Originally published by AxiTrader
Market Summary
As US markets head into the close (6.52am) the S&P 500 is up another 0.2% to another record close of 2,534. The Dow Jones Industrial Average is up 0.36% to 22,638 and the Nasdaq 100 composite is up 0.22% to 6,530. In Europe stocks were mostly higher and here at home SPI traders have had another punt at trying to give the local market a positive lead adding 16 points after yesterday’s fall.
Stocks are buoyed by global growth and continued hopes that US tax cuts will actually get done. But Warren Buffett told CNBC that he didn’t think cuts were fully priced yet.
On forex markets the US dollar was pressing strongly in Asian and early European trade but it backed up quickly and most pairs are actually stronger on the day. That’s seen the euro (1.1746), the yen (USD/JPY 112.86), and the Australian dollar (0.7833) all make significant gains from their lows yesterday. Such is the nature of the first legs of trend reversals – if this is what this is for the US dollar. Traders are still not convinced.
On other markets US 10's were down a couple of points to 2.33% while 2-year Treasuries are sitting at 1.48%. In Europe Spanish bonds are blowing out to German bunds but there is a long way to go to fully unwind the Macron dividend that EU peripheral bond markets earned when he won the French election.
On commodity markets copper is becalmed, zinc hit another 10 year high, and oil drifted a little lower once more. Gold is up a couple of dollars from the low after the US dollar turned lower.
On the day ahead it’s quiet here in Australia with the release of the Ai Group services PMI before similar releases across the globe and retail sales data in Europe. 5am tomorrow morning we get speeches that could be at opposite ends of the US interest rate outlook as both Yellen and Bullard speak.
Here's What I Picked Up (with a little more detail and a few charts) Lots on the RBA today
International
- Global growth is on the up. That was in evidence with the manufacturing PMI’s I talked about yesterday. And what comes with confidence about growth is confidence about the operating conditions within which companies operate. That’s a positive for stocks even before we add in the stimulatory impact of Trump’s tax cuts, or possible infrastructure spending. So it’s no surprise then that the US credit derivatives index – a measure of the price of credit default swaps - has hit a post crisis low. The FT reported overnight this index “dipped to 54.4 basis points, its lowest level since 2007”.
- This is just another reason the Aussie dollar remains bid. Global growth, rising stocks, increased risk appetite, and tightening credit spreads are all part of the Aussie dollar’s positive backdrop.
- BoC deputy governor Sylvain Leduc said overnight that the economy can grow above potential. On the face of it that sounds bullish for the Canadian dollar and bearish for interest rates. But Leduc noted that it is “encouraging to note that the most recent data show that the rate of entry for new firms appears to have stabilized over the past few quarters” which mitigates the natural inflationary pressure that operating on the outer limits of growth potential would face. “An increase in productive capacity resulting from new firm creation would, therefore, allow the economy to grow faster without creating inflationary pressures,” Leduc said.
- Spanish 10-year bonds are blowing out to German bunds still. At 122.90 we are seeing a large part of the Macron contraction being unwound. But unless this spread blows out to, or through the years highs at 150 it would be fair to say that the Catalonian problems the Madrid government simply have traders on alert, not alarmed. Perhaps that's what we need to watch in terms of a real, and lasting, level of impact on the euro. But it feels like the Catalonian government is going to press forward.
Spanish-German 10 year bond spread (Source: Reuters Eikon)
- And while I’m in Europe, outgoing German finance minister Wolfgang Schaeuble said overnight that the three way coalition would come together and as a result “I advise calm. A way will be found,” he said.
- UK construction went into contraction last month data from the HIS Markit and CIPS showed overnight. The construction PMI for the UK dropped to 48.1 in September from August’s tepid print of 51.1. Reuters reports that this is the lowest level since July 2016 and below all forecasters it polls. Brexit uncertainty is really complicating things for the UK economy. But the pulse in inflation means the BoE increasingly feels it needs to hike rates. That combination hurt the pound overnight.
- The isolation of the Iraqi Kurds continues. Overnight we heard that Iraq’s central bank has told the Kurdistan regional government that it will cut off four leading banks in the region from foreign exchange transfers and refuse to sell them dollars. This is the latest move to pressure and isolate the Kurds after their referendum vote last month. Given the Iranian and Turkish governments also have a stake in this play for Kurdish independence this could become another hot spot for region. It’s something oil traders in particular need to watch given the ease with which Turkey could turn off the Kurds 500,000 barrel a day export pipeline.
- Also, yesterday I highlighted that the US data flow had helped lift the US CESI back into positive territory. But I said this was associated with the Atlanta Fed lifting its GDPNow forecast to 2.3%. I erred it was 2.7%!
Australia
- The S&P/ASX 200 unwound more than half of the previous day’s gains yesterday with a 28 point, 0.49%, fall to close back in the middle of the range at 5701. It was an across the board move with telecommunications the only one of 11 sectors on the ASX to finish in the green. SPI traders have added another 11 points in overnight trade so they are expecting a better day.
- Technically the day’s price action was an inside day – the high and low of Tuesday was inside the range of the previous day – which given the positive lead from US markets and reversal from the open and day’s highs so easily suggest overhead resistance remains strong in this market. The reality is the ASX200 lacks the positive catalysts that are driving the US stock market higher – tax cuts and economic stimulus – so we are stuck in a range. For me a break of either side of Monday’s range is the signal I’m looking for as to the next leg of this rangey market.
ASX200 Daily (Source:Investing.com)
- RBA governor Phil Lowe delivered another masterful statement to accompany his, and his board’s, decision to leave rates on hold at 1.5% yesterday. In a perfectly crafted 608 words Lowe was both upbeat and cautious.
- He looked to the strength of the global economy “labour markets have tightened and above-trend growth is expected in a number of advanced economies”, noted the Fed is tightening and that in “other major economies, there is no longer an expectation of additional monetary easing,” as a result of this. But also highlighted inflation remains low.
- Locally he said the Australian economy is on track to “pick up over the coming year” in a manner “consistent with the bank’s expectation”. And highlighted – in line with that expectation – that “non-mining business investment is picking up” while noting that infrastructure spending is “also supporting the outlook”. But he also said highlighted, “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”
- Like the NAB business survey he was also upbeat on the outlook for employment but noted “the unemployment rate is expected to decline only gradually over the next couple of years,”. Which is partly why wage growth remains low. Something that will, “continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time”.
- As I say, beautifully balanced between a strongly positive outlook the RBA holds for the economic outlook in Australia and the headwinds the economy faces that are likely to stay the RBA’s hand – for a time - from the tightening’s this otherwise positive outlook suggests. All of which was aimed at not boosting the Aussie dollar in a manner that expectations of rate rises have in other jurisdictions as central banks have moved toward removing monetary accommodation.
- And to this end Governor Lowe could not have been more explicit as to the impact – given all that he’d said before the relevant paragraph – of the impact of a higher Aussie dollar as a handbrake on growth. He again reiterated that “The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
- In layman’s terms – a stronger Aussie restrains both growth and inflation and that would feedback into interest rate expectations thus rendering the bullishness void. So the RBA is on hold – and for some time it seems.
Forex
- The US dollar reversed course a little after being higher in Asian and early European trade yesterday with the US Dollar Index, DXY, trading up to around 93.92. That it’s lower again this morning (93.56) - and euro is higher - speaks to the residual disquiet around this first leg of the dollar’s rally.
- Only data can really fix that. And while I noted yesterday the Citibank economic surprise index for the US finally made it back into positive territory after Monday’s data traders clearly need the constant reinforcement that data beating expectations brings. Naturally in this first week of the month that means US non-farms are important. But in the wake of the Hurricanes expectations are for jobs growth of 100,000 or less. Such is the nature of first waves. The key short-term is the DXY needs to break 94.10/15 to really get traders excited technically
- So this morning euro is back at 1.1743, up 0.14%, which is very solid after an overnight low of 1.1695. USD/JPY is sitting at 112.87 after again failing above 113. It made a high 113.19 and is back at 112.86. 113 is becoming an area of supply with multiple bull failures. So a break of 112.40/45 would signal that the Yen, and possibly the dollar, is in the midst of a short term turnaround.
- In the UK the uncertainty around Brexit and that weak construction PMI knock the pound lower against both the US and euro – and on the crosses. GBP/USD is down 0.26% at 1.3240. 1.3194 is the next Fibonacci support.
- On the commodity bloc the kiwi is the worst performer after the dairy auction saw prices drop 2.4% from the last auction. The kiwi is down half a percent at 0.7158 after making a low of 0.7149 just a little below the very important 200 day moving average which sits at 0.7151. 0.7130 was the recent low and the level to watch. The Canadian dollar is sitting at 1.2486 about 0.15% stronger against the US dollar.
- And finally, the Aussie dollar was knocked hard after Governor Lowe’s masterful statement showed he is upbeat on growth but relaxed on any need to tighten rates anytime soon. It made a low around 7784/5 overnight in the wake of the governor’s impact and a weak US dollar. But as the governor also noted in his statement the Aussie dollar’s move reflects moves in the US dollar and that’s what pulled the Aussie back above 78 cents such that it is now up 0.15% on the day at 0.7837.
- There remains lots to recommend the Australian dollar to investors as I’ve highlighted above in my discussion on credit spreads. But in the immediate term it’s the flow and ebb of the US dollar that is driving price action
Commodities
- Oil was down again overnight despite the increased pressure on the Kurds and comments from OPEC secretary general Barkindo that he is very pleased with the level of compliance and that OPEC is working well and closely with Russia.
- But this morning WTI is down another half a percent to $50.34 while Brent is off 0.4% to $55.89. Technically the break of the trendline – and my systems positioning – suggests further downside for WTI and Brent. $49.90/50.00 is the key in WTI while in Brent the similar level is $55.40. Here’s WTI.
- Gold dipped into the $1268 region yesterday while the US dollar was stronger but has lifted a little to $1272, up 0.1%, as I write. Gold is under pressure from a number of fronts as geopolitical tensions over North Korea recede, as confidence in global growth increases, as stocks are buoyed by this confidence and as that confidence also but upward pressure on bond rates. $1263 remains an important support to see if bonds can find a base.
- While zinc hits a 10 year high copper is still relatively becalmed up just 0.15% to $2.94.
Have a great day's trading.