Originally published by AxiTrader
Quick Recap
Stronger US data has again helped lift the US dollar and pushed 10 year treasuries up to their highest levels in a month while the 2’s are at their highest level since may with traders recalibrating their bets on a December Fed rate hike to above 60%.
But stocks are fairly quiet and the SPI futures traders are betting on a small rise at the open for the Australian market.
Oil is higher again and gold collapsed another $15 to important support at $1250.
What You Need To Know
International
- The Nasdaq 100, Dow Jones Industrial Average and S&P 500 are either side of flat with an hour to go before the close.
- Markets are focussed on the improvement in US data we have seen recently in the manufacturing and services sector indicators. So last night’s release of jobless claims which printed just 249,000, the second lowest weekly outturn since 1973 reinforced that maybe the US economy is looking good.
- This sentiment is feeding into expectations about tonight’s US non-farm payrolls. While the markets guesstimate has averaged out at 175,000 the price action suggests that forex and interest rate traders are fearful, betting on, a higher number. That’s a risk for the US dollar and bond bears like me (although I’m still waiting for a 1.75% break on the 10’s to confirm). So it’s going to be a big night. Here’s the chart of the 10’s…next stop 2.0/2.1%.
- I’m not sure what’s in the Fed’s coolaid since Jackson Hole but some of the senior and vocal advocates for a Fed hike like NY Fed’s Bill Dudley and Fed vice chair Stan Fischer seem to have gone all dovish. Last night it was Fischer’s turn to tell an audience that “ultralow interest rates may reflect more than just cyclical forces…[and] be yet another indication that the economy's growth potential may have dimmed considerably." For me it’s just another indication the fed doesn’t intend, at present, to hike rates too aggressively.
- Fears of a hard Brexit seem to be dominating chatter in UK markets at the moment. The FTSE 100 was the worst performing big market with a fall of 0.47% overnight. UK 10 year gilts lost 5 points and Sterling hit another 30 year low as PM Teresa May maps out here vision for a new Britain. Some folks are saying that her speech I referenced yesterday about the problems with low rates and QE was meddling in the bank of Englan but the reality is that it’s about time pollies took responsibility for the economy and the outcomes that flow in it. So May should be congratulated and is the vanguard.
Australia
- The S&P/ASX 200 finished up around half a percent to close at 5480, up 27 points yesterday. The market was lead higher by strong gains in energy (unsurprisingly given oil’s rally) and consumer non- cyclicals which themselves were lead higher by Woolworths Ltd (AX:WOW), A2 Milk Company Ltd (AX:A2M) and Australian Pharma Industries Ltd (AX:API). The banks all had a positive day with gains of between 0.4% and 0.7% for the Big 4 while the miners were fairly quiet.
- On the data front the trade deficit was smaller than expected for August with a print of 2.01 billion against expectations of 2.13 billion and July’s 2.3 billion. The narrowing of the deficit has the economics team at UBS so excited that they think the spike in the value of coal prices recently means the deficit could be wiped away in coming months.
- Speaking of data the trade data, retail sales, and the improvement in the PMI and PSI suggest Australian growth is still going okay in GDP terms this quarter. We won’t know for months when that is released but things may be looking up again for growth and my concerns about high frequency coincident growth after last month’s data may have been premature.
- On the docket today we have the AI Group performance of construction index out at 9.30am
Forex
- The US dollar is stronger again as traders increase the odds of a Fed rate hike in December to above the imagined Fed minimum threshold of 60% (55%+8.9%). I’ve put the chart in here as a reference point to see how things look after tonight’s non-farm payrolls release.
- The impact of this is that the US dollar is at its highest level in 3 months (71) and trying to break out of the downtrend that goes back to the late 2015 high – non farms is a big deal in this respect. Here’s the chart from my Reuters Eikon.
- Naturally the corollary of that US dollar strength has been the continued surge in USD/JPY which is now atop 104, EUR/USD has dipped to 1.1140 and like the US Dollar Index it too is breaking out. The AUD/USD is down at 0.7575, a little off the low of 0.7560ish and the NZD/USD is sitting at 0.7151.
- GBP/USD has collapsed again as fears of a hard Brexit after British PM Teresa May’s speech the night before last. GBPUSD is at 1.2630 this morning for a fall of 0.9%.
- In other forex news the Chinese Yuan has lost ground against the US dollar in offshore markets. While the USD/CNH, the onshore Yuan, has remained stable around 6.66 for the past couple of week’s the USD/CNY, offshore market, has drifted from around 6.66 last Friday to 6.7083 this morning. Not a huge move but one worth keeping an eye on as it’s back near the post-Brexit highs which are also the highs since the devaluation in August 2015.
- One thing worth noting though is that People's Bank of China Deputy Governor Yi Gang said yesterday that the economy is stable and he expects growth to remain in the 6.5% to 7% region.
Commodities
- Crude oil continues to climb. Crude Oil is up another 1.38% and back above $50 ($50.46) a barrel as the reverse head and shoulders break out continues, traders focus on the more than 20 million barrel fall in inventory during September and as the Algerian Oil minister again reiterated that the deal is going to be done and could actually be a little bigger, just, than originally announced.
- WTI is looking overdone short term – but the move has legs. I’ve been bullish for some time expecting OPEC to be able to drive prices here and toward the mid-$50 region. I retain that view. But for the moment I also hold the view the June high around $51.50 should pull this move up. So I’ll be scaling out of remaining longs in the next $1. Here’s the chart.
- Gold was crushed again as bond rates rise. Last night Gold fell to a low of $1249.68 (Reuters Eikon price) and it has only slightly recovered at present to $1250.68. It’s fallen through the 200 day moving average but so far found support at the 38.2% retracement level of the rally from December’s low to the June post-Brexit high – that’s around $1250 at the moment. That’s an important level for many traders who what these Fibonacci’s ratios as indicators of support and resistance.
- Last week I said a break of $1305 would see a $50 fall. So with gold looking oversold in the short term I’m happy to take back 50% of shorts. But the weekly charts suggest more weakness ahead. As I said on my video yesterday the $1200 region could be retested on this time frame.
- Copper is lower again but doing reasonable well at $2.1485 a pound. It looks like it is headed lo