Euro Roars On An Upbeat Draghi

Originally published by AxiTrader

Market Summary

Oil is higher by 2% this morning but it’s the euro which is the big story, after Mario Draghi’s speech overnight ignited animal spirits in currency markets.

EUR/USD is up at 1.1334 this morning having blown through the 1.13 US election night high with ease. That’s hit the US Dollar Index hard. But the US dollar move is not even, nor universal. The Australian dollar is at 0.7580 having been chased back from a high at 0.7624 while the kiwi is at 0.7262 after making a high of 0.7344 overnight. The Canadian dollar is stronger as oil lifts, the pound is winning too, but the yen has lost ground.

Rising oil and Draghi’s confidence has driven bond rates around the world higher. But stocks are lower after the EU hit google parent Alphabet (NASDAQ:GOOG) with a record fine. That knocked tech stocks 1.6% lower on the Nasdaq which closed at 6,148. The S&P 500 fell 18 points, 0.74% to 2,421, while the Dow lost about half a percent to 21,310.

Those moves, and the weakness in European bourses has knocked the SPI 200 down 12 points this morning. We’ll see whether the atmospherics outweigh sectoral positives in trade today.

I say that because gold, iron ore, copper, and base metals more broadly are all higher overnight.

We have more central bank speak tonight in Portugal.

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

International

• ECB president Draghi was upbeat in his introductory speech at the ECB Forum on Central Banking overnight. It was a cracking speech, which was in no doubt that the outlook for European growth has picked up. It was also a speech which highlighted that even with the current downtick in inflation the overall spectre of deflation had receded and the overall trend in inflation is expected to rise as growth improves. Drgahi was at pains to continue to highlight that the EU economy still needs the assistance of monetary policy.

• Draghi said “Nevertheless, we are still in a situation of continuing slack, and where a long period of subpar inflation translates into a slower return of inflation to our objective. Inflation dynamics are not yet durable and self-sustaining. So our monetary policy needs to be persistent. This is why the Governing Council has repeatedly emphasised that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up, and to support headline inflation in the medium term”.

• But euro traders focused on the positives in his speech and I think this paragraph which effectively said policy tightening is coming down the track. “As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged,” Draghi said. This is the non-tightening tightening. But it’s still a tightening for forex traders.

• Influential Fed speakers last night continued the theme that rates are going to rise. Janet Yellen didn’t give too much away, Patrick Harker, Philadelphia Fed president, said rates will rise while also noting inflation has been on the weak side.

• But the comment that caught my eye, in the same way as Bill Dudley’s comments the night before about overall financial conditions in the US, were those made by San Francisco Fed president John Williams who said the US stock market was running on fumes and then gave a sure sign the Fed wants rates higher so it can cut them again at some point.

• Williams said “the stock market seems to be running pretty much on fumes…It's something that clearly is a risk to the US economy, some correction there -- it's something we have to be prepared for to respond to if it does happen." Clearly the Fed is on the path of policy normalisation and won’t be swayed from the path of higher rates and balance sheet unwinding anytime soon.

• Fed vice-chair Stanley Fischer doubled down on this saying high asset prices can pose a financial stability risk. Interestingly Fed chair Yellen could be seen to have dismissed my theory saying the FOMC is not targeting asset prices. I agree that they are not directly targeting a level – who knows what the right level for the S&P might be at any given point in time. But the Fed has learned often times over the past 20 or 30 years that risks to the economy often flow from financial markets. So they will be watching closely.

• Mark Carney, BoE governor, performed a non-tightening tightening overnight. He raised capital requirements which had been relaxed. Forex and bond traders took this as a first step in the road to higher rates and sign the BoE is indeed soon about to begin its monetary tightening.

• Rates are higher in the US and across Europe this morning with the US 10 year back at 2.19% while the 2 year is at 1.37% - close to the highs for the year. UK, German, French and other bond rates are also rising.

• And in many ways this is the great thing about markets right now. Mario Draghi said last night he wanted the European recovery to build self-sustaining momentum. That requires confidence. We know the US economy seems to have sustainably crossed the confidence Rubicon and Europe is on its way. Supra-national forecasters have been increasing their estimates for global growth, inflation is ticking higher – notwithstanding the current dip, and now it’s just for wages to start rising and we’ll have a virtuous circle and cycle of growth. Naturally wages are the missing ingredient but even Draghi was clear last night that he thinks they will eventually rise.

• POLITICS: US lawmakers have withdrawn the Senate Health Care Bill till after the Summer recess. This is a blow to the Trump agenda because it makes tax cuts all the more difficult. The president has summoned, sorry invited, Republican Senators to the Whitehouse to try to get things back on track. But if there is one lesson of Trump’s rise it is that voters don’t like to be taken for granted or ignored. So this means the Senators will be thinking about the impact on their constituencies directly – and thus their chances of re-election – rather than the Trump agenda.

• Citibank says that Theresa May’s position is untenable and that we’ll see a change of leadership of the Conservative party and then another election in the UK within the “next 12 months”.

• The US and Russia are facing off over Syria again. That’s after the US yesterday said they had seen some movements which suggested another chemical attack was imminent. Russia reacted strongly overnight. Also worth noting is that the press suggests president Trump is getting impatient with China over North Korea while separate newswires say the US is worried Russia can fill the void if China withdraws or increases pressure on the Hermit Kingdom. Geopolitics, never simple.

Australia

• The ASX was little changed at the end of trade Tuesday finishing down 6 points at 5,714. In the reverse of the previous day where traders rejected the highs yesterday it was the lows which were rejected. Having opened at 5,720 the S&P/ASX 200 fell to 5,685 before recovering the 29 points to the close. That leaves traders with two days of long-tailed candles to represent what is clearly uncertain price action.

• SPI traders turned negative between 4.30am and 6 am this morning with prices turning from +2 to -12. The question for traders is whether the weakness we’ve seen is US and European stock markets overnight is the focus today or, rather, whether traders on the local bourse focus on the clear positives that could flow at a sectoral level.

• By that I mean the rally in energy with crude up 2%, the bounce back in gold to $1250, and the solid rise in copper, base metals and iron ore. Any rally, or not, today will be the subset of the market’s perceptions about these sectors and the companies within them.

• Looking at the charts the ASX200 is inside a range of the recent highs and lows at 5,757 and 5,665. Turning to the SPI 200 there is a short term 50 point range which could signal the next move if it breaks. 5,677 topside and 5,624 bottom side. The SPI is at 5,646 this morning. Here’s the daily chart:

Forex

• What an ugly night for the US dollar. But suffice to say it is under pressure unless or until the data turns and starts to reinforce the Fed’s tightening cycle. Last night the IMF downgraded the outlook for US growth as the Trumponomics agenda stalls. And it’s clear that traders are focussed on the recent run of poor data and what’s clearly the fear that the Fed could further harm growth with tightening.

• Personally I think that's ludicrous. The level of Fed rates is still below inflation – so it’s nowhere near contractionary yet. Monetary policy is still very accommodative on any version of the Taylor rule as well.

• But the path of least resistance – the one traders look for when they are following the price action – still seems to be lower for the US dollar until we see a turn in US data. At that point all heck could break loose to the topside. That's out in the never never somewhere - for now the only good thing I can say about the US dollar is at least it hasn't broken the recent low. Here's the chart of DXY.

• But for now the euro and many other currencies are surging again. Euro is at 1.1336, and GBP/USD is at 1.2811. The Swiss franc has had a huge surge of more than 1% as well and is at 0.9602 as I write this morning. The US economy is the winner here if these moves persist.

• Looking elsewhere what’s interesting about the moves overnight is how the Aussie and kiwi were chased back from their highs. The Aussie failed again below the 0.7635/40 region and it has lost substantial ground on the crosses. You won’t be surprised to hear me say that Mario Draghi’s speech may be the source of that reversal. Not directly perhaps, but it certainly reinforces the notion that traders have other markets offering better opportunities in which to deploy their capital.

• The Canadian dollar was back testing recent lows at 1.3165 when oil was at its peak. But it's back off to 1.3190 after teh inventory data derailed the oil rally this morning.

Commodities

• Oil is roaring today and there are clear signs the market sentiment has turned a little. I say that not just because WTI is up 1.91% at $44.21, or because Brent is at $46.65 after a 1.77%. Rather I say that because we heard last night that Libya’s production continues to increase while “sources” revealed that OPEC is in no rush to cut production further just yet.

• On any other day such news might be expected to be bearish. But it’s testament to the extreme pessimism I’ve discussed earlier this week here and in my daily video that traders ignored the news.

• Last night saw WTI stall at my fast moving average and the 23.6% FIbo retracement level. Inventories have since knocked it back to $43.72 but a garden variety retracement to the 38.2% level at $45.96 looks a fair chance. My system is still long but position size has been reduced a little on the test of the fast ma overnight - as is my usual protocol.

• Here’s the chart of WTI:

• Gold has recovered a little on the back of the weaker US dollar. But bond rises are the enemy of golds rise so that tempered things a little. Equally though if this equity weakness morphs into something more dire and attention getting then gold will find support. The 200 day moving average, and previous night’s low at $1235 remains the key support zone.

• Copper is up 0.74% amid a generalised improvement in base metals and iron ore overnight. It’s about the US dollar to a certain extent but then again the Chinese profits data yesterday and reassuring comments from Chines premier Li about growth also helped the complex.

Have a great day's trading.