Originally published by AxiTrader
Welcome to my overnight markets wrap.
Coming to you live from Koh Samui this morning. I hadn’t been to this part of Thailand before, but it’s glorious.
Feedback always welcome
Greg
Market Summary
The minutes to the FOMC meeting were out early this morning and suggest both a residual level of disquiet among some Fed members on the level of inflation but provided an equally strong signal that a rate hike is on the cards. That’s particularly the case because the minutes are a little historical compared to much recent hawkish Fedspeak and the wages data contained in last week’s jobs numbers.
But rate hikes don’t worry stock traders who are looking toward the start of earnings season this week and lifted US stocks to new record highs as the S&P 500 rose 0.18% to 2555. The Dow was up a similar amount to close at 22,872 while the Nasdaq 100 rose 0.3% to 6081.
European stocks were mixed save for Spain where stocks leapt 1.34% as traders bet that Madrid has the upper hand in the face off with the Catalan leadership. And here at home SPI traders are a little quieter after another good rally on the ASX 200 yesterday – they’ve subtracted just 2 points.
On currency markets the US dollar's drift lower continued with the euro up another half a percent along with the Canadian dollar, which gained as oil lifted once more. The pound, yen, Swiss franc, and Kiwi are all stronger while the Aussie dollar gained 0.2% and is sitting around 0.7793 after a high of 0.7808 in the past 24 hours.
On commodity markets a weaker US dollar has helped gold which gained another $5.50, 0.43%, to $1292, while oil was higher as the dollar weakened, OPEC upgraded demand forecasts and tensions between the Kurds and their neighbours grows. Copper shot higher again and is up 1.23% at $3.08 a pound – upgraded global growth forecasts anyone. Iron ore was lower again.
Today in Australia we get the release of home loans data but the key release is going to be inflation data in many jurisdictions including US PPI. There are a raft of central bankers also talking including Mario Draghi, Peter Praet, Andrew Haldane, Lael Brainard and Jerome Powell.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The Bank of England is right to release its minutes on the same day that the meeting is held. Otherwise we can have the confusing situation like we do, again today, where the minutes reflect a discussion which occurred and has been subsequently overtaken by time and events. That’s my take anyway as the Fed’s minutes to me seem to reflect a slightly different tone – more dovish – than the one we have heard from most Fed speakers recently.
- But the minutes also reflect the divergence of opinion at the Fed over the outlook for inflation and between those – like Neel Kashkari, James Bullard, and Charles Evans overnight – who believe that the Fed should wait until it sees inflation hit and/or exceed it’s 2% target and those – like chair Yellen, Bill Dudley, John Williams, and others – who believe that to wait is to risk a necessary over reaction if inflation does surprise to the upside.
- It’s a difficult debate. And it’s one being had in many central banks around the globe as growth picks up and inflation stays low. Perhaps in a modern world with myriad interconnections and dependencies, where technology and services dominate activity, it’s not that any one country will see inflation as growth lifts but rather the inflation will lift when global capacity tightens. That may require the very synchronised growth that it appears we are about to experience in the year ahead.
- Anyway, the market moving paragraph of the minutes said, “Many participants expressed concern that the low inflation readings this year might reflect... the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted”. But the minutes also reflected the push toward higher rates noting that another rate rise this year “was likely to be warranted”.
- Overnight we also saw a little of the internal discussion at the Fed over the outlook for inflation. Chicago Fed president Charles Evans said “I really don't see any harm in waiting longer to take more stock of the inflation situation… I think we would be well served by trying harder to get it (inflation) up, even if inflation went to 2.25 percent or 2.5 percent. We need to see substantial progress of inflation in the data”. BUT San Fran’s John Williams said he sees another rate hike this year, three next, and then more in 2019. Likewise his colleague from the Kansas City Fed Esther George said she thinks inflation will rise and the Fed should keep lifting rates.
- The German government did indeed upgrade growth last night as sources told Reuters the day before that it would. The economy ministry lifted the 2017 target to 2% with the 2018 target at 1.9%. Driving the growth is a switch from trade to consumption in Europe’s biggest economy the ministry said. “Given the dynamic domestic demand, imports will grow somewhat stronger than exports in the years 2017 and 2018…As such trade will, on balance, provide in this time frame absolutely no contribution to growth," it added.
- Madrid is now playing hardball with the Catalan leader with Spanish Prime Minister Rajoy giving the Catalan government 8 days to drop its independence bid or face the prospect of the central government’s suspension of the regions political autonomy.
- Brexit talks seem to be going sideways. It seems to me that Theresa May’s government reckons the EU should play nice and accommodate their requests for an easy transition as the UK does what the voters wanted and Brexits. But the EU and its negotiators still have almost no incentive to ease the path of Britain from the EU. And when I hear British Finance Minister Philip Hammond saying that a transitional arrangement is a “ wasting asset” with value on both sides and says the UK’s “European partners need to think very carefully about the need for speed in order to protect the potential value to all of us of having an interim period” I wonder if any real forward progress is going to be made. That’s something pound traders will need to keep an eye on
- The Kurds said overnight that Iraqi forces and Iranian backed militia were getting ready to strike them. But the Iraqi’s denied this saying they were still chasing IS.
Australia
- We had a good day on the S&P/ASX 200 again yesterday with stocks finishing at 5,772, up 34 points. That takes the index from the bottom end of the range recently back up to the top end of the range with the banks the drivers yesterday. The overnight lead from SPI traders is virtually non-existent but iron ores reversal could again be problematic for that sector of the market. We’ll see.
- The question for me now is whether the index can build the momentum to test the range highs around 5830 in coming days. 5800/05 is the August high and then we have to stretch back to June to get above there and the period which ushered in this range. In SPI terms the levels to watch topside are 5775/5785 – here’s the chart.
- Yesterday’s Westpac Consumer Confidence release was a reasonably positive number. It wasn’t just that the headline number climbed another 3.6% to 101.4 – meaning the optimists outweighed the pessimists for the first time since last November. It was the improvement in the sub-indexes, especially the unemployment expectations index. Bill Evans, Westpac chief economist, noted “Expectations for the labour market continue to improve. The Westpac Melbourne Institute Unemployment Expectations Index fell 3.3% to 129.2 in October, marking the lowest reading since June 2011 (recall that lower reads mean more consumers expect unemployment to fall in the year ahead).”
- If folks are not worried about losing their job then they are more inclined to spend and borrow. It doesn’t mean that the real concerns over the risks to the economy about the high levels of debt Australian households aren’t valid – especially as prices start to pull back for housing. Rather as I write often the strength of the Australian jobs market is an important salve to these concerns and a key area of support for the economy both directly, in terms of jobs and money circulating, and in the positive psychological impacts that a lack of fear of job loss can have on a person, their family, and the economy.
Westpac Consumer Sentiment Table (Source: Westpac)
Forex
- The US dollar remains pressured with the US Dollar Index down 0.3% and back under 93 while the Euro is up halaf a percent and trading at 1.1866. This euro rally in many ways is the ECB’s to break, to end. I say that because it’s clear that the Fed is going to be hiking again in December unless something goes awry pretty fast in the US, or global economy. That’s pretty much priced into interest rate markets and assimilated into forex rates like the EURUSD. And it’s pretty clear that the ECB is grappling with its own withdrawal of monetary stimulus as growth across the EU accelerates.
- But the ECB wants to do it – that withdrawal – in a manner that recognises its earlier in the expansion than the US, has lower growth rates across the EU, and has the smallest impact possible on the euro. It’s a tightrope – one Mario Draghi and his colleagues have to walk and one which makes tonights speech by Draghi interesting. 1.1880 and 1.1929/30 are resistance at the moment.
- USDJPY still looks toppy at the moment but it’s largely unchanged at 112.50 day on day after another recovery from a low near 112. 111.90/95 is the key level USD/JPY must hold to avoid a cascade lower. Looking at the pound and it’s the US dollar’s weakness that is again driving it higher. At 1.3221 GBPUSD is up about 0.15%.
- Turning to the commodity bloc now and the Canadian dollar has been the best performer rising with the price of oil overnight. At 1.2454 USDCAD is down half a percent as prices roll over and look like they are headed toward a test of the 38.2% retracement level of the upmove which comes in at 1.2393.
- The Aussie and kiwi have been lifted as well with the kiwi up 0.4% at 0.7088 and the Aussie up about 0.2% at 0.7787. The Kiwi is still waiting on a resolution as to which party will form government while the Aussie benefitted from the more positive consumer sentiment data yesterday only to be weighed on by weakness in iron ore again. I’ll write more in my AUDUSD piece soon.
Commodities
- Oil was up more strongly earlier but the surprise build of 3.097 million barrels in the API stockpiles data last week has taken some of the lustre off the rally. So WTI is only up 0.2% at $51.02 while Brent is up 0.1% at $56.67. The official weekly stockpile data tonight, as well as the US exports numbers will be key to the direction from here as we head to week’s end.
- Gold’s recovery continued and it’s up another 0.33% to $1291. For me $1297 is still the key level to watch.
- Copper is up 1.23% at $3.083. It looks like it could be in for a full round trip to thee $3.175 region it pulled back from in September. A break of this level – if it happened would see copper up near $3.40 potentially.
Have a great day's trading.
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