Originally published by AxiTrader
Market Summary
Pretty much from the moment that the news broke the US Senate had approved the Budget around lunchtime Friday Australian East Coast time stocks and the US dollar caught a bid and bond rates started to rise having gone a little offered.
The key to the turnaround sentiment was that the passage of the Budget clears a hurdle to the much anticipated Trump tax cuts which in turn are expected to both improve the US economic and earnings outlook while at the same time strengthening Hawks at the Fed’s hand to pursue at least 4 rate hikes in the next 14 months.
That’s left US 10-year bonds at 2.38% close to the recent range top and important resistance in the 2.40/2.42% region.
And it saw the US dollar rise 0.4% to 93.66 while the euro and the rest of the forex universe lost ground. Of particular note was the selling of the yen and Swiss franc, which lost 0.86% and 0.82% respectively. The New Zealand dollar was hammered again losing another 0.88% against the US dollar after the previous day’s almost 2% drop while the Aussie was dragged lower by the stronger US dollar and I think some sympathy for the Kiwi. It closed the week at 7818, down 0.77%.
Stock traders focused on the positives to growth and potentially to earnings in the US with the S&P 500 up 13 points, half a per cent, to a new closing record at 2575. The Dow Jones Industrial Average rose 0.71% to 23,328 while the Nasdaq 100 was 0.48% higher. Europe didn’t really participate in the rally and after a turnaround Friday and 10 point gain SPI traders only added 5 points to Friday afternoons close.
Naturally with bond rates and the US dollar rising gold dipped, losing 0.7%, to close at $1280. Copper was largely unchanged, and crude oil was around 0.6% higher with WTI closing the week at $51.84.
Plenty for traders to watch this week including Q3 CPI in Australia Wednesday. Wednesday night sees the release of the Bank of Canada’s interest rate decision with the ECB holding its meeting and decision Thursday on the Taper of its QE program. Also out this week are a raft of “flash” manufacturing PMI’s across the globe, the German Ifo business survey, UK GDP, US Durable goods, Korean Q3 GDP, the Riksbank rate decision, Norges bank, as well as the latest decision from Turkey’s central bank. We’ve got a few central bankers also speaking and the week rounds out Friday with the advance read of Q3 GDP for the US.
HUGE!
Here's What I Picked Up (with a little more detail and a few charts)
International
- The vote in the Senate Friday really got traders attention. The reason was that Senate passed a budget measure which effectively means that the republican’s themselves are now able to pass the tax cuts on their own based on their majority in the Senate – without the Democrats. President Trump said Friday, “The Budget passed late last night, 51 to 49. We got ZERO Democrat votes with only Rand Paul (he will vote for Tax Cuts) voting against," Trump wrote on Twitter. "This now allows for the passage of large scale tax cuts (and Reform), which will be the biggest in the history of our country!”.
- Trump told Fox that he won’t be attaching infrastructure to the tax cuts because, “I don’t want to take any chances cause I feel we have the votes right now the way it is”. But there are now two bills. The Senate’s plan which raise the deficit by $1.5 trillion over the next decade and the House plan which is revenue neutral. It’s a question now of the Republicans finding a compromise between the two chambers to get the final details worked out. Either way though traders are betting a deal is going to get done and the stimulatory impact of tax cuts are coming.
- RATES. This is the market to watch folks. Interest rates and specifically US 10 year bonds are edging closer to a big break higher in rate as traders factor in the added stimulus to the US economy already strong enough for the Fed – or at least the dot plot – to be suggesting 4 rate hikes in the next 14 months. 2.42% is the level to watch near term and is just 4 points higher than Fridays close at 2.38%. Above that it is last December’s high when the 10-year Treasury rate maxed out at 2.60/65%. US 2 year rates were also higher reaching a 9 year high at 1.585% before closing at 1.576%.
- One thing worth noting is the inset to the chart below of the 10 year Treasury rate. It’s a chart I saw earlier this month of the long term relationship between the monthly ISM manufacturing PMI (inverted) and bond rates. It suggests higher rates. Much higher rates closer to 3%. That will really roil global markets if US long rates break that much higher. They have to break 2.42% first let alone 2.60/65% or 3%. But this is a market that needs to be watched.
US 10 year rates (Investing.com)
- Markets moved around on Fed chair speculation Friday. There was the rumour that both Jerome Powell and John Taylor would be appointed to the Fed as chair and deputy chair. That saw rates rally a little. But they rose again when it was reported that Janet Yellen was back at the White House having lunch with President Trump’s top economic advisor, Gary Cohn. President Trump has said he’ll decide before he heads to Asia next week. So we’ll know soon.
- If you are wondering why the New Zealand dollar got sold so heavily in the wake of Winston Peters decision to go with Labour and anoint Jacinta Ardern as prime minister you need to go no further than some of the headlines like this one from Reuters “Kiwis test new formula in central bank petri dish” or take note of conversations such as the one I heard between Dennis Gartman and Bloomberg Surveillance hosts Tom Keene and Gura. Gartman essentially channeled the implied theme of that headline saying NZ had a leftist government who was going to experiment with the central bank.
- And then of course Ardern herself has fed investors fears about the outlook for the economy and the dollar with her comments that capitalism has failed new Zealanders. The NZ Herald reports Ardern said “When you have a market economy, it all comes down to whether or not you acknowledge where the market has failed and where intervention is required. Has it failed our people in recent times? Yes. How can you claim you've been successful when you have growth roughly 3 per cent, but you've got the worst homelessness in the developed world?” You can see where the room for traders and investors uncertainty comes from in statements like that. As a result the Kiwi remains under pressure.
- Catalonia’s leaders are not backing down as Madrid moves to impose direct rule. Catalan leaders Carles Puigdemont said the move was the “worst attacks against the people of Catalonia” since Spain’s days under military dictatorship. Puigdemont has asked the local parliament to meet.
- Also in Europe the stumbling blocks along he road to Brexit – like how much the UK will have to pay to leave remain. But British PM Theresa May got a welcome reprieve Friday when Eu leaders voted to move to phase two of the talks on Britain leaving the EU. German chancellor Angela Merkel said what everyone is thinking, “I think it is very clear what additional steps need to be taken”.
- An exit poll by TBS suggests Japanese Prime Minister Shinzo Abe is going to keep his “supermajority” in Japan’s lower house after Sunday’s election. We’ll get more details today.
Australia
- Friday’s turnaround in sentiment in Australian stocks was remarkable but understandable. Under pressure early the market turned around when the news broke that the US Senate had passed its budget bill. At the close though the S&P/ASX 200 was up just 0.18%, 11 points, at 5907. That’s the first close above 5900 since early May after the ASX had a wild ride on the day trading to a low around 5868 and a high of 5925 before settling at 5907.
- In physical terms that was a massive outside day. And it highlights two things. Both that this is still a market that looks toppy. And, why I never pre-empt my system and always wait for a signal to be generated. As the SPI200 chart shows the market broke this very steep uptrend Friday but then reversed. It’s still my contention the market looks dangerously extended at the moment – in the near term. But I haven’t received a sell signal yet. That means I’m waiting not pre-empting. US markets rallied on stimuli that the ASX just doesn’t have. We seen the impact of a renewed focus on the domestic and economic outlook in the ASX’s strong recent rally. But there is no economic stimulus coming from tax cuts in Australia. So the market needs to lift under it’s own steam. Certainly positive risk appetite helps. But as the German DAX showed Friday maybe global stocks will lag the US market’s rally?
- CPI this week is a big number. It’s critical number in the debate about what the RBA might, or might not, do with rates. The median expectation from the Bloomberg survey is a rise of 0.8% with a forecast range of between 0.7% and 1.2%.
Forex
- The US dollar pushed higher against safe haven currencies the yen and Swiss franc Friday after the news of the budget passage opened the way for the tax cuts to get closer to execution. What’s important about the tax cuts for forex traders is that it might be the impetus to change perceptions about the path and pace of fed policy vis a vis that of the ECB. That in turn may be enough to see the dollar break up and through recent highs in US Dollar Index terms.
- That level, 94.20/25 if it gives way would suggest the next leg of the US dollar rally is underway with targets around 95.40/96.00 initially.
USD Index - DXY (Source:Investing.com)
- In euro terms the relevant levels are 1.1660/70 and then 1.1525. Only really with a break of 1.1525, or a run above 96 in DXY terms would we be able to say that the US dollar’s outlook has really changed. Otherwise it’s just a garden variety 38.2% retracement of the previous move.
- Naturally what the ECB says and does is going to be important this week for the outlook. It’s widely expected in markets that the bank will again reduce the amount of bond buying it will undertake each month. But forex traders recognise that the EU economy, lead strongly by Germany, is on the mend. Indeed data released Friday showed rising exports boosted the Eurozone’s current account surplus to 33.3 billion euros in August from 31.5 billion in July. That’s the problem for the ECB. The economy is recovering which sends the strong signal monetary accommodation needs to be withdrawn. At the same time the fact exports aren’t being hurt by the recent Euro strength suggests to traders that maybe these levels isn’t the handbrake on growth Mario Draghi and some of his colleagues suggest it is. This week’s meeting, and messaging, is going to be interesting.
- Chartwise, the setup is pretty clear as you can see from the wedge. 1.1880/1.1900 remains the topside level to watch with 1.1660 support.
- Elsewhere in forex land the pound got a lift from what traders read as a more conciliatory EU in Brexit negotiations. But I’m not convinced that’s actually what we have. Theresa May is struggling to get a deal done on both sides of the channel at present. That said the GBP/USD closed at 1.3180 which is roughly where it is this morning.
- The spectre of the solid mandate Shinzo Abe has gained in Sunday’s election has buoyed USD/JPY in very early trade Monday. It’s up 0.3% at 113.84 after gaining 0.86% Friday. That Abenomics and an accommodative BoJ are again reinforced will continue to pressure the yen.
- The Kiwi is suffering under the weight of uncertainty. As discussed above traders and investors are wary of just what the new coalition government, and its apparent intervention tendencies will mean for growth. But they don’t like what they see initially. NZD/USD now looks biased back toward the start of the rally at 0.6817.
- Locally the Aussie came under pressure Friday. That was a reaction to the US dollar which was stronger across the board Friday with the Aussie dollar down in sympathy with the moves we saw in forex markets and despite a reasonably solid rally in Chinese iron ore futures. Friday’s price action has darkened the outlook for the AUDUSD which couldn’t get up and through resistance at 79 cents. That being the case the focus turns back toward 0.7730 given that the Aussie traded ended the week near its lows.
- When I look at the chart it looks to me like a break of 7800/10 is the key. While it holds we are just in a 1 cent range. If it breaks then its 0.7730 and perhaps 0.7650. Much depends on the US dollar and this week’s CPI.
Commodities
- Naturally with stocks up and bond rates rising gold come in for some attention from the sellers losing 0.7% to $1280. Gold is under pressure certainly but for three days in a row it has found support in the $1276/77 region. If that level breaks then perhaps a run back to the recent low at $1260 is on the cards. If the US dollar gets a wriggle on and breaks 1.1660 in the euro gold could head toward $1220/25.
- Crude oil ended the week a little higher with WTI at $51.84 and Brent at $57.75. There were many moving parts Friday with news flows through the Kurdish pipeline are running at just 200,000 bpd, well down on the usual 600,000 bpd. But there was also news that Rosneft has bought this pipeline despite the tensions in the region as Moscow seeks to expand its influence in the region and give the Kurds a bit of political cover. The Baker Hughes rig count in the US was down for a third week. While CFTC data showed the net positions of speculators rose to a 3 month high last week. Key levels to watch in WTI are $50.60 and $52.83. A break either side would get things moving.
Have a great day's trading.