Originally published by AxiTrader
Market Summary
It was a tight vote, 216 to 212, but House Republicans got the job done overnight voting for the Budget resolution bill that will pave the way for President Trump’s tax cut/reform package to be enacted. That, and the fact that Mario Draghi was able to bat away the hawks on the ECB and deliver a dovish policy statement and open ended QE program combined to push stocks higher in Europe and the US overnight.
Continental European stocks markets were all up more than 1% with the DAX 1.5% higher, the CAC up 1.4% while stocks in Milan rose another 1.6%. The FTSE lagged with a 0.53%. In the US stocks are higher but off their highs in the S&P 500 and Dow Jones Industrial Average while the Nasdaq 100 lost ground before some important earnings reports after the bell.
So at the close the S&P 500 is up 3 points at 2560. The Dow is 0.3% higher at 23,400 and the Nasdaq is down 0.3% at 6,037. SPI traders have marked prices 11 points higher than yesterday afternoons close. This builds on what was a handsome recovery from the lows in the mid 5880’s yesterday.
European bonds rallied on the back of the ECB decision to extend the ECB’s bond buying program for another 9 months while reducing the amount from €60 billion to €30 billion a month. US rates on the other hand are higher with the 10-year back at 2.45%.
That combination helped the US dollar surge in index (94.62) terms and against the euro (1.1650). It’s broken out on both measures and looks like further gains are in the offing. USD/JPY was more circumspect and is just shy of 114 but against most pairs it’s been a day of solid gains for the US dollar. The Canadian dollar is lower again with USD/CAD up at 1.2844, USD/CHF is closing in on 1 again at 0.9973 while the Aussie and kiwi have had another night to forget.
The AUD/USD is down half a percent at 0.7661 and looking wobbly now it’s broken through the 200 day moving average while the Kiwi is at 0.6832 and at risk of breaking the years lows.
On commodity markets all of the above hurt gold, which is down at $1267 after losing 0.8% over the past day. Dalian iron ore had a fall yesterday of more than 1% and copper is relatively flat, down 0.2% at $3.1665. Crude had a better night with WTI up 0.88% to $52.64 while Brent rose 1.5% to $59.33. Ranges tops loom overhead.
On the day today we get CPI inflation out of Japan, PPI in Australia, and industrial profits in China. Tonight’s big event is US Q3 GDP but we also get German import and export prices and the Michigan confidence numbers.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Mario Draghi seems to have won the battle at the ECB delivering a dovish tilt overnight as the ECB left rates on hold, reduced its bond buying program from 60 to 30 billion Euros and extended that program for a further 9 months. Draghi highlighted that he expects “rates to remain at their present levels for extended period of time, and well past the horizon of our net asset purchases” but the key was the open-ended commitment to QE if necessary after the new program ends in September 2018 with addition of the crucial words “or beyond, if necessary and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with inflation aim”.
- As I’ve written many times, the ECB is a single mandate entity – inflation only. And Draghi signaled that if the outlook for inflation becomes “less favourable” the ECB “stands ready” to increase QE once more if required. Pretty dovish stuff. No wonder EU area bond and stock markets rallied. And no wonder the Euro got hammered down and through support at 1.1660/70. By refocusing attention on inflation, and the ECB’s mandate while at the same time reducing the bond buying program Draghi has successfully walked the minefield traders set for him. Draghi has emphasised a clear policy divergence between his ECB and the Fed, one which markets, traders, and investors weren’t as committed to because EU area growth has improved so much this year. Indeed Draghi focussed on that divergence with the Fed pointedly saying “Net asset purchases, sizeable stock of acquired assets and reinvestments, and forward guidance on rates provide monetary support”. In other words the ECB is still going in the opposite direction to the Fed and intends to stay that course. No wonder Euro got hammered.
- Tax cuts are coming. We still need to see the final bill, and all the special interest groups need to be defeated to fund the cuts, but the process took another step forward last night with the House of Representatives passing the budget blueprint for fiscal 2018, 216 to 212. A win is a win and president Trump claimed it. Now for the nitty gritty but tax cuts are coming.
- BofA CEO Brian Moynihan said of the tax cut proposal “I think there will be immediate impact and that people will have the optimism which is built around it fulfilled, which has been really a part of the problem for a lot of policy decisions”.
- Fed Chair Watch – we are still waiting on the decision from President Trump. But reports overnight from Politico is that it’s now a game in two with Jerome Powell and John Taylor the front-runners. Taylor will be viewed as mechanistic and hawkish if he gets the nod. That would reinforce the moves we’ve see this week to higher bond rates and a stronger dollar.
Australia
- I was utterly wrong yesterday. If there was a day when the S&P/ASX 200 was ripe for a fall it was yesterday. And while the sellers came and tried to knock prices lower they failed. That’s because for the second time this week buyers were there in the mid 5885 region. So, the recovery in the banks and miners by day’s end was a solid performance which left physical ASX200 up 11 points at 5,905.
- Overnight SPI traders have taken prices up another 11 points which implies the physical market will test the 5925 resistance level which has been constraining prices and the rally recently. Traders may be wary of getting too excited given the weakness in metals and iron ore prices over the past 24 hours. November iron ore futures fell 3% on the Dalian exchange while May 2018 prices dipped 1.28%. That said though, the basic materials sector in the US is way out in front in terms of S&P 500 moves this morning with an increase of 1.4%. Anglo American (LON:AAL), Glencore (LON:GLEN), Rio Tinto (AX:RIO), and BHP Billiton (AX:BHP) have all had solid gains overnight.
- That brings me to the chart. I’ll use the SPI again as it captures both the turnaround yesterday and the rally overnight. The first thing to say is that while the market looked toppy the fact that my system never gave me a sell signal means I did not short it. This is an important part of my process to understand. My rhetorical self, the one who writes this note each day, gets me ready for trades. But it is the system which generates the signals. Anyway, you can see the support at 5863/64 for the third day in a row yesterday and the SPI is now through the recent high. Resistance is now at 5945/50. For the Physical market it is 5925, 5950, and then 6000. Does it still look toppy? Absolutely. Am I selling? Not until my system gives me a signal.
- RBA deputy governor Guy Debelle delivered a must read speech last night on uncertainty - how it impacts the economy, the RBA, and central bank policy more broadly. You can read it here.
- Worth highlighting for this note was a clear message there is still plenty of slack in the Australian labour market but that eventually here, and countries across the globe that have unemployment below NAIRU estimates yet still have no inflation that the laws of supply and demand will eventually apply and wages head higher once more. “Here in Australia, our assessment is that there still remains a sizeable degree of spare capacity in the labour market. Our forecast is that spare capacity will be gradually reduced in the period ahead. But, as it is reduced, we will be alert to the possibility that these developments we see in other labour markets, in terms of subdued inflation in the face of minimal spare capacity, occur here too” Debelle said. It’s another signal that the RBA is likely to leave rates on hold for some time yet. And might have even been a touch dovish.
Forex
- Perhaps it’s a bull market for the US dollar now. By signaling a clear policy divergence between the ECB and the Fed Mario Draghi has sought to break the nexus between recovering global growth, and in particular EU growth, and an associated convergence in central bank policy. In the same way that the RBA has recently said it won’t be influenced by what other central banks are doing right now, and in the same way as BoJ governor Kuroda has set a different path for monetary policy in Japan, Draghi masterfully highlighted that the ECB is not the Fed. He also highlighted that he, Peter Praet, and Vito Constancio – the DOVES – are in control and the voices to listen to at the ECB.
- So as I highlighted above the euro was pole axed and the US dollar has broken up and through resistance in DXY terms at 94.25. The targets for both are now 1.1500/20 and 95.50/90. Don’t rule out 1.13 or 1.1150 as targets for the euro either. We’ll see how it looks at 1.15 first though. Here’s the euro.
- I’ve highlighted most of the other big moves in the wrap at the top of this note so I won’t rehash and waste your time. But it’s worth noting that this US dollar move is unlikely to be a one day wonder while the data supports it. Naturally that makes the release of Q3 GDP tonight a big event to close the week and of course the next non-farm payrolls will be important as well.
- But if you look at a pair like USD/JPY you can see that having built a base in the 113.20/30 region it looks set to make a run higher. My target would be 115.52 which is the 138.2% projection of the recent move and the upper end of the medium-term range.
- Looking at the commodity bloc its weakness across the board. The Kiwi, caught in a perfect storm of US dollar strength and concerns on the outlook for the RBNZ and the economy, has fared worst with a loss of 0.77% to 0.6836. It’s just 20 points above the year’s low. A break could see a move toward 0.6500/50 as discussed earlier this week. The Canadian dollar is under pressure as well now that the BoC has also taken a dovish bent this week itself highlighting policy divergence with the Fed. USD/CAD is at 1.2850 up 0.43%.
- And of course, the Aussie dollar is also lower. My target of 0.7650/60 has been achieved and it sits at 0.7656 this morning down 0.6%. Again the RBA has signaled it is not in a hurry to raise rates and that stance was supported both by this week’s inflation report and last night’s speech from Deputy governor Guy Debelle and his focus on slack in the labour market. The AUD/USD is now below both that trendline I highlighted yesterday and the 200 day moving average. The chance of “doing a Kiwi” and making a full round trip to the start of the rally above 81 cents are growing. That suggests the Aussie is headed back into the 73 cent region.
Commodities
- Oil is setting up either a huge break or reversal. I don’t mean that to sound like a bet each way. It’s simply a reflection that prices for both Brent and WTI are now approaching important recent range tops. My rhetorical self is bullish longer term and my system is already long. So I have an obvious bias. But unless or until the range breaks traders will be cautious at these levels. As I’ve written earlier this week though a break of the range top suggests an run of $2.50 to $3.50 a barrel pretty quickly. Here’s WTI.
- Gold needs to hold $1260 to avoid a run to the low $1220’s and copper is still caught in the recent range.
Have a great day's trading.