Gold Crushed And Stocks Lower On Central Bank Fears

Originally published by AxiTrader

Quick recap

A big night of moves on forex markets last night as increased bets the Fed will actually tighten this year saw the US dollar strengthen. The GBP/USD collapsed again, but not much more than the AUD/USD and less than the Yen now that USD/JPY has broken the years downtrend.

But it was the EUR/USD which had the wildest ride as reports surface that the ECB will end it’s bond buying program as scheduled next year and that as a result it will begin to taper soon. That combination has driven 10-year bonds in the US, Germany, and the UK up about 5 points.

On commodity markets gold collapsed after breaking through support around $1305 and is at $1268 now while Crude Oil continues to climb higher and is at $49.14 this morning.

CHART RICH TODAY

What You Need To Know

International

• At the close in New York US stocks were down around 0.5% in S&P 500 and Dow Jones Industrial Average terms while the Nasdaq 100 was off 0.2%. That belied the lead from Europe where stocks in the UK, Germany and France were up more than 1%. US gold miners were under pressure as Gold collapsed but it's the move higher in bonds which is the real threat to stocks.

• Overall the S&P is in a nice little wedge and a break is coming.

• The big story of the day is the one about potential ECB tapering its bond buying in the lead up to the scheduled end to QE. It all started with a Bloomberg story saying an “informal consensus has built among policy makers in the past month that asset buying will have to be tapered once a decision is taken to end the program, the officials said, asking not to be identified because their deliberations are confidential”. Confidential means confidential folks - so no leaking :S. Anyway, moving on.

• The ECB told Bloomberg via email that “The Governing Council has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament”. But if, as it seems, central banks are tiring of trying to do it all alone, and if the efficacy of monetary policy is being questioned within central bankers circles then perhaps the ECB is not a lock to extend its QE next year as everyone thinks.

• But that doesn’t gel with Draghi’s defence of his policies before the German parliament last week, nor Yves Mersch’s comments the night before last that if banks can’t cope with the next few years then maybe there is something wrong with their business model. Likewise comments overnight from ECB chief economist Peter Praet that “The ECB will preserve its accommodative stance until inflation returns to our aim…Very low interest rates will probably prevail for an extended period of time” suggest otherwise.

• IMPORTANTLY: But bond traders are worried because they recall the US treasury’s taper tantrum, and the uptick in yields and market turmoil that caused. But don’t tell the forex gals and guys – Euro is still around 1.12.

• Good news on Deutsche Bank AG NA O.N. (DE:DBKGn): Comments from JPMorgan (NYSE:JPM) boss Jamie Dimon and HSBC that Deutsche Bank can get through its current troubles, the fact that DB CEO John Cryan are heading to Washington for the IMF meeting and likely discussions with the US DoJ, and another report that DB will settle the case for between $4-5 billion all helped to buoy the stock price. In European trade it was up 1.5% while the NYC ADR rose 2%.

• The IMF has released its latest outlook for the world economy before the meetings in Washington this week and for once its not all bad news. There are some mild adjustments as you can see in the chart below at a country level – most troubling is the 1.6% growth rate for the US economy this year. Interestingly the IMF warned policy makers that further economic stagnation will continue to fuel the populist uprisings against trade and immigration we’ve seen recently. It again suggests to me that fiscal policy will eventually be unleashed across the developed world.

Australia

• It was a pretty good performance for the local market yesterday as it recovered from early losses with the S&P/ASX 200 finishing at 5484 up 1 point. The Commonwealth Bank Of Australia. (AX:CBA) was down marginally as its CEO Ian Narev faced parliament but that was a solid performance in the context of the lead from offshore financials the previous night.

• And it is a poor lead again today that sees futures traders marking the December SPI 200 contract down 31 points, 0.6%, to 5442. Again all sectors on the S&P 500 are in the red but financials are only just so.

• In other news yesterday the RBA left rates on hold and governor low added a little more colour to his statement than his predecessor. I thought the chat about the labour market was interesting, and the warning on housing supply was clear. But most talk was about the lack of an easing bias in any form and no comment that the board will continue to evaluate data as it comes in. To many that suggests a cut in November after the release of Q3 CPI in late October is off the table.

• Two important data releases are out today. retail sales at 11.30 is the headline number. Butu the PSI read on the outlook for the sevices sector at 9.30 am is also important given the size of services in the economy.

Forex

• A night of many moves on forex. Euro was volatile after the rumour of ECB tapering hit the wires. It traded a 100 point range between 1.1138 and 1.1238 but in the end is hardly moved at 1.12. Elsewhere the Aussie dollar found the air too thin near 77 cents again. Naturally some part of that is the US dollar strength in the past 12 hours or so but the reversal simple reinforces the strength of this region as a supply zone for the moment.

• But as USDJPY shows if an asset can build a base a rally can begin and levels can be broken. To that end USDJPY is up and out of the 2016 down trend and sits at 102.78 this morning. On my video yesterday I said I thought it would get to 102.80/103.10 with the latter level needing to break to give a clear sign the Yen is losing its appeal. A break and hold above 103.10 over the course of this week would signal a sea change.

• Sterling cam under pressure again overnight as it seems Britain will give no quarter as it moves toward Brexit. I thought the news that the UK government is moving to protect defence personal from some provisions of EU law which hit the wires overnight is just the first sign that perhaps the new PM doesn’t think Europe is as important to Britain as European policy makers do. That comes with risks and puts pressure on Sterling. But as we know in Australia a weaker currency can be a boon to an open economy.

• Anyway back to the price action and the break of support suggested a move to 1.27 and we are almost there at 1.2735 this morning.

Commodities

• Gold is the big story here overnight. Like everything else at the moment in financial markets with no real driving catalysts the charts, and the technical are the markets guide. So with gold have failed multiple times near the post Brexit high, failed recently at the downtrend from that high, lost momentum, come under pressure since long bond rates have stopped falling, and broken the trendline from the December low it collapsed when it took out $1305 support overnight.

• That’s the level I’ve been talking about that could trigger a $50 fall but last night’s low bottomed at $1266 so it was only $39. It looks oversold now in the very short term. But nevertheless the 200 day moving average at $1255 (hence my expectation of the $50 fall) is likely to be tested at some point to gauge where the real support lies.

• West Texas is slowly climbing up and away from the neckline of the reverse head and shoulders pattern many traders are watching. It’s the one that suggests prices will indeed head into the mid $50 region OPEC wants to drive them to. But a retest of the neck line is likely and US dollar strength will weigh at the margin.

• Copper is down at $2.1585 – just dancing on the spot for the moment.

Today's key data and events (all times AEDT)

• Australia - AiG Performance of Services Index (Aug) (10.30am); Retail Sales s.a. (MoM) (Aug) (11.30am)
• New Zealand - ANZ Commodity Price (Sep) (11am)
• China - Nil
• Japan - Markit Services PMI (Sep) (11.30am)
• Germany - Markit Services PMI (Sep), Markit PMI Composite (Sep) (6.55pm)
• EU - Non-monetary policy's ECB meeting (6pm); Markit Services PMI (Sep), Markit PMI Composite (Sep) (7pm); Retail Sales (MoM) (Aug), Retail Sales (YoY) (Aug) (8pm)
• UK - BRC Shop Price Index (MoM) (Sep) (10.01am); Markit Services PMI (Sep) (10pm)
• Canada - Imports (Aug), Exports (Aug), International Merchandise Trade (Aug) (11.30am)
• US - Fed's Evans Speech (11.40am); MBA Mortgage Applications (Oct 7) (10pm); ADP Employment Change (Sep) (11.15pm); Trade Balance (Aug) (11.30pm); Markit Services PMI (Sep), Markit PMI Composite (Sep) (12.45am); ISM Non-Manufacturing PMI (Sep), Factory Orders (MoM) (Aug) (1am); EIA Crude Oil Stocks change (Sep 30) (1.30am); 5-Year Note Auction (4am)