about stocks yesterday is that at least they held the recent lows. That may prove more difficult today after the collapse of copper, base metals sell off and overnight SPI action. Just look at this chart. If 5944 breaks then its that 5885 level I talked about a while back that beckons. I’m short.
Forex
- The US dollar is on the march this morning as traders get some conviction – even if bond markets don’t yet have it – that the tax reform package will deliver the type of stimulus which will lift both growth and the possibility of a more aggressive approach from the Fed in the year ahead. It’s about time is all I can say and I’m expecting euro to finish the year closer to 1.15. But the results of a big global investment bank survey I was part of yesterday showed that I’m one of just 2% who think that is likely. Fully 45% of respondents – remember this is a global survey from a huge investment bank – voted for the status quo of a EUR/USD between 1.18/1.20.
- Of course I could be completely wrong. But have a look at this EUR/USD - what do you think? Maybe 1.15 is a little optimistic but certainly 1.17 seems possible in fairly short order and then we’ll see. Anyway I like euro, EUR/JPY, and EUR/AUD lower.
- The Brexit talks have the pound at risk. Of course a resolution would see the bulls return and one would hope that a deal can be done. But the reality is the DUP sounds to have an entrenched position and so too does the Irish government. So the chance of slippage into 2018 for a deal seems high. As a result GBP/USD could retest the recent uptrend at 1.3320 and if that breaks I’d be looking for a 200 point fall.
- Just quickly on the Aussie, because I’ll have more to say later in my Australian dollar daily piece. But the big fall in copper is as much to blame for the Aussie’s fall as the US dollar's strength is. I use 10-minute copper versus 10-minute Aussie as a really short term indicator of direction. The linkage is a sentiment one – it’s about global growth, commodities, and Australia’s outlook. It’s not perfect by any stretch but it works in a directional sense kinda neatly.
- I raise it because it GDP misses today – recalling that the market is looking for 0.8% for Q3 – then the Aussie could easily slip back into the mid 75 cent region.
Commodities (just copper today)
- I reading some rubbish this morning as folks try to ex-poste rationalise what the heck happened with copper’s big 4.4% fall overnight to $2.93. Let me say clearly though copper’s fall can not be about global economic growth. I say that because whether it is the PMI data I have outlined above or whether it is the OECD’s outlook this week which suggested synchronised growth will continue into 2019 global growth is SOLID.
Twitter Screenshot
- What’s going on in copper is a combination of technical and positioning. Readers of this note know that I have long targeted the $2.93/95 region for a pullback. You’ll recall the rise to and failure at $3.17 recently was text book technical. That’s important. I find copper to be one of the most “technical” assets I trade. So when we get worries of growing inventories, combined with a very long market and technicals pointing lower, then the downside is the risk as we saw overnight.
- Looking at the chart you can see the satisfaction of the Fibo extension – and my very first system – to the 1.382% level at $2.93 overnight. If this level breaks then copper would seem to be biased toward the mid $2.80 region. This is very important technically. $2.81 is the 200 day moving average and $2.85 is the trendline from last years lows. I’d expect this region to hold. But if it didn’t it would be catastrophic for copper prices – and likely the Aussie dollar.
Have a great day's trading.