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Gold And The Yen Find A Bid In What Feels Like Rising Risk Aversion

Published 24/08/2017, 09:22 am
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Originally published by AxiTrader

I did something I never do today, I slept in until 4.45am.

It was glorious.

But it also truncated my research time so the report is a little shorter than usual today.

Market Summary

Stocks in the US dipped, the DAX pulled back from a two-month trend line, and the US dollar was mostly weaker, and bond rates fell a little as traders reacted to president Trump’s stump speech in Arizona during Asia trading yesterday.

At the close, the S&P 500 was 8 points lower, 0.32%, to 2,444. The Dow Jones Industrial Average dropped 88 points for a 0.4% loss and the Nasdaq 100 fell 0.3% to 6,278. IN London the FTSE 100 was largely unchanged but the DAX neatly reversed off a two-month down trend from the record high.

Locally after a 13 point fall yesterday on the S&P/ASX 200 index SPI traders have marked prices up 15 points this morning suggesting a better day. We’ll see.

On forex markets the US dollar lost about 0.45 in US Dollar Index terms and roughly the same against the euro as the combination of a hawkish Bundesbank president and weaker US home sales saw EUR/USD climb back to sit at 1.1814 this morning. That’s 80 points off the low of the past 24 hours. The Aussie too is off its lows at 0.7905 this morning after trading down to around 0.7880 in Asia yesterday. Most interesting for forex traders though is that the Yen is back below 109 this morning and back near the bottom of the 2017 range.

On commodity markets crude is higher after EIA inventory data showed crude draws a little more than forecast and gasoline inventories down almost double what the market expected. WTI is at $48.39 this morning. Like the yen, gold is higher this morning at $1,290 – traders seem to want to have another run at $1,300. Copper is a little lower at $2.97 in what was a mixed night. But iron ore recovered some of yesterday’s losses.

And bonds rallied. US 10’s fell to 2.17% from 2.22% yesterday.

Kiwi trade is out this morning and then tonight we get UK Q2 GDP.

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

International

  • President Trump’s threats to shut the US government and burn the NAFTA agreement didn’t exactly roil markets overnight but they certainly garnered plenty of attention. Fitch has threatened the United States credit rating if it happens, Speaker of the House Paul Ryan has said it won’t happen, and while the comments initially put the Mexican peso – and to a lesser extent the Canadian dollar – under a bit of pressure that has mostly washed away.
  • For me, when I think about the impacts on markets, the key to that speech as I watched it was it gave the President the chance to re-energise himself doing what he is best at – the Stump Speech. It was great theatre – unless you’re an advisor of course – as he went off script, was politically incorrect, threatened the government shutdown, building the wall, intimated a pardon for the Arizona sheriff Joe Arpaio, and again bashed his predecessor Barrack Obama.
  • But it’s Congress that will decide on the debt ceiling limit and avoid the shutdown – not the President. And it’s likely the Congress that will need to work out what it wants to do on tax cuts. I’m still expecting some progress there in the months ahead.
  • The battle at the ECB governing council table next meeting is going to be interesting after Bundesbank president Jens Weidmann said overnight that QE must end. “Based on our June forecast, there is no need in my view for taking further action for next year and in particular not for extending the buying programme” Weidmann said in an interview with the German press. It’s hard to disagree with him given the economic performance of the German and EU economies.
  • But Weidmann’s comment appears to be in contrast to Mario Draghi’s speech overnight where he talked about the uncertainty that the ECB, and central bankers more broadly, face. “We must be aware of the gaps that still remain in our knowledge” Draghi said in a speech. It wasn’t exactly a cry to leave QE intact. But it was a recognition of the reality of central banking.
  • Just look at the absence of inflation around the globe, the lack of price pressure in the US and UK labour markets even though they both appear very tight. Draghi is essentially saying that central bankers are not omnipotent and don’t have all the answers. It’s an argument for caution wherever each economy and central bank is in the cycle.
  • On the data front - US home sales fell 9.4% on an annual basis to 571,000 units in July which was the lowest reading so far this year. The housing sector appears to have slowed and this data point garnered plenty of discussion overnight.
  • So much so that the fact the Markit HIS composite PMI for the US hit a 27 month high in August seems to almost have been lost. The flash print for this month rose to 56 from 54.6. Services rose to 56.9 from 54.7 but manufacturing dipped to 52.5 from 53.3.
  • In Europe the data backed up Jens Weidmann’s call. The flash composite PMI for Germany in August printed 55.8 up from 55.7 last month – holding near 6 year highs. EU services PMI dipped to 54.9 but manufacturing rose to 57.4.
  • And speaking of central bankers, Dallas Fed's Robert Kaplan again reiterated his expectation that balance sheet taper will begin soon even as he suggests patience on rate hikes pending inflation updates.

Australia

  • What a disappointing day for the bulls on the S&P/ASX 200 yesterday. Stocks fell 13 points, 0.23%, to close at 5,737. I’m out of step – given time constraints this morning – with why exactly SPI traders have marked prices higher this morning. Certainly, global miners look to have had another good night, and gold and crude are higher. So maybe that’s enough?
  • We’ll see. The reality is that both the physical ASX200 and thee SPI are trapped in a range, and have been for month’s now. Here’s the latest update of the SPI chart – Not Drowning, Waving.

Chart

Forex

  • The Trump effect was less important than the ECB and data affect in forex markets overnight. That’s not to say that the President’s hyberbolic threat to shut down the government – and perhaps precipitate a default – didn’t get some attention. Certainly, Fitch’s threat to the US AAA rating is proof of that. But traders are betting that cooler heads – even the president’s when he gets off the Stump – will avoid a shutdown and will raise the debt ceiling.
  • Likewise, you can see the lack of Trump traction in the prices of the Mexican peso and the Canadian dollar. USD/MXN is up just 0.17% at 17.6790 while USD/CAD has lost 0.1% to 1.2546. Now that means both currencies have lagged the euro and yen in their overnight rally – the peso materially – but in the overnight moves you can see little worry about president Trump’s threat to NAFTA.
  • Elsewhere the Euro is higher as noted above after Bundesbank president Weidmann released his inner hawk. The yen likewise rallied but pound is struggling having lost around 0.2% overnight to 1.2800. My outlook remains for a run toward 1.26. The corollary of this weakness of course is that EUR/GBP has lurched higher again gaining 0.61% to 0.9226. Only the pound’s flash crash has seen EUR/GBP higher since the GFC kicked off.
  • Elsewhere in the commodity bloc the Aussie has recovered 79 cents again after dipping back into the low 0.7880’s for a loss of 0.05% on the day. The battle continues for the Aussie. Metals recovered some of their poise but this is counterbalanced by a little weakness in stocks and the rally in gold and the yen which, all taken together, speaks of a little risk aversion in markets. That’s never the Aussie dollar’s friend.
  • Likewise the move in the New Zealand dollar, and NZD/JPY, might be a sign of risk aversion at least in forex. NZD/USD is down 0.73% at 0.7224 while NZD/JPY is at 78.73 down 1.27%!!!

Commodities

  • Crude is a little higher this morning after inventory data showed a continuation of the trend to lower inventories. EIA data released overnight showed a draw in crude inventories of 3.327 million barrels in the latest week’s data following an 8.945 million drop in the previous period. The market had expected a 3.45 million decline. Meanwhile, gasoline stocks fell by 1.223 million, compared to expectations of a 0.643 million decrease.

Chart

  • Gold is higher again, up at $1,290 after a 0.45% rally. It seems like the uptrend line is holding for now and traders may want to have a pop at what is likely to be very strong reistance at the recent high – which is also the 138.2% projection of the earlier move.
  • Copper was lower in a mixed night for metals. It’s at $2.97 but off the lows around $2.95. It’s still elevated and there is an element of growing disquiet about the price in the commentary I’m reading about prices up here. But as I wrote in my Aussie piece yesterday the fact that metals and mining shares have been outpacing the overall global rally has been a sign that this is not just punters on the Dalian or other futures exchanges driving prices.
  • The question going forward though is what’s next. And I agree much is priced in. But for now the rally continues.

Have a great day's trading.

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