Markets Kick Off The Week Under Another Geopolitical Cloud

Originally published by AxiTrader

Market Summary

Friday’s miss of US non-farm payrolls is almost a memory already as markets open the week in Asia faced with a clear escalation in tensions on the Korean Peninsula after the apparent successful test of a Hydrogen Bomb by the DPRK. President Trump has reacted by reiterating again the time for talk has passed. He also threatened countries that trade with North Korea and said he is meeting with his generals to discuss a response.

This is now fair dinkum nuclear brinkmanship folks – Kim Jong-un shows no signs of conciliation.

Forex markets are open and the safe haven yen has caught a bid with USD/JPY down 0.7% at 109.47. Gold is likely to play catch up a little later this morning.

Back to Friday and there was a bit of disappointment but also discounting of the August non-farms. Disappointment because the print of 156, 000 was lower than expected but discounting because August is often weak at the first print only to be revised up subsequently.

So the wash up was stocks in the US, and Europe, were higher at the close. The S&P 500 was 5 points higher, 0.2%, at 2,476. The Dow Jones Industrial Average rose 0.2% to 21,987 and the Nasdaq 100 rose 0.1% to 6,435. The DAX and CAC were both up a little more than 0.7% though the FTSE 100 only rose 0.1%.

Here at home SPI traders added 24 points to follow Friday’s 10 point gain when futures closed. Whether that market can achieve that gain when the physical market opens is now questionable and very much depends on how traders react to the nuclear test.

Back to forex markets and the US dollar came under pressure after the release of non-farms but that was reversed in most respects after another “sources” story from the ECB jawboning the euro. That said this latest escalation in tensions is the key for the day ahead. As noted above the yen is higher, euro and Swiss franc too. Naturally the Aussie is under pressure as it often is during times of heightened market tension.

Gold is at $1324 this morning…the charts and tension suggest $1360/65 eventually. Energy markets are still messy in the aftermath of Hurricane Harvey but crude oil prices rose into week’s end. Copper is still uber-strong at $3.10 a pound.

It’s a big week for markets. The RBA, BoC, and ECB all meet. In Australia we have partial indicators of GDP, retail sales, and housing finance.

It’s Labor Day in the US tonight - so US markets are out.

Here's What I Picked Up (with a little more detail and a few charts)

International

• The DPRK seems hell bent on either goading the United States, and it’s President, into a response or what it thinks will be an embarrassing back down. The test yesterday of the H bomb was worrying enough. But the pictures of a two stage device being readied for placement on the end of a missile which were released suggests the North Koreans are trying to say they can get a H bomb on the end of a missile and deliver the payload where they will.

• That in itself is a threat to the US and its allies. So it is no surprise President Trump, among others, has responded. So far he has stuck to words as his tweets below show. But in threatening a trade war with anyone who trades with the North Koreans he is implicitly escalating the tensions and pressure on China. Defence secretary Mattis said the President has been briefed on all the options but reiterated that the US is not looking to annihilate North Korea.

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• China itself condemned the North Koreans nuclear test. But its ability to influence the DPRK is clearly limited at the moment. On the sidelines of the BRICs conference over the weekend presidents Xi and Putin said “The two leaders agreed to stick to the goal of denuclearisation on the Korean Peninsula and keep close communication and coordination to deal with the new situation”.

• And speaking of Russia they have hit back at the closure of a consulate and two annexes in the US last week saying “we treat these developments as a blatantly hostile act, a grave violation by Washington of international law," the Russian foreign ministry said. The Ministry added it urges "US authorities to come to their senses and immediately return the Russian diplomatic facilities. Otherwise the USA will bear total blame for the ongoing degradation of the relations between our countries."

• So, finally to non-farms. Data released Friday showed a lower than expected 156,000 jobs were created during August. Unemployment rose from 4.3% to 4.4% and average hourly earnings only rose 0.1%. So it was all around a disappointing number. It’s been discounted somewhat given it usual for this number to be subsequently revised higher in the following months by as much as 75,000 as the BLS updates the data.

• That said the US dollar was under pressure after the data and stocks rallied as traders bet that the chances of a rate rise this year had fallen. One number is too soon to give up on the Fed, and there is still plenty of water to flow under the bridge before we get to the December meeting. Traders will be focussed on other central banks this week before the FOMC meeting next week. That said the path toward normalisation still looks intact.

• On the ECB a Bloomberg story reported the ECB is worried about the euro’s strength and changes to policy are likely to be slower than expected. That’s a clear attempt to jawbone the euro lower and it worked on Friday. Comments by Governing Council member Nowotny Friday I think summarise what everyone knows. That is “the question is not whether we should hit the brakes (on the programme) abruptly…But it's how to initiate normalisation carefully. This is the sensible discussion." We all know the time for emergency stimulus has passed if the relative strength of the EU economy is taken into account. But the ECB is a single mandate inflation central bank and the euro’s strength, and the recent undershoot of inflation, is complicating things.

• That’s something ECB chief economist Constancio admitted Friday. He said “the strong worldwide reflationary phase that seemed likely at the beginning of the year has not materialised. Therefore, the tasks of normalising inflation and unemployment to acceptable levels continue to be difficult."

Australia

• We are still inside the range the S&P/ASX 200 and SPI have been trading in for some month. Were it not for the nuclear test over the weekend I would happily be writing about the increased chances of a retest of the top of that range this morning given the price action both here and in the US over the last couple of days of last week.

• But the uncertainty around North Korea, and the clear goading by Kim Jong-un, raises the geopolitical pressure which is also likely to give buyers in Asia some pause to reflect on what was otherwise likely to have been a good day.

• All that means really is that the range is likely to remain intact. There is a big chance we don’t add the 24 points SPI traders thought likely when futures trade closed on Saturday morning. How much we could fall is hard to know however. 5,685/5700 is technical support being the 38.2% retracement of last week’s rally. Below that it’s 5,670 and 5.655.

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Forex

• A messy morning with the Swiss franc and yen surging 0.5% and 0.7% respectively against the US dollar as safe haven flows occur in early Asia trade. There is not a lot to add over what I have said above. But it is worth highlighting just how mixed the technical are becoming at the moment. The euro’s low Friday of 1.1845/50 suggested that this week we’d see a move to Thursday low at 1.1820 and if that broke we’d be back toward 1.1660/80. As long as we stay below Friday’s high of 1.1980 that’s still my bias. It was after all a big reversal Friday and the market is very long euro.

• For the yen and Swissie it really depends on whether tensions rise or fall again as they did last week. USD/JPY finished the week at 110.20/25 but it is back at 109.46 this morning. That’s 120 points above the low last week which is the level to watch if things deteriorate on the week.

• For the commodity bloc the Aussie has opened weaker this morning because of the test. It’s at 0.7944, down 0.3% from Friday’s New York close as traders bet that if risl is taken off the table the Aussie will come under pressure once more. 79 cents is the short term key for the AUD/USD, then below that it is 0.7965 and Augusts low in the 0.7800/10 region.

• The Canadian dollar has lost ground too at 1.2425 this morning after doing best among the bloc Friday night. kiwi is down a little as well at 0.7146.

Commodities

• Gold is solidly above $1300 after another strong rally Friday. It hasn’t really reacted much from that $1,324 close yet this morning. But based on flows in yen, Aussie and Swiss franc, a move higher looks likely. The charts suggest an ultimate target of $1,360/65.

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• Oil was higher again Friday. Harvey has disrupted US demand because it has either taken refineries off line or made it difficult to get crude to them. That saw gasoline spike over the week, but it was off a little Friday. So net, on net oil ended the week lower but well off its lows for the week. WTI ended at $47.33 while Brent finished at $52.75.

• Copper continues to look strong with pullbacks limited and support clearly there. It’s at $3.098 this morning.

Have a great day's trading.