Originally published by AxiTrader
Market Summary
A terror attack in Barcelona, nervousness about the Trump White House (which denied Gary Cohn was leaving), and of course the reducing chances that any of the President’s agenda will turn into legislation knocked stocks in the US sharply lower overnight.
The S&P 500 fell 1.54%, 38 points, to close at 2,430 in what’s an important break technically. The Nasdaq is off 1.94% at 6,221 and the Dow Jones Industrial Average dropped 274 points, 1.24%, to 21750. Stocks in Europe were lower as well – but they have some catch up to do when they open this afternoon.
Ans SPI traders are betting after a disappointing day yesterday the S&P/ASX 200 has plenty of selling to do when prices open this morning here in Australia. Traders have knocked 48 points, 0.84%, of the SPI from yesterday afternoon.
With such a surge in risk aversion its naturally no suprirse that gold has surged back to $1287, that the coincident indicator of volatility – the CBOE Volatility Index – rose back to 15.55 (it’s going higher) or that the Australian dollar has come under pressure.
On that front the Aussie is back below 79 cents at 0.7880 this morning as base metals also came under pressure, reversing yesterday’s gains. The yen and Swiss franc are strong and the euro is under pressure after ECB minutes highlighted disquiet about the euro’s strength.
Oil rose.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Stocks are breaking down. The psychological tipping point may have been reached for the S&P and other US stock indexes after the President’s poor handling of the Charlottesville incidents, after corporate America abandoned him, and after rumours of the fracturing of his Cabinet gained traction.
- Readers know I’ve mentioned this deteriorating outlook for US stocks a few times and even wrote (and said on Sky) the high was in the day after the latest record earlier this month. The tells for me were the behaviours of investors – not rewarding beats and so on. Last week we saw the tensions around the DPRK knock stocks but the S&P found support at an old trendline. That trendline has broken overnight with the fall in the S&P and other US stocks. How far it goes is anyones guess. All I know is that my favourite market timer, Jimmy Rohrbacak, is out of the market at the moment and my system is short.
- Here’s the chart:
- The conundrum for the ECB and its policy outlook was writ large overnight in the convergence of a number of releases. On the positive growth side German employment hit a new high and French unemployment fell to a five year low. That's good news. But inflation data for both headline and core printed just 1.3% showing again that prices pressures in the EU remain subdued.
- As a single mandate central bank this combination matters. Particularly given the minutes of the latest ECB meeting released last night showed that the governing council is worried about a market over reaction to any change - especially with regard to the euro. No wonder Mario Draghi won't be talking about Policy at Jackson Hole next week.
- And speaking of central bankers, we heard from two important voices at the Fed overnight and both were very cautious. Dallas Fed President Robert Kaplan said in Texas overnight that he doesn’t “need to see that we’re going to meet that target on the near-term…I just want to see evidence, or belief, that we’re going to meet that target in the medium term”.
- Minneapolis Fed president Neel Kashkari was also cautious noting that when the decision to taper the Fed’s balance sheet is made the FOMC will “look at the debt ceiling negotiations that are happening in Congress”. That could be an interesting time given Washington politics right now. Kashkari added “I think we want to keep our eyes open to that process”. That folks is the excuse to do nothing at the September meeting.
- Personally I think the fed is on track to both taper and then hike in December. But if the sell off in stocks becomes something more pernicious the Fed has a solid excuse.
Australia
- Yesterday’s employment number in Australia was another solid report. The rise of 27,900 jobs in July and unemployment rate of 5.6% reflect a jobs market that is both strong but still experiencing some slack. I’m not overly worried by the full-time/part-time split because the ABS uses a 35 hour delineation between the two categories. That’s way too high to really convey the true picture.
- Key for me – and regular readers won’t be surprised by this - is that the data also showed that the total number of Australians employed hit a new record of 12,201,400 in July. That’s more Australians earning, more Australians spending, more money circulating through the economy.
- The economy is in good shape.
- Not so much Australian stocks though. September SPI is down 48 points this morning after what was a poor day for the index yesterday anyway. I say that in a technical sense. The high of 5806 for the physical was exactly inside the resistance zone I talked about and it found the going too tough. Sure we can give Telstra (AX:TLS) some of the credit for that. But it’s about the overall index and on that front the reversal back to the 5779 close was a disappointment.
- Throw in the big move lower in US stocks and the fall in the SPI and we have the S&P/ASX 200, and SPI trading back inside the range and at risk of a move to the lows once more. Here’s the latest SPI chart.
Forex
- The euro is an issue for the ECB and that means its an issue for forex traders who believe the current level reflects an expectation that the ECb will materially change policy to support current valuations even though – as I pointed out in my forex today column earlier this week – German bond rates do not. 1.1680 is still the key to the bear's castle. If it breaks we’ll see EUR/USD head lower. Otherwise this is an uncomfortable consolidation for the euro – and the US dollar more broadly – as traders try to figure how the economic, central bank, and Trump influences all coalesce. And what that means for currency valuations going forward.
- Yen traders too are making bets with USD/JPY reversing sharply from near 111 just two days ago to sit at 109.53 this morning – down 0.6% from yesterday. Stronger Japanese data, stocks and bond rates lower, uncertainty about the presidency of Donald Trump all combine to see the yen (and the Swiss franc to a lesser extent) stronger and near the bottom of the recent range.
- Elsewhere the commodity bloc has reversed somewhat as commodity prices – especially industrial metals like copper in the AUD/USD's case – have also eased. The Aussie is down 0.4% at 0.7890, the kiwi is at 0.7236 down 0.36%, and the Canadian dollar is 0.44% weaker with USD/CAD up at 1.2674.
- As I tweeted yesterday the Aussie's rally is very much about copper – and industrial metals. Here’s the 5 minute chart of the price action between it and the 3rd contract on the Shanghai metals exchange.
Commodities
- Inventories matter.That's something I've been banging on about when it comes to the price of crude for months now. It's always been my contention it is the only empirically pure way to judge the efficacy of the OPEC/non-OPEC production deal on the balance in the oil market.
- Yet even with big draws over the past few weeks oil has fallen. That's been a technical play. Sure yesterday traders reported the focus was on increased US production not the draw in inventories. But had the trendline held it would have been a different narrative. I say all that because crude is up this morning after Cushing inventory data released over night showed a big draw. So this morning we have WTI up half a percent at $47.02 while Brent is up a stonkingly strong 1.27% at $50.91.
- The low of $47.43 in WTI was only 13 cents above the top of the support zone I’ve talked about this week. But crude has to break back above the uptrend line to get the bulls excited again.
- Gold is higher again this morning after the rally in bonds, sell off in stocks, South Korean “red line” and terror attack in Barcelona. Currently trading at $1287 it’s back near recent highs. $1295/1300 is the big level.
- Copper rallied hard again yesterday and then collapsed. It’s all about rampant Chinese traders. Nothing real, nothing fundamental, not even anything technical really. Just punters punting. $2.87 has been the low 4 days of the past 5 – that’s the level to watch.
Have a great day's trading.