Originally published by AxiTrader
Market Summary
Nothing to see here, move along please.
That’s been the reaction of markets since US traders entered the fray and US President Donald Trump warned North Korea “all options are on the table” but left his reaction to yesterday morning’s missile launch at just words.
That precipitated a big reversal in safe haven assets like gold, Japanese yen, and Swiss franc. It also lifted the weight off the Aussie dollar which, at 0.7959, is now largely unchanged from 7am Tuesday. And the improvement in risk appetite and investor sentiment has seen US stock markets reverse the sharp losses futures predicted in our time zone yesterday.
At the close, the S&P 500 is back in the black with a 2 point gain to 2,446. The Dow Jones Industrial Average is up 0.25% to 21,865 and the Nasdaq 100 has risen 0.3% to 6,301. Small gains sure, but they are nothing to sneeze at given where stocks came from overnight and in Asian trade yesterday.
Indeed, even though it was off its lows the DAX in Germany still fell 1.46%. The CAC was down 0.94% and the FTSE was off 0.87%. European bourses will be playing a little catch up when they open this afternoon Australian time. And talking of home we are likely to see a strong recovery on the S&P/ASX 200 index today. After yesterday’s 41 point fall SPI traders have marked prices up 20 points. But it might be better than that.
I say that because of the big reversals we’ve seen on forex markets as fear washed out of the market. USD/JPY traded to a low of 108.26 yesterday but it's trading at 109.79 this morning. The Australian dollar is 0.7949, the Swissie is back at 0.9549 where it was at 7am yesterday and Kiwi likewise is largely unchanged.
Gold too has given back its gains and is now down $4 day on day at $1305. Oil prices are still under pressure as Hurricane Harvey’s wake continues to batter US oil infrastructure. Copper remains strong, but iron ore futures dipped overnight.
As I say, nothing to see here – move along.
But what's interesting - really interesting - is that even though bonds are off their lows (US 10s at 2.13% from 2.08% low) they are still bid.
Anyway.
On the day we have a speech by RBNZ Governor Wheeler while construction work done and building approvals are out in Australia. German CPI and the latest read of US Q2 GDP is also out.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The North Korean tensions, the belligerence of the DPRK, and the latest missile test which ratchets up the pressure on the US and Japan to respond remains a clear danger to markets. That’s not to discount the potential human toll if rhetoric turns to action. But for now, US President Trump and Japanese Prime Minister Abe have chosen a verbal rather than military response.
- Overnight President Trump reaffirmed US support for Japan and the President warned Pyongyang that all options are on the table. “Threatening and destabilising actions only increase the North Korean regime's isolation in the region and among all nations of the world. All options are on the table,” he said.
- And no doubt he – and the generals around him – means it because the DPRK’s chutzpah knows no bounds. To wit, North Korea's official Rodong Sinmun said, “The US should know that it can neither browbeat the DPRK with any economic sanctions and military threats and blackmail nor make the DPRK flinch from the road chosen by itself”. Clearly the North Koreans think if they rattle their sabres they achieve whatever goals they have in mind.
- China has naturally urged restraint but I found the Russians comments interesting. Russian UN Ambassador Vassily Nebenzia told reporters: "It's troubling, because tensions are high and whose nerves are stronger, we don't know." Are they goading President Trump and Kim Jong-un?
- We saw the reaction in markets yesterday. We saw the reaction of markets to tensions a couple of week’s back. We all hope for a peaceful resolution. But clearly, the price action shows that the North Korean issue is a big risk to the outlook for financial markets. That’s important because at their weekly or monthly investment committee meeting global investors will be discussing North Korea and factor this into their outlook. Not the outcome but the risk of an adverse outcome. That could lead to some interest capital flows and see an overall reduction in risk appetite. I won’t pretend to know how this will end. All I know is we have two unpredictable leaders.
- One thing that might actually end better than previously anticipated is the US debt ceiling and budget process. That’s because the the aftermath of this storm in Texas and Louisiana might actually make the budget and debt season resolution easier when Congress returns next week. That’s a theory Greg Valliere form Horizon Investments posited in his daily note in the US Tuesday. His thesis is that the package of measures – money – that is required for the recovery and rebuild after the storm and these devastating floods will bring legislators and the White House together to get things done in a less argumentative way. I’m on board, the spectre of the poor response to Katrina looms too large for missteps and partisanship. That would be a positive for US stocks and the US dollar.
- On the data front in the US overnight consumer confidence rose to 122.9 in August the Conference board reported. That is the second highest reading since 2000 and back near March’s 16 year high of 124.9. The rise of 2.9 points from July suggests two things to me. First the US economy and the labour market are doing quite well still. Second the machinations of Washington and the media’s enchantment with the president and their view of his failings isn’t impacting on consumer view of the economy. That’s something traders and investors need to focus on – look through the headlines. Also out was the Case Shiller house price index for 20 cities which showed 5.7% growth over the year to June.
- Jean Claude Juncker had a pop at Britain and their Brexit position papers overnight. That makes him the second senior EU official in two days to chid the government of Theresa May for its approach to the Brexit negotiations. “I would like to be clear that I did read with the requisite attention all the papers produced by Her Majesty's government; I find none of them truly satisfactory,” Juncker said adding there are still “huge numbers of questions”. The UK economy is stalling while this process – this lack of progress – plays out. That’s important for markets. Especially the pound, gilts, and the BoE.
- Canadian producer prices unexpectedly dropped 1.5% in July with the data showing that 18 of the 21 groups in the survey were lower. Naturally the strength of the Canadian dollar will have played a part here. But this will give the BoC something to think about when it next meets given at 1.2520 this morning USD/CAD is back near the bottom of the recent range.
- A day after BoJ governor Kuroda said that the 4% growth rate in Japan is unsustainable we got a report on household spending which suggest he’s right. Spending by households in July unexpectedly fell 0.2% against expectations of a 0.7% rise. More encouragingly the jobless rate in Japan was flat at 2.8% in July.
- And speaking of growth He Lifeng, China’s head of the National Development and Reform Commission, said yesterday that “China is able to achieve targets in economic growth, employment, inflation, fiscal revenue and trade for the second half”. He was speaking to parliament and added that the investment goals, both at home and abroad, may fall short.
Australia
- Can we forget about yesterday’s awful price action on the S&P/ASX 200 now that we’ve seen a strong recovery on US markets and a 20 point lift in the SPI overnight? Yes, and no. Yes because we saw the ASX 200 move just below the July low at 5,653 yesterday before recovering to close at 5,669 – back inside the range. Prices also held above the June low. So that’s good news.
- But the No side of the yes and no above is that poor price action is still poor price action. It hurts sentiment which means investors may be more reluctant to step in on the next dip or chase the next rally. So you end up with a sinking lid. We’ll see. There is nothing like a big rally offshore – if that happens – to take us back to the top side of this range. But for now the message is the range the ASX and the SPI have been in for months remains intact.
- On the data front here yesterday we got an indication in APRA lending stats and HIA new home sales that housing has certainly come off the boil. APRA data showed that the flow of interest only loans – the ones that APRA has identified as risky to financial stability because they have that Ponzi finance character of not requiring any principal repayment – has fallen to APRA’s target of 30% in Q2. APRA will be pleased that high LVR loans – the ones with the most leverage – also continue to fall. So its actions are biting.
- On the home sale front the fall in apartments has seen new home sales fall to a four year low the HIA reported.
- Looking at the day ahead Construction work done is the first of the partial indicators for Q2 GDP due next month. Building approvals will also be interesting given it is the slowdown in dwelling construction which might be a risk for the economic outlook in 2018.
Forex
- It’s a very different outlook on forex markets this morning compared to the early evening Australian time when the US dollar hit its lowest levels in years and traders worried what the US administration's response would be to the North Korean Missile launch. As I highlighted above the situation on the peninsula is still a grave risk for markets – not to say folks in the line of fire should this escalate. Naturally there is still a chance given the North’s risky strategy of escalation.
- But this morning things are very much “as you were” in forex markets. The euro surged to 1.2020 but is back at 1.1971 begging the question of whether that was the top for this run. It might be in the short term. But what I said about the impact of the Trump administration on investors attitudes toward the US and the US dollar yesterday still holds as a medium to long term influence. If Hurricane Harvey’s aftermath leads to a swift resolution of the debt ceiling so as to get the aid package through that will be US dollar positive in the short term.
- Likewise the yen’s respect for the bottom of the 2017 trading range is a sign that the US dollar is not yet ready for a capitulation. Certainly traders tested the bottom end with a low just 14 points above the range bottom. But at 109.72 this morning USD/JPY is actually up 0.43% now.
- And we’ve also seen a reversal in the risk currencies with the Aussie at 0.7946 down 0.2% and the kiwi at 0.7248 down just 0.1%. The Canadian dollar likewise has lost 0.1% after reversing of the range low in USD/CAD which is at 1.2516 this morning. Sterling is hanging tough at 1.2919 but under pressure.
- THE BIG QUESTION FOR ME THOUGH IS WHETHER - ASSUMING THE NORTH KOREAN MESS DOESN'T GO MILITARY - WE HAVE SEEN THE PESSIMISTIC CRESCENDO, THAT IS OFTEN NEEDED FOR A REVERSAL, IN THE USD.
Commodities
- Gold had a big rally and reversal over the past 24 hours. At $1309 it is largely unchanged on the day. But that belies the high just under $1326 an ounce. Gold needs to hold above $1301 if it's not to have a sharp reversal and search for the true bid.
- Oil markets in the US are still being roiled by the aftermath of the Hurricane. WTI is down at $46.39 and Brent is at $51.96. It's going to be a messy time for oil traders. We can ignore inventories for this week and the next few week's, maybe even months while the aftermath of the devastation to the region and US refinery capacity works through. Pressure is likely to be brought to bear on other oil markets around the world - eg last night Brent was a little higher while WTI dipped again. So we are less likely to see unifrom movements as traders react to individual circumstances and tightness in specific markets.
- For WTI specifically I'll let charts be my guide. Here's the latest update showing the short term down trend and its parameters.
- Copper is still hanging tough around $3.08 per pound as inventories shrink.
Have a great day's trading.