Originally published by AxiTrader
Quick Recap
Stocks drifted into week’s end as oil and gold dipped and a big fine for Deutsche Bank (DE:DBKGn) dragged down the financial sector. Bonds finished the week fairly high relative to recent ranges after the US CPI suggested the Fed is still going to be in play this year.
That helped the US dollar rally knocking the pound and Euro heavily and pushing the Aussie dollar back under 75 cents.
What You Need To Know
International
- The sudden perturbations flowing through financial markets as long bonds sell off, yield curves steepen and stocks wonder if their dream run of free money and never ending stimulus is coming to an end and may hit a climax this week. That's because of the twin event risk Wednesday's Bank of Japan and FOMC meetings may offer. But it’s also because traders recognise that things must, and seem likely to, change if the global economy is to get back on an even keel.
- The slightly higher than expected US CPI print for August (0.2% mom, 1.1% yoy, 2.3% ex-food and energy BOOM!) is an interesting talking point but most folks don’t expect it to change the outlook for the Fed. The market is still expecting only a 12% chance of a Fed hike this week. But the chance of a Fed hike in December, which was under 50% on Friday morning, increased to 55% after the CPI.
- That means the dot plot and Janet Yellen’s press conference are of incredible import. I still think the4 Fed should go and I’ll be positioning for a hawkish surprise.
- US 10 year bonds finished at 1.70%. That’s high, and threatening a big breakout even though it is just holding under at present. My view is it’s going to 2%-2.1% in the months ahead.
- Looking ahead to this week and we have a big meeting from the BoJ as well as the Fed, and about a gazillion other central banks. Markets, especially long bond and USD/JPY traders, are on tenterhooks as to what the BoJ will do as a result of its comprehensive review of monetary policy. My sense is they’ll somehow seek to lower the excess cash interest rate further into negative territory but take the downward pressure off the longer bonds to steepen the curve and get some pick up back for banks and lifers. Wednesday is a huge day for markets.
- One other thing worth noting amongst so many things to talk about is that the VIX, volatility index, remains elevated and above the recent range. That tells you traders are still wary and nervous for the week ahead.
Australia
- What a cracking recovery the ASX had at the end of last week to finish back inside the 2016 trendline both in S&P/ASX 200 physical terms as well as in SPI terms. The close of the week for the physical at 5296 was just below the psychologically important 5300 level. SPI traders have given no lead even though the US market dipped a little bit Friday so the question for local traders is likely to be how the sectoral break up fits together.
- Gold and energy sectors could be under pressure given the performance of their underlying commodities. Financials will be interesting. They were the source of the ASX resurgence last week with the CBA closing at $72.24 – roughly $2.75 off the low for the week. But financials in northern hemisphere trade came under pressure after the DoJ went hunting Deutsche Bank for alleged crimes commited back in the GFC period.
- So the local market might be under a little pressure today when we kick off the week. 5260 is the level to watch in the ASX200.
Forex
- The US dollar strengthened again on Friday night after the CPI print was little stronger than the pundits forecasts. But it was more than that. There was Euro weakness, the Aussie slipped back under 75 cents and the Pound is back at 1.30. Sure it might just be the paradigm that forex traders have fallen into of buying dollars on a Friday recently. But I think forex traders more broadly recognise that in macro terms the Fed and the US economy are in a different place to much of the developed world. That’s US dollar supportive.
- In technical terms however the dollar, in index terms, remains trapped in this wedge waiting for a break out.
- Looking specifically at Europe and we saw that both the pound and Euro collapsed and took out their recent daily uptrend lines. Euro looks biased under 1.10 and the Pound has support at 1.29. Clearly both are open to what the fed says this week and it’s more likely than not that even if the Fed passes on a rate hike they’ll still make it clear they think they need to raise rates which is in contrast to the Bank of Englands obvious dovishness last week and expectations that Draghi will be back with more stimulus eventually. Also Slovakia saying it will veto any Brexit deal – yes Slovakia :S – isn’t positive for either currency.
- Looking at the commodity bloc and the fall in oil is weighing on the CAD with USD/CAD now back above 1.32 and close to a topside break. The NZD/USD is at 0.7260 while the Aussie is back at 0.7481 this morning after another Friday of selling. 0.7400/20 is key support on what is a light week locally sand one where the Australian dollar will be dominated by offshore events.
- For the CAD the 200 day moving average looks like a key level that traders are watching. 1.3260 is the level to watch. A break would be a big signal for CAD weakness.
Commodities
- Crude Oil closed at $43.03 on Friday. That’s the lowest close since August 11. After both OPEC and the IEA gave the impression that the glut is getting bigger it’s no real surprise that oil prices fell 5% last week. But it seems OPEC is now trying a rear guard action to try to stem what is looking like an increasingly bearish outlook for the price of crude.
- Over the weekend we heard from Iranian president Hassan Rouhani who said his country supports moves to stabilise the market and lift prices. That came OPEC, secretary general Mohammed Barkindo said the Algiers meeting at the end of the month was just for discussion not decision and a special meeting would be called if the parties agree at this meeting. So at least we know how this is going to work – two meetings.
- The question is whether this is a bullish or bearish pronouncement. My sense is the two meeting tactic is more likely to be read as another example of OPEC’s inability to come together in consensus when trade opens for the week. So the pressure remains on oil after Friday’s close.
- Speaking of weak closes Gold ended trade Friday right on important support. The yellow metal has lost support as rates at the back end of the yield curve have risen lately. That’s despite the fact uncertainty, and market based measures of volatility being heightened, has been rising in the past week. It suggests there was a strong element of the cheapness of holding gold in the rally in prices this year as interest rates collapsed.
- $1300 is the level to watch on the charts
- Copper is at $2.15 and while it’s still lagging a lot of the commodity complex rally chatter in markets is increasing of a supply demand imbalance in a few years because of a lack on new production. Can that support copper in the short term? Maybe not. But it is holding well above the 14 year trend line. It closed the week at $2.15 a pound and looks like a run back into the $2.20’s is on the cards.
Today's key data and events (all times AEDT)
- Australia - Nil
- New Zealand - Westpac consumer survey (Q3) (8am)
- China - House Price Index (Aug) (11.30am)
- Japan - Respect-for-the-Aged Day Bank Holiday (24h)
- Germany - German Buba Monthly Report (n/a)
- EU - Current Account n.s.a (Jul), Current Account s.a (Jul) (6pm)
- UK - Rightmove House Price Index (MoM) (Sep), Rightmove House Price Index (YoY) (Sep) (9.01am)
- Canada - Nil
- US - NAHB Housing Market Index (Sep) (12am); 3-Month Bill Auction, 6-Month Bill Auction (1.30am)
Have a great day's trading