Originally published by AxiTrader
Market Summary
Stocks in the US, and across the globe had a mostly poor night after the warning of a “Minsky Moment” from the Chinese central bank governor and worries about Apple's (NASDAQ:AAPL) sales traction with the new iPhone 8 hit sentiment a little. That and some mixed corporate earnings results out of Europe combined into a mild sell-off.
BUT, at the close the S&P 500 actually managed to claw back into the black after being down 13 points at one point to close at 2562 - up 0.03%. The Dow Jones Industrial Average likewise climbed higher, just, ekeing out a 0.02% gain to close at 23,163 while the Nasdaq 100 was off 0.36% to 6092.
Here in Australia, it was another mixed day for the ASX 200 with the 6 point gain again printing a chart pattern that is indicative that the top for this run is in, or near. Overnight SPI traders have knocked 16 points of prices from yesterday afternoon’s close.
Elsewhere the big news is the collapse of the kiwi after Winston Peters surprised markets by forming a coalition with Labour and the Greens, not the incumbent National Party. That’s knocked the New Zealand dollar down around 2% against the US dollar (NZD/USD 0.7011) and more than 2% against the Aussie dollar (AUD/NZD 1.1210).
But the US dollar itself has again struggled against the EUR/USD (1.1828), lost a little ground against the yen (112.64) and Aussie dollar (0.7861) while the pound (1.3148) and Canadian dollar (1.2485) have both suffered under their own weight.
On other markets US bonds dipped a little even though jobless claims hit a new post-1973 low and the Philly Fed result was stronger than expected. 2-year Treasuries are at 1.55% and US 10's at 2.32%. That, stocks dipping, and the US dollar’s struggles helped gold rally to $1285. Copper was down again after Chinese growth delivered yesterday but traders worry about the outlook - it’s off 0.4% to $3.15 a pound.
Oil is also lower off 1.33% despite bullish entreaties from OPEC’s secretary general and signs the production deal will be extended. WTI is at $51.34 as it and Brent ($57.20) back off recent range highs. Perhaps, I think, comments from the Rosneft boos that there has been no watershed moment in oil might have weighed.
It’s a quiet day today in Australia but we get Canadian inflation data tonight along with speeches by the Fed’s Loretta Mester and Chair Yellen to round out the week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- China’s data dump yesterday was pretty solid. Q3 GDP printed 6.8%, retail sales grew 10.3% year on year in September, investment was up 7.5% and industrial production rose 6.6% over the same time frame. Solid but not spectacular and GDP’s slight miss – the pundits had guesstimated 6.9% - along with the reformist zeal on show at the 19th National Congress and the warning of a Minsky Moment from PBOC governor Zhou caught traders attention.
- Hong Kong shares fell 1.92% as a result and the warning from Zhou then impacted sentiment on stock markets across the globe overnight. Zhou said “If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment…We should focus on preventing a dramatic adjustment”. What’s important with Zhou’s comments is that it fits with the narrative of president Xi the day before that the party, the country, remains paramount and inequality must be dealt with.
- Also in China yesterday we saw that steel output in September to 71.8 million tonnes, the lowest since February this year. Output is still up year on year but this news hit steel and iron ore futures hard yesterday. Though they did recover a little overnight.
- Here’s something to watch in the next day or so. Trump’s tax plan faces an interesting test as republican Senators move to pass a crucial 2018 budget bill which is needed to progress to the cuts.
- US data was solid last night. Weekly jobless claims continued their post-Hurricanes recovery falling 22,000 to 222,000 which Reuters tells me is a 44 and a half year low. That number is huge in the context of fed fears about the eventual re-emergence of inflation and wages growth as the US labour market tightens further. Also out last night was the Philly Fed Manufacturing Index which hit 27.9 versus 22 expected and 23.8 last.
- AND ON THE REMERGENCE OF GLOBAL INFLATION former RBA governor Glenn Stevens told the AFR that “global investors have become complacent about the risks of a sharp rise in inflation that would have "considerable implications" for financial markets”. He’s not an uber hawk saying we aren’t heading back to the 1970’s but he did note that it was remarkable "how little compensation" investors were accepting for the risk of inflation being much higher, the AFR reports..
- Britain still seems to think it has the whip hand when it comes to Brexit. That’s the only takeaway I can come up with when I see the disconnect between comments from British prime minister May, her Brexit minister, and the belief that they have done enough to go to the next phase of negotiations – along with their transition period after the “hard” Brexit date of March 2019 they have previously signed up to by triggering this process. Overnight May said see wanted to see some more urgency of EU citizens rights in the UK post Brexit. But when I hear comments from EU leaders that Britain’s concessions are not enough I worry about a hard Brexit.
- That’s been important for sterling in the past few weeks, and months, and when combined with some more dovish tones from the Bank of England in recent days, and weaker than expected data, has really knocked the pound for 6. Last night we saw retail sales in September fall 0.8% in volume terms with year on year sales down at 1.5% - the lowest since 2013. We also heard from BoE deputy Governor Cunliffe who said the timing of the rate hike was an “open question” and that he’s not seeing sustained inflation pressure.
- The Spanish government is getting close to triggering Article 155 and suspending Catalonia’s self rule after the region’s leadership effused to back down from independence calls.
Australia
- After the last 24 hours trade I’m increasingly convinced we are about to see that pullback I highlighted was near a couple of days back. Certainly, US stocks are well off their lows but the chart set up is such that the chances of a 50-100 point pullback are growing.
- In SPI terms – which is my preferred measure because it trades most of the daily clock and thus sees the overseas moves – the target would be 5,791 (from the current 5860). But that is just the 38.2% retracement level of the recent rally once this very steep trendline has been broken. So it’s just the usual garden variety consolidation I’m looking for, I haven’t actually got a signal yet from my system though – I may have to wait to see how today goes and what the MACD does as a result. Here’s the chart.
- Yesterday’s employment dat was another example that the economy – in aggregate – is on a solid footing. Employment rose by 19,800 in September seasonally adjusted, total employment in Australia is now 12,290,200 – a record. And unemployment rate fell to 5.5%. No wonder consumers are less worried about losing their jobs, are borrowing again, buying cars ,and business reports conditions are strong.
- As I often have said during these talks over many years now employment is the key. More Australians working means more Australians earning means more Australians spending. That money flowing through the economy has knock on and multiplier impacts.
- As Callum Pickering from job site Indeed said on Twitter – great numbers.
Twitter Screenshot
Forex
- An awful past 24 hours for the New Zealand dollar after Winston Peters New Zealand First party decided to form a coalition with the second place Labour Party and the Greens to form government. That made Jacinta Arden the next Prime Minister of New Zealand and saw the kiwi collapse close to 2%, around 1.4 cents, against the US dollar to 0.7013. Against the Aussie dollar the Kiwi has lost around 2.2% as the rate surged to 1.1208.
- The kiwi had already been on the back foot due to the uncertainty surrounding the formation of the next government after the recent election failed to deliver a majority to either of the main parties. And what’s hurt the kiwi against the US dollar and on the crosses is the uncertainty that the new government brings. After a decade of National Party rule the change to Labour was always going to increase uncertainty. But when Arden says things like she wants to lead an “active government” and that “We won't just allow the economy to be carried by housing price inflation and population growth” traders wonder exactly what that means. It’s not a vote of no-confidence in the new government per se. But traders hate uncertainty which is what the New Zealand First decision has delivered. So they act accordingly and sell. Support, or the target for the fall, is 0.6968. But a full round trip to the start of the NZ dollar’s rally at 0.6817 is not out of the question.
- Elsewhere in forex markets, it’s again clear that for the US dollar to push higher the market needs to see something more than simple confirmation that the Fed will be hiking in December. With jobless claims again hitting lows not seen since the 1970’s it’s pretty clear that the labour market remains tight and the fed’s concerns on the eventual impact on wages will remain elevated. But US dollar strength faded quickly and the euro is up 0.36% at 1.1828. It seems that for the moment the good news for the US dollar is baked into the cake and traders don’t want to sell euro sustainably before next week’s ECB meeting.
- The US Dollar Index has clear parameter that are currently constraining it as you can see in the chart below. Why the US dollar is so weak relative to euro when the Fed is hiking and the ECB on tapering it’s bond buying is fundamentally hard to fathom. But behaviourally the answer I think is that traders are still adjusting to the reality that EU data has been so much better than expected over recent months (the EU version of Citi Eco surprise index is at 68.5 against the US version’s 1.8) and the fact that the US has disappointed and we all know the Fed thinks it will be tightening. Traders aren’t convinced though as the 10 year at 2.32% and 2 year at 1.55% suggest.
DXY Futures Daily (Source: Investing.com)
- Just quickly because I’ve run out of time this morning. Euro needs to take out 1.1880/1.1900 to break higher and negate the downside bias – and the head and shoulders some are watching. The pound came under pressure from the weak retail sales data and Cunliffe’s dovish comments. And the yen strengthened a little as the US dollar backed off the top of the recent range in USD/JPY.
- The AUD/USD didn’t get as high as it could have after the unemployment data yesterday after the solid employment data. That’s because a little after the result was out iron ore and steel were collapsing and then the Chinese data left traders - who thought PBOC governor Zhou was signaling stronger growth with comments last week- a bit non-plussed. So the AUD/USD made a high around 0.7888 before pulling back a little to 0.7874 this morning up 0.4%. It is still the case that 0.7897/05 and then 0.7927/32 are the key overhead resistance levels for the AUD/USD.
Commodities
- Again, I’ve run out of time. OPEC was jawboning again overnight with the secretary general of the organisation lauding the ties with non-OPEC nations like Russia and doing his cartel building best to say these ties need to be strengthened. He also said the market is moving back into balance and there is now “peak” in oil demand yet in site with demand expected to hit 10 million bpd in 2020. But WTI is off 1.27% (its roll time soon) to $51.38 and Brent is at $57.21 as traders back off from range highs.
- My take on all this is that yes, range highs are important, and yes OPEC does appear to have stabilised prices and inventory levels. But equally my sense is comments from Igor Sechin, the head of Russian oil giant Rosneft, that it is too early to declare a “watershed” for oil markets is a big part of the reversal. Not only did he say that but he warned about US shale as well. "That's why I think, we shouldn't expect a jump in oil prices in nearest future," Sechin said. Here’s Brent:
Have a great day's trading.