Originally published by AxiTrader
Market Summary
A mild bout of risk aversion permeated markets on Friday after North Korea threatened an atmospheric nuclear test in the Pacific. That sentiment could be accentuated in trade today after an escalation in tensions and rhetoric on both sides over the weekend (see below).
It’s early in Asia, so we’ll see as the day progresses. But if traders want to be cautious in what is a pretty quiet week for data then the weekend’s events provide much fodder. Not just from President Trump and the DPRK either. Elections in Germany and New Zealand didn’t exactly go to script either.
Anyway, back to Friday and stocks pretty much did nothing by the close. Europe was mostly in the black while stocks in the US were mostly positive. The S&P 500 was up 1.6 points, the Nasdaq 100 rose a miserly 4 points and the Dow Jones Industrial Average dipped 9. Here at home SPI traders added 7 points.
On forex markets the US dollar was on the back foot, fought back a little, and is in the ascendancy this morning after the weekends events. Euro, yen, Swiss franc, kiwi, and Aussie are all a little lower. Yes there is an internal inconsistency with these moves if it has anything to do with Trump and Korea – but we’ll see.
Gold is at $1296, WTI is at $50.66 and copper recovered from a Friday swoon.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Politics and central bank speak is likely to dominate what’s a pretty quiet week of data. Rhetoric in North Korea escalated again, as Angela Merkel won the German election but lost 10% of her parties vote with the far-right AFD making it back into Parliament for the first time since the 50’s and as New Zealand waits to see which way Winston Peters goes after Bill English’s Nationals fell 3 seats short of an outright majority.
Let’s unpack that a little.
- Rhetorical tensions between the US and North Korea seem to be escalating. On Friday there was a mild risk off tone to markets after the North Koreans said they could conduct the first atmospheric nuclear test in decades. This was followed up with the DPRK’s ambassador to the U.N. saying on Saturday that president Trump is “a mentally deranged person full of megalomania and complacency” and called him “Mr Evil President”. He also added that the DPRK is “finally only a few steps away from the final gate of completion of the state nuclear force”.
- As is his want, President Trump responded with a tweet saying the foreign minister and “rocket man” wouldn’t be around much longer. His tweet on Iran was also interesting.
Twitter Screenshot
- It all sounds like it’s headed toward some sort of conflict. But Russian Foreign Minister Sergei Lavrov doesn’t think that will happen. On Friday he likened the spat to a “kindergarten fight” between children. But on Sunday he said the US won’t attack North Korea because the DPRK has nuclear weapons. Lavrov said “The Americans won't carry out a strike on (North) Korea because it's not that they suspect, they know for sure that it has nuclear bombs… I'm not defending North Korea, I'm just saying that almost everyone agrees with such an analysis," Lavrov said. He added that 10’s, “if not hundreds of thousands of innocent citizens of South Korea but also North Korea, of course, and Japan will suffer -- and Russia and China are nearby".
- Likewise US Treasury Secretary Steve Mnuchin said President Trump “doesn’t want a nuclear war” with North Korea but will “pursue all the options”. He also said "on the other hand, the President will protect the American people and our allies…And having a country like this have nuclear weapons, testing them, using them, sending rockets over our allies, that is unacceptable behavior."
- The German election didn’t exactly go to plan. Certainly, it looks like Angela Merkel will remain as chancellor. But the reduced vote - her party looks like it lost more than 10% - has meant she’ll need to cobble together a broad coalition. That she can do.
- But what will startle Europe, perhaps markets, is the rise of the far-right AFd party which gained 13% of the vote.
- In New Zealand, Bill English came agonisingly close to returning the Nationals to their 4th term, at just 3 seats short of an outright majority. That leaves them needing a coalition partner and puts political veteran and New Zealand First leader Winston Peters in the box seat for the third time in his career. Peters has worked with both sides of politics in the past and although the Nationals seem the obvious choice given the vote they are not yet certain.
So we open the week with gold up half a per cent at $1,296 with the euro and kiwi down similar amounts at 1.1902 and 0.7307 respectively. We’ll see the impact on stocks and bonds when they open a little later this morning but mild risk aversion seems the most likely outcome.
- John Williams, San Fran Fed president, said on Friday that the new normal for Fed funds rate is around 2.5%. He said he thinks there is one more hike this year and then 3 next year but added “honestly, the exact timing of that is not that important. I think the overall view that we would be raising rates gradually over the next two years and getting back to a normal level is the one I think I have a lot more confidence in”.
- This is important folks for how we all frame what the Fed is doing. As I always write this is about policy normalisation, its not about trying to restrain the US economy. There is an element of anticipation. The return of inflation – and the Phillips Curve – at some point down the track certainly. But the Fed is simply trying to get rates at a level appropriate for current growth in the economy and the outlook that the US economy faces.
Australia
- The S&P/ASX 200 rose 27 points to close a tough week at 5,682 on the back of a better performance by the banks. SPI traders put on another 7 points Friday but I’m wondering what the impact of the big banks exiting the ATM fees market might have. Not so much on the cash component that this would represent to earnings but rather the clear political pressure it shows the banks are under. But investors already know that I guess.
- Anyway, to the price action, and the best thing I can say is that the range held. That of course is not an insignificant thing to say technically. But the range bottom is about the only good thing going for the ASX at the moment it seems. At least as far as traders are concerned. It seems to be the only thing that has sustained the market recently. I always respect levels, lines, and ranges unless or until they break. And for the moment this one is holding. But if 5,620 - 5585 in SPI terms – gives way another 100 points fall is in the offing the charts suggest.
- Here’s an interesting one for affected companies on the local bourse. The push toward more steel production cutbacks to fight pollution in China continues. And the AFR reports this morning that Chinese iron ore demand is going to fall as cities, regions, and the government in Beijing fight to improve air quality – especially over the coming winter. I recall writing, or saying in my video, that the initial pulse higher in iron ore on the news – and the associated front running in production – a while back made no sense because the impact would be lower demand for the West’s red dirt. That view has gained currency as the recent price action suggests.
- And naturally, we saw further falls in steel and iron ore prices on Friday. Rebar for December was down 1.42% in Shanghai Friday with iron ore futures in Dalian down 1.5-2.0% depending on the maturity.
Forex
- We can pretty much rule out what happened Friday at this early stage of the week because of politics. Sure the euro ran up to just above 1.20. But it’s at 1.1902 as I write. Certainly other pairs were a little better bid against the US dollar as well. But they do have mostly given back some gains in early Asia this morning.
- USD/JPY is up 0.23% from Friday’s close. USD/CHF is up 0.18% to 0.9705 while the pound is down 0.12% unchanged at 1.3475. These aren’t big moves – and it is early Asia on a Monday. So the question is what happens to risk appetite and sentiment in Asia today. That will be important.
- For the Aussie dollar the outlook is going to rest with risk aversion – or not – how the US dollar fares and whether the run of weakness in Chinese steel and iron ore futures continues today and this week. It’s a light week for data so sentiment is key for the Aussie and there are some signs that a run toward support – to find exactly where that might be – is on the cards. 0.7850 seems a reasonable level to test this week.
Commodities
- Gold will get a lift if tensions rise again. But traders mostly agree with Sergei Lavrov I think. That is, the chance of a military conflict is non-negligible but still low enough that it is a risk they aren’t prepared to bid gold higher on. Gold would need to break back above $1304 to change the short-term outlook.
- Copper fell and then bounced Friday – its back at $2.93
- Crude traders were ready for a new OPEC deal but the meeting Friday ended without anything explicit so prices remain better bid but not yet breaking out. At least in WTI terms. We’d need to see price above $51 to signal the next leg higher – otherwise this is looking like a reasonable resistance zone prices are currently sitting in.
- And part of that could be that Brent is actually right at its range top since last year. With prices at $56.86 Brent is looking toppy.
Have a great day's trading.