Originally published by AxiTrader
Market Summary
It has been a cracking 24 hours for global stock markets.
After the Australian market’s rally seemed to come out of nowhere before driving the S&P/ASX 200 up 95 points the buying continued in Asia, Europe and then the US overnight where the big indexes are up solidly. The S&P 500 has risen 0.45% to 2440, the Dow Jones Industrial Average rose 0.44% to 21,328 and the Nasdaq 100 is up 0.73% as the buy the dip crowd wanders back into the market.
Coming a day before the FOMC decision suggests traders are not worried about rate rises and most likely are betting on a dovish hike from the Fed. That means a September, perhaps even December, follow up is far from certain.
On forex markets that expectation didn’t really hurt the US dollar which along with the euro, yen and Aussie are not much moved from where they were a day ago. Sterling and the Loonie were the big movers as inflation rose more than expected in the UK and the BoC governor reiterated that perhaps low rates have done their job in Canada. For the Aussie it’s been another tight range and it is barely moved day-on-day at 0.7535.
On commodity markets gold found support under $1260 and is back at $1267. Oil was higher after news that the Saudis are cutting supplies to Asia and the US. But the build in API inventories of more than 2 million barrels in the past week wiped that away and prices are now down marginally. Elsewhere, copper and base metals are all lower this morning.
On the day today in Australia, we get the Westpac consumer sentiment data. But the big driver of markets could be the triple treat of Chinese data with the release of retail sales, industrial production and urban investment.
Tonight it’s consumer prices in Germany, unemployment in the UK, retail sales and CPI in the US, EIA crude inventories and then, of course, the FOMC decision at 4am AEST tomorrow morning.
Here's What I Picked Up - in a little more detail
International
- It’s getting a little more difficult for Janet Yellen and her colleagues. That’s the quick takeaway from last night PPI data for May which was unchanged on the previous month. That saw the yoy rate dip back to 2.4% which is still relatively high. But the issue becomes the fading inflation pulse globally and the lack of wage pressure yet to emerge in the US or anywhere else.
- My sense is that it won’t change the fed’s decision this week but it makes for many uncomfortable questions for the Fed chair during her press conference. The dot plot is going to be very interesting as well.
- UK inflation went the other way however as headline CPI shot the lights out with a print of 2.9%. That was higher than the market’s expectation of 2.7% and reinforces that the big post-Brexit fall in the pound and rise in inflation continues. Almost any other central bank in the developed world would be happy about such an inflationary problem right now. But the BoE has renewed uncertainty about political stability and its impact on growth to add to the bank’s Brexit impact concerns. I expect the BoE’s MPC to look through the inflation pulse when it meets this week.
- And speaking of growth and inflation ECB governing council member Jan Smets said that the stronger growth should have seen inflation tick up by now. His comments reinforce Mario Draghi’s dovish stance last week and highlight that the ECB may pursue QE and keep rates lower for longer than the market expects. “We are looking for a sustained adjustment of the path of inflation. That is the single most important thing we should look at”.
- And to round out central bank speak we got news yesterday that the BoJ has slowed the pace of bond buying recently. That, and official said, is because rates are stable. That, I’d add, is because Japanese data has rolled over and the inflation and growth pulse seems to be fading a little.
- Oh, and to round out a big night for central banks BoC governor Poloz said last night that interest rates have done their job. “The interest rate cuts we put in place in 2015 have largely done their work…So that's very reassuring, we're encouraged by the data," Poloz said.
- Qatar is still worth watching as sides are picked and battle lines drawn. The Turkish president last night compared the Saudis action and the isolation of Qatar to a death sentence for the nation and its people. Iraq critiscised the move as well. And of course the Iranians are furious after the terror attack in Tehran last week and again accused the Saudis of sponsoring action in the nation.
- While US attorney general Jeff Sessions addresses the Senate Intelligence Committee it’s worth noting that US treasury secretary Steve Mnuchin said overnight in a CNBC interview that “let me just assure you people talking about impeaching the president is the biggest waste of time”.
Australia
- From virtually nowhere a stonkingly strong rally on the S&P/ASX 200 ignited yesterday lead by the banks which surged higher to take the market up 95 points for a 1.67% rally. It’s the biggest rally since last November. And while the ASX outperformed other stock markets around the globe yesterday it’s clear that something in the water changed during the Asian session with gains almost across the board (only the Nikkei dipped a smidge). Solid rises in Europe and then the US is an indication that something changed.
- What it is is hard to fathom. It’s trite to say it’s just the buy the dip crowd. But in many ways that’s exactly what it is
- I say that because if the inflationary pulse across the globe is fading and if the central bank rate rise cycle many thought was coming is delayed then we’re in a world where the ECB and BoJ will keep pumping in cash. It’s a low interest rate world. And in that world yield matters. That’s my hypothesis for today anyway.
- Looking at the price action of the ASX 200 and the SPI my system was triggered long on the break of 5691 and 5702 respectively. I didn’t expect the rally in a rhetorical sense. But price action is price action and resistance is now 5795/5805 in the physical index once again. A break would be a massive signal that the time is nearing for the ASX 200 to again chase back toward gains in the US markets. Now that would be a stonkingly good rally if it happens – 5805 has to give way first though.
- Yesterday we got the NAB business survey and while it dipped a little from last month it still paints a picture of an economy that is doing pretty well. I read an article quoting HSBC’s chief economist – and RBA alumnus – Paul Bloxham which said that this survey is a better indicator of how the economy is tracking than the GDP data. Regular readers won’t be surprised to hear me say I agree.
- Confidence and conditions remain well above long run averages.
- This survey is for me the most important data release in Australia each month. It Trumps everything when it comes to sending the information we need about the state and outlook of the economy. So I’m encouraged. This is a salve to my worries about household debt and consumption.
- Now for today’s Westpac-MI consumer sentiment data.
Forex
- Sterling and the Loonie are the big winners again today with gains of 0.77% and 0.65% respectively as GBP/USD trades at 1.2752 and 1.3236 respectively.
- Key to the pound's rally was the release of higher than expected inflation data with the headline CPI print of 2.9% yoy higher than the 2.7% expected. Hence the buying of the pound. That kind of puts Mark Carney and the BoE in a bind some say when the MPC meets later this week. But I’d argue that just like the ECB is looking through growth to inflation so Carney might look through inflation to growth.
- A break of 1.2770 for GBP/USD would open up the topside again – if it breaks.
- The Loonies strength came from BoC governor Poloz reiterating what his deputy had said the previous day about interest rates. Poloz noted that the interest rate policy had done it’s job. It didn’t hurt that oil moved a little higher as well.
- The euro is becalmed again and stuck at 1.1205 while the yen is also sitting near 110. In the latter’s case however with Japanese data rolling over recently and the BoJ meeting later this week these level look too low for USD/JPY.
- The Australian dollar likewise is unchanged but that doesn’t mean it’s been a benign 24 hours. The high at 0.7564 was just 2 points below the recent high while the low of 0.7521 was close to the 200 day moving average. A break of 0.7566 or 0.7515/20 is needed to kick things along.
Commodities
- The Saudi armoury isn’t empty it seems when it comes to tools to manipulate oil prices. That’s the takeaway from the positive price reaction from traders to the news that the Kingdom is again cutting supplies to Asia and making cuts to US sales.
- In no small way however that news is offset over the medium term by news that OPEC production has actually risen as exempt nations Libya and Nigeria ramp up production. Indeed OPEC said last night the market is rebalancing at a “slower pace” than expected as production rose 336,000 barrels last month to 32.14 million bpd.
- But it’s still about inventories. And on that front the API data this morning showed another unexpected build in US crude stockpiles of 2.755 million barrels, In the early morning email I wrote "the short term level I’m watching, and which WTI needs to get above is $46.68". We can forget that now WTI is back at $45.97 while Brent is at $48.25.
- Gold is largely unchanged at $1267 but that belies a dip toward the all important $1255/58 region with a low overnight in the $1269 region. While this level holds the outlook is far from bearish.
- Copper’s rally faltered again in the past 24 hours as the base metals complex came under pressure across the board. It’s back at $2.60, down 0.72%