Originally published by AxiTrader
Welcome to my overnight markets wrap.
It’s Sunday in Koh Samui as I’m writing this so will be up to date as at 5pm Sunday afternoon AEDT. I’m traveling tomorrow pretty much all day and I arrive back in Sydney at 7am Tuesday. I’ll try to do an update from the magnificent Singapore Airlines A380 on Tuesday morning if the WiFi is working.
Have a great Sunday evening and Monday’s trade.
Feedback always welcome
Greg
Market Summary
US stocks were higher, bond rates lower, and the US dollar pressure initially after a combination of weaker than expected US inflation and dovish comments from BoJ governor Kuroda and ECB president Draghi all went into the market maelstrom Friday.
Throw in President Trump not certifying Iranian compliance with the deal that lifted sanctions and halted its nuclear arms program and we also had another element for traders to consider.
Whether that impacts the tone of markets next week is in question because if North Korea has taught traders anything it is that knee jerk reactions are costly and quickly unwound.
So after another solid day Friday, a day that took the ASX to the top of its range SPI traders have added another 12 points over the weekend. 5833 is the big level on the physical to watch.
On forex markets the US dollar was under pressure on the back of the data. But it’s worth noting the Atlanta fed upgraded its forecast for Q3 to 2.7% and Mario Draghi made it more than clear that the ECB is way behind the Fed. They’re still conducting QE for goodness sake.
Anyway euro is at 1.1822, USD/JPY is offered at 111.84, and the Aussie dollar is higher on the back of a positive global backdrop and data releases last week which suggest a lower chance of an RBA rate cut. It ended the week up another 0.88% at 0.7888.
On commodity markets copper was higher along with most base metals after Chinese import data shot the lights out Friday. Iron ore is also higher and crude benefitted as well with WTI up more than 1.6%. Gold was higher too as bond rates rallied and curves flattened in the wake of inflation data and central bank comments. It’s at $1304.
The week ahead is a big one for the global economy and markets. China has its 19th National Congress as well as some important data releases including inflation today. Australia gets unemployment Thursday and we hear more from fed and ECB speakers.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Short end traders might be betting on a December rate hike from the Fed but it’s clear that not all traders are convinced. I say that in the wake of market reaction to what looked to me like reasonable inflation and retail sales numbers. Headline inflation printed 0.5% in September against the 0.4% expected and that lifted the inflation rate to 2.2% year on from the 1.9% last month. But the fact the pundits guessed at 2.3% for yoy headline and that core inflation rose just 0.1% seemed to catch traders attention. Retail sales were solid up 1.6% but again this was less than the 1.7% pundits guessed at. It all means that the Citibank Economic surprise index actually dipped back to just +3.9 on Friday. It’s expectations, not actual prints, that matter in the short run to traders.
- But the data wasn’t poor at all and as a result, the Atlanta Fed upgraded its expectation for Q3 US GDP Friday from 2.5% to 2.7% on the back of “the forecast of third-quarter real consumer spending growth increased from 2.2 percent to 2.5 percent after this morning's retail sales report from the U.S. Census Bureau and this morning's Consumer Price Index release from the U.S. Bureau of Labor Statistics”.
Atlanta Fed GDPNow estimate (source: Atlanta Fed)
- But the US yield curve flattened with both the 2-10, and 2-30 spread falling to post GFC lows Friday. Here’s the chart of the 2-30 from the FT. At post GFC lows the chart highlights, and the German bond rally supports, that whatever the strength of this synchronised global recovery right now, whatever the tightness of the US labour market, the strength of the US economy, and the prospect of economic stimulus from President Trump’s tax plan, traders and investors are betting that inflation is going to remain quiet. Equally I could make the case that traders and investors are also betting that the global economic uptick won’t last – certainly not sufficiently to reignite inflation in a lasting manner.
US 2-30 Treasury Bond Spread (Source: FT.com)
- Of course the rally in bonds, especially European also suggests that the rumours of an extension to the ECB’s bond buying plan for 9 months at lower amounts (via Reuters) means traders and investors are working still on the central bank backstop paradigm for bond rates and bond markets.
- That’s especially the case given that BoJ governor Kuroda again reiterated the policy differences between his central bank, the Fed and the ECB Friday. Kuroda said, “Inflation remains around 0.5 percent, still below our target,” adding "I would like to explain to the G20 that we will continue our ultra-loose monetary policy to achieve 2 percent inflation at the earliest date possible". That’s a central bank governor in no rush to see Japanese bond rates rising, and thus the yen strengthening, anytime soon.
- Mark Carney was at his hawkish best Friday saying that the UK is running out of spare capacity and thus his ability to tolerate inflation which is running above target. Thus a rate rise is likely to be appropriate in coming months. But the BCC says he’s on the wrong track and it’s “extraordinary” for the BoE to be mulling the withdrawal of policy stimulus.
- On the other side of the Hawk-Dove divide was ECB president Mario Draghi who was again at pains to suggest that when QE is scaled back the ECB will need keeps rates low. “Progress towards a durable and self-sustaining convergence of inflation towards our objective is not yet sufficiently convincing,” Draghi said adding “Thus, a very substantial degree of monetary accommodation is still needed”. No wonder bonds rallied.
- Chinese trade data Friday got traders attention with solid imports and exports data showing China is both the beneficiary and a strong contributor to the current outlook for global economic growth. Imports grew 18.7% from a year ago in September against expectations of a solid 13.5% increase. Exports were also up solidly at 8.1% from August’s 5.5% year on year rate. But that print missed expectations of an 8.8% increase. Of particular note for Australia and iron ore traders was that September saw China set a new record for Iron ore imports of 103 million tonnes.
- President Trump has raised tensions surrounding Iran and its nuclear/sanctions deal by not certifying their compliance. It’s another potential geopolitical flash point for traders to watch and it’s raised the ire of other signatories to the deal which includes allies and non-allies of the US alike.
Australia
- We finally did it. For the first time since June 29 this year the S&P/ASX 200 has closed above 5800 on Friday. The market gained a solid 1.8% this week to close at 5814, not too far below Friday’s high at 5823. It was the banks and the miners leading the charge as investors take another look at the outlook.
- And while the range top has still held I’m going to reiterate what I suggested Friday. That is, that given both the positive domestic and global economic backdrop it would take an awful run of policy errors to knock the economy over at present. That means, the time is nigh for the ASX to test and see if it can break the range highs.
- SPI traders added another 12 points on Friday which implies a physical ASX 200 at 5826 on the open Monday. That’s just 7 points below the range high which has an increased chance of getting blown to bits given this positive domestic and global backdrop. Even if international investors see the local market as overly concentrated on banks and miners and largely irrelevant in the new global economic context where other sectors dominate interest. The reality is the positive backdrop will support, or should support, the local market. So the chance of a catch up to US and other market rallies is growing. A range break would imply a move back to 5950, probably 6000.
- This week is pretty quiet on the local economic data front with participation in a panel discussion by the RBA’s assistant governor for economics Luci Ellis, a speech by her colleague, assistant governor for the financial system, Michele Bullock, New motor vehicle sales, and employment the highlights. But traders will be very interested in what Ellis and Bullock have to say about the outlook and I’ll be watching car sales as my real world guide to where confidence is.
- And then of course employment on Thursday will really get traders attention. The jobs market in Australia has been real bright spot in the economy and the NAB business survey is pointing to a continuation of this. We’ll know at 11.30 AEDT Thursday. Just before important Chinese data which includes retail sales, urban investment, industrial production, and GDP.
Forex
- It may not be all beer and skittles for the US dollar bears if the ECB has anything to do with it, or if the price action in the EUR/USD at the end of last week is any indication. Traders had to balance the twin inputs of what they saw as weaker than expected inflation data in the US but a clear signal from the ECB that it it is way behind the Fed in terms of plans to normalise rates. It’s not even able to end QE let alone contemplate rate rises. Of course that message is aimed at consumers, business, and also forex traders who the ECB does not want to take the EUR/USD too high. A break of either 1.1800 or 1.1880 is the signal for the next move. But chances are we’ve seen an interim top.
- USD/JPY has certainly rolled over with prices Friday taking out the ranges and lows of the past 3 days. That suggests further downside toward the 38.2% retracement level of the big upmove at 110.98. That said, USD/JPY’s ability to hold above the 200 day moving average around 111.80 is worth watching. President Trump’s Iranian decision helps the yen to the exclusion of almost all other assets save gold.
- GBP/USD has had an interesting week of Brexit bearishness and bullishness. But Thursday’s recovery from the lows was a sign the bulls are in the ascendancy. SO that, and Mark Carneys hawkish tone Friday certainly helped GBP/USD run to its highest level since early this month at 1.3337ish before it dropped 50 points to close the week at 1.3282. Still a good week but another sign maybe the US might improve from Friday’s lows – especially if Fed chair Yellen is a little hawkish this week.
- The Aussie and kiwi roared back at the end of last week. At 0.7888 Friday the Aussie gained another 0.88% to finish the week around 1.15 cents higher than the previous week’s close. The keys to the recovery has obviously been the US dollar’s weakness, but the Australian data flow has also been important at undermining the economic bears who started to discuss an RBA rate reduction. With solid NAB business conditions and confidence, with a bounce in Westpac’s measure of consumer sentiment back into positive territory at 101.4, and the return of property investors to the home loan market all point to the very smallest chance of an interest rate hike above zero. That’s AUD positive.
- Technically the Aussie has now satisfied both support at the 50% move from below 74 cents to above 81 cents and now closed roughly at the 38.2% of that fall. Whether this is just the second leg of a deeper move lower will be decided very much in the next week and by way of price action if 0.7920/30 is tested and holds. We’ll see.
Commodities
- The Chinese import data really got commodity markets moving. Iron ore for Feb on the Dalian exchange rose 4.6%, Copper hit $3.13 as it’s round trip toward $3.17 continues and oil surged again to cap off what’s been a wild and woolly week for traders.
- WTI rose 1.68% to end the week at $51.45 while Brent closed at $57.17 to be up around 3% on the week. President Trump’s reopening of the Iran nuclear issue, the ongoing threat of the Kurdish pipeline being cut off, and the technical suggest WTI can head toward $52.63 and if that breaks possibly $55.00/10.
- Gold is up and through the $1297 resistance I was watching with an $11, 0.86%, rally on Friday to close at $1304. The $1309 (Fibo) to $1316 (late September high) region looks like the next big region of resistance. Bonds lower, curves flatter, and tensions over Iran all contributed to golds rally. But can they provide the catalyst to break up and through this resistance? I’m not sure. I’ll let the price action tell me.
And just quickly. There is a new star in the sky tonight. Its name is Kevin, my dad, he passed away earlier today after 76 years. Rest in Peace.
Have a great day's trading.