Global Growth Is On The Up

Originally published by AxiTrader

Market Summary

Stocks in the US were stronger again while Europe was mostly mixed except for Spain where the IBEX was hammered down 2.85%. But that residual worry that traders expressed by selling Spanish stocks and bonds has spread beyond Spain’s borders in a material way at the moment.

In no small part that is likely because the PMI’s this week – manufacturing, services, and thus composite – have all been so strong. That speaks to a solid, and coordinated global growth outlook in quarters and year ahead.

That would normally be positive for the Australian market but it’s not at the moment as the ASX languishes at the bottom of its range after the lowest close since February yesterday. SPI traders retain their optimism however and have added another 14 points.

Offshore the S&P 500 is up 0.1% at 2,537, the Dow Jones Industrial Average is up a similar amount at 22,661 and the Nasdaq 100 is barely changed up just 0.02%. US bonds remain reasonably calm at 2.33% and 1.475% for the 10 and 2-year Treasuries respectively.

On forex markets the US dollar came back from weakness as the ISM services report shot the lights out and reinforced the notion that the Fed will be hiking again in December (NB Yellen made no comments on the economy of MP in her speech this morning). So on balance the US dollar is mildly lower with the euro at 1,1765 and the Aussie at 0.7861.

On commodity markets crude dipped despite a raft of positive inputs. WTI is at $48.86 off more than 1%. Gold has flowed and ebbed with the US dollar and is at $1275 while copper is fairly calm despite big gains in zinc, nickel, aluminium, and lead. US iron ore futures were quiet.

Today is a big one for local data with the release of both retail sales and trade for August.

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

International

• Global growth again folks, is looking positive with a raft of services PMI’s released over the past 24 hours supporting the strength shown in the manufacturing PMI’s earlier in the week. Overnight the US ISM services PMI leapt to 59.8 in September from Augusts 55.3, easily beating expectations. Likewise in Europe French, German, and EU wide services PMI’s were all significantly stronger in September than the previous month.

• It’s contributed to a lift in the composite global PMI reading released by IHS Markit and JP Morgan. David Hensley, Director of Global Economic Coordination at J.P.Morgan, said (my bolding), “The global PMI suggests that underlying global growth is strong and steady, with recent performance the best in three years. This is providing a real spur to the labor market with job creation in recent months being among the best seen over the past decade. As output growth remains broad-based by sector, new order inflows solid and backlogs of work rising, the world economy looks primed to continue this solid upturn during the final quarter of the year.”

Composite Global PMI (Source: IHS Markit)

• I’ve highlighted the jobs growth part of that statement because that’s what the fed is focussed on, that’s what has helped keep consumption up in Australia even as wages growth and inflation are low. And it’s that move toward labour market tightness which the fed worries will ultimately lead to inflation. It’s why it will keep tightening even though Janet Yellen, and Stanley Fischer overnight, have admitted some confusion as to why inflation is so quiet and why their models aren’t working like they used to. Improved jobs markets across the globe are a real positive for the outlook. As I wrote the other day, no wonder a growth asset like the Aussie dollar keeps finding a bid.

• Tomorrow is non-farms day and in the lead up we got the release of the ADP report which was slightly better than forecast with a print of 135,000.

• And on growth, here’s something worth keeping an eye on for the DAX and the euro. Reuters reports this morning that some investors are hopeful that Wolfgang Schaeuble’s departure from Finance might open the purse strings in Germany and lead to tax cuts and spending. Apparently the FDP, one of the prospective coalition partners with Angela Merkel’s SDP, has this as a policy.

• And here is an interesting take on why the EU’s tax grab from Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) increase the chance of the Trump tax cuts getting through. Writing at CNBC Jake Novak argues “The message of the day's news for Amazon, Apple, and just about every other major US corporation is now crystal clear: The days of being able to take advantage of highly favorable corporate rates in Europe are ending, and the exact expiration date could come anytime. They can continue to roll those dice overseas, or get behind the GOP effort to provide them with a reliably low tax rate right here in the good ol' USA”. I must say I kind of agree with him. We’ll see.

• Eye’s on Catalonia. The region’s leaders said that Catalonia will declare independence “in a matter of days”. Spanish 10-year bonds continue to blow out to their German counterparts – they are at 131 points now from 123 when I wrote this note yesterday. It’s not hurting the euro but the IBEX lost a whopping 2.85% last night. The King seems to have kicked an own goal with his intervention. Worth noting though is that in my reading on the issue it seems there is a silent majority in Catalonia who do not want independence – so this has a way to play out it seems.

• President Trump sent Puerto Rican bondholders into a funk overnight saying that the territory owes a lot of money and that “we’re going to have to wipe that out”. What exactly that means is uncertain but the capital price of PR bonds apparently plunged to just 36 cents in the dollar at one point. And while I’m talking about Trump, Secretary of State Rex Tillerson held an impromptu press conference overnight to deny he had thought about quitting and had to be persuaded out of the idea by his mate, VP Mike Pence. Stocks apparently liked that.

Australia

• What a day. The S&P/ASX 200 has another awful day's trade yesterday with heavy loses across the board as the market again came under heavy selling. The close of 5,652, down another 49 points, was the lowest close in the S&P/ASX 200 since February 9 this year. That’s not below the range low at 5,629 but it’s the lowest close on the local market in almost 8 months.

• SPI traders have again tried to suggest a positive start to today’s trade adding another 11 points to last nights close. But I wonder. As readers know I always respect ranges unless, or until they break. But there is some serious psychological damage being done at an index level in Australian stocks right now. It saps confidence and makes traders take profits quickly – as we’ve seen in recent week’s trade. So, lacking the positive catalysts for a sustained move higher that exist overseas the local market is drifting. We need a catalyst to break the ASX out of its funk and I’m not sure where that is going to come from.

ASX200 Daily (Source:Investing.com)

• This chart, from the RBA’s monthly pack, tells you everything you need to know about why RBA Governor Phil Lowe didn’t ease when many said he should during his first 12 months and why he is a reluctant tightener in his next 12. What you see on the right with the relatively low percentage of interest paid by households. That speaks directly to affordability which in turn speaks directly to home loan size which drives prices and, of course, the left-hand side of the chart - Australia’s record level of household debt.

Australian household debt and interest payments (Source: RBA)

• So, to summarise, Governor Lowe doesn’t want to ease to improve affordability which feeds loan size, price growth and debt. But the high level of debt, low wages growth, low inflation, and an uncertain transition in housing construction and prices, means he’s also not keen to raise rates.

• As the RBA has stated it’s worried about the impact rising rates will have on household finances and thus consumption.So Governor Lowe is - at least for the moment - kind of stuck. No way will he ease without serious economic weakness. But neither does he want to hike rates and risk household retrenchment and a higher Aussie dollar.

• It means today’s retail sales data for August, which the market is forecasting to print a reasonable 0.3%, is going to have more clout than it’s already sizable market-moving potential. I say that because retail sales gives us a chance to judge whether or not Australian households really are as pessimistic as they say they are and whether these concerns about the high debt level are weighing on spending given that the Household savings rate is at a post GFC low of 4.6%. Also out today is August trade with the market expecting a surplus of 875 million. Both releases can move the ASX, interest rates, and especially the Australian dollar.

Forex

• The US dollar is down, but off the mat this morning after the solid ISM services PMI again reinforced that the fed is likely to stay the course and hike again in December. The trouble for the dollar though is that the strength in the US is not isolated to the world’s biggest economy. Rather the services, and composite, PMI’s for the globe, for France, Germany, and the EU all suggest that the ECB too needs to keep walking the path of withdrawing emergency stimulus. Certainly Austrian central banker, and prominent ECB voice, Ewald Nowotny said overnight that the ECB should not hit “the brakes abruptly” he did highlight that the ECB is “aiming for the prospect of cautious normalisation”. So as the Fed moves so will other central banks. To a certain extent that is a handbrake on this nascent US dollar rally.

• So this morning we have the euro at 1.1761 up 0.16% after a run toward 1.18. The yen is a tiny bit stronger as well with USD/JPY down 0.1% at 112.72 after break down through trendline support before bouncing back. The pound gained a lift from its own decent services PMI print which beat with a print of 53.6. So GBP/USD is at 1.3256 this morning up 0.17%

• On the commodity bloc the Canadian dollar is a little stronger with USD/CAD down 0.1% at 1.2470 and the kiwi is up 0.17% to 0.7169 after again finding support at the 200 day moving average and as traders await meetings between Winston Peters and both of the major parties in New Zealand.

• The Aussie has been mostly better bid since this time yesterday. As I highlighted above the solid PMI’s and the global growth outlook that speaks to would usually be a positive for thee Aussie and at the moment it provides a reason for traders to buy on dips. But as the weakness in the ASX shows Australia is not exactly the investment capital destination of choice right now. So that’s a mitigant, a handbrake if you will, to a stronger performance. So the AUDUSD is stronger up 0.34% to 7861 but off its high at 0.7875. The US dollar’s moves are still the key driver in a macro sense but today’s data releases of retail sales and trade are both market moving. 0.7900/10 is resistance on the topside with support at 0.7835/40 and then 78 cents.

Commodities

• Oil traders had a few good reasons to drive prices higher overnight. But it seems the recent sharp reversal of last week’s gains has sapped their confidence a little. So this morning WTI is back below $50 a barrel after a fall of 1.11% to trade at $49.86. Brent is off less at $55.73 down 0.48%.

• That’s weakness comes despite the EIA reporting a much bigger than expected draw in US inventories of 6 million barrels last week. The market had expected just a 500,000 barrel drawdown. Likewise, Vladimir Putin’s comment that the OPEC/non-OPEC production caps could continue through to the end of 2018 was also a bull point. But traders seem to have focussed on the surprise increase in US oil exports as a reason for concern. The data showed crude exports beat the previous week’s record of 1.5 million bpd with a 1.98 million bpd print.

• At $49.90ish WTI has satisfied the target I highlighted last week. Next support, biggish, is the 200 day moving average at $49.53 and then the 61.8% retracement of the latest move which comes in at $49.21.

• Gold has been lifted by the weaker US dollar – it’s up 0.33% at $1275 about the middle of it’s $1270/$1282 range over the past 24 hours.

• Copper remains becalmed, Zinc hit another 10 year high, copper, lead, and nickel were all up sharply as well. US iron ore futures are hardly changed.

Have a great day's trading.