Originally published by AxiTrader
Market Summary
It’s easy to get wrapped up in the importance of markets, but coming back from dropping the kids at swimming training this morning I came within centimetres of running over a koala crossing the road. It crossed and disappeared into the bush. No trade I’ve ever put on made my heart race like that. Gives me a little perspective check.
Anyway, to the markets and it’s more records for US stocks as solid data, the House passing a fiscal 2018 blueprint, and a real sense that Trumponomics is back drives prices higher once again. At the close the S&P 500 was up 0.56% to 2552, the Dow Jones Industrial Average rose 0.5% to 22,775 and the Nasdaq Composite was 0.78% higher at 6,585.
Save for the FTSE 100, which seemed to like a weaker pound, and the IBEX in Spain which bounced sharply, Europe missed the memo for stocks strength. We may get some catch up this afternoon when markets open. But SPI traders took notice and have added 36 points overnight to yesterdays rather lacklustre price action and close.
On forex markets all of the above gave the US dollar a bid but it also got a lift from a dovish ECB and concerns about British Prime Minister Theresa May’s longevity in the job. So this morning the US dollar is on the cusp of the break I’m looking for in US Dollar Index and eurouro terms. That’s pressured the commodity bloc and then the weak retail sales in Australia has hurt further. The Aussie is at 0.7791 and at risk of a big break lower.
On commodity markets oil traders are starting to notice the bullish setups fundamentally and we saw a solid rally overnight with WTI up 1.5% to $50.74. Gold is down, under the weight of its very own perfect storm. It’s trading at $1268 this morning. And to copper, which finally caught up to the gains of other metals. It rose 2.8%.
Non-farm payrolls tonight is going to be a huge release.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US factory orders, jobless claims, and trade were all positive last night and have prompted some upgrades to expectations for Q3 growth in the US. That’s been the case with Wall Street banks and also the Atlanta Fed’s GDPNowcast for Q3 growth which was increased to 2.8% from 2.7% earlier this week.
- The Commerce Department said factory orders rose 1.2% in August after July’s 3.3% fall. That was a little better than forecasts of 1%. But it was trade which was the more interesting with the deficit falling 2.7% after exports increased 0.4% and imports dipped 0.1%. The lift in both goods and services exports which in turn seems to have been driven by a lower US dollar. Juxtapose that with the Canadian trade deficit for August, also released last night, which blew out to C$ 3.41 billion on falling exports. This has been a trend since May when the Canadian dollar really got a move on and started to appreciate strongly.
- This is real world, real data, proof of the impact of exchange rate moves. So it’s not hard to see why central banks get titchy when their currencies appreciate too much or why there has been a clear fight back against the US dollar’s weakness from central bankers over the past 4-6 weeks. The RBA is at the forefront of verbally warning about currency strength along with the ECB. But whether it was the PBOC taking the shackles off the Yuan, of the BoC’s recent comments that they were watching the Canadian dollar's appreciation closely it’s clear that the US dollar weakness caused disquiet in central banking circles. That trend is reversing however now. The US Dollar Index just needs to break 94.15, or euro needs to fall below 1.1660 to confirm.
- Fed speakers were out and about overnight with comments from the Philly Fed’s president Patrick Harker and San Francisco Fed president John Williams signalling a December rate hike is coming. Interestingly though Williams said he things real GDP growth in the US over the long term is likely to sit around 1.5% with an associated relatively low level of interest rates given that reasonably tepid growth outlook.
- The ECB minutes reflect a central bank which is confident growth is on the up but not confident this trend is intact and worried that inflation remains too low. That fed discussion around how the bank will taper QE - quote- the minutes said. The clear takeaway was that the ECB is looking at a lower for longer type approach as the minutes reflect a debate of whether the amounts of QE should be reduced and thus the period for the bank’s bond buying was extended. The Euro was also in the spotlight with the minutes reflecting disquiet on the impact of a stronger Euro on inflation. The minutes said “at the same time, the questions raised about the treatment of the exchange rate in the current projections might imply some downside risks. On balance it’s clear the ECB recognises the time for emergency measures has past. It’s simply trying to extricate itself from these measures without driving the euro sharply higher.
- The Spanish Constitutional Court ordered the Catalan Parliament closed Monday which sounds to me like another escalation in tensions. But traders seem more confident of Spain’s integrity remaining intact it seems with the IBEX up half a percent, good demand for the Spanish bond auction overnight and a big fall in rates and contraction in the Spanish German bond spread.
- In the UK BoE Hawk, and MPC member Ian McCafferty said last night that market pricing of a rate hike this year had averted an “unpleasant surprise”. It didn’t help the pound though as it was hammered over concerns around Theresa May’s leadership and a Brexit power void.
Australia
- Okay, surely today the S&P/ASX 200 can rally, get its skates on and push higher. I know there has been some awful psychological destruction of the bulls with the recent inability of the market to hold onto gains. But surely on a relative value basis with the rally offshore, and with global growth looking so solid again Australia might start to look attractive. Or perhaps not, because if yesterday’s retail sales highlighted anything it is that the very concerns many local and certainly international investors hold about Australian households, housing, consumption and thus the banks is a clear and present danger for Australian stocks and the economy.
- SPI traders have priced a solid rally today adding 32 points in overnight trade on top of yesterday’s again weak looking close. You can see that overnight move in the SPI chart below. But what we really see is a market stuck in neutral and going nowhere. We might have a better day today. But the overall trend to nowhere doesn’t look likely to change in a hurry.
- Yesterday’s retail sales data was a disaster. The fall of 0.6% in aggregate sales and the sub component break down really does give strength to the argument that Australian households are maxed out. Of particular note to me was the 1.3% fall in the cafe, restaurant, and takeaway sector. That’s as discretionary as spending comes and I’ve always used that as an indicator of household health and happiness. So to that extent this will need to be watched.
Australian Retail Sales mom sa (Source: Tradingeconomics.com)
- And it highlights the discussion we had yesterday about why the RBA is on hold at the moment. There is a real risk that rising rates, or just the prospect of rising rates, drives households into their caves and reduces spending. Indeed that café, restaurant, and takeaway sub sector of the retail sales report is what I call my “caving index”. I’m not going to get too hand wringy about the Australian economy just yet. I need to see what the NAB business survey shows and where employment growth prints. But yesterday’s data really does highlight that household retrenchment is the big risk to the Australian economy as we make this next difficult transition away from the building construction boom.
Forex
- As highlighted above the US dollar is on the cusp of a break higher with the DXY at 93.94 (+0.53%) and the euro at 1.1704 (-0.47%). It sets up a tantalising release tonight of US non-farm payrolls and the associated hourly earnings and unemployment data. The market is looking for just 90,000 new jobs.
- Naturally the euro’s weakness was also driven by the lower for longer ECB message that the minutes conveyed. Technically my money is on a test to 1.1525 which is just an easy garden variety 38.2% retracement of the recent run higher.
- Sterling was rocked by rumours that British Prime Minister Theresa May would be resigning. These were denied but the damage was done as traders again focus on the troubles of Brexit and the uncertainty about what exactly it will mean. GBP has broken back under the Brexit downtrend line and there is multiple time frame support at 1.3095 which has to hold. A break would signal a move toward 1.29, perhaps lower.
- USD/JPY is intriguing. As I posted yesterday on the blog there is a clear trade either way as it looks toppy but is still finding support on falls – like last night. So a break of either 113.25 or 112.30 is likely to ignite the next big move.
- On the commodity bloc it’s carnage across the board. The Australian dollar is the worst of the three with a loss of 0.9% at 0.7791 this morning. That fall was in the wake of the stronger US dollar and yesterday’s shockingly poor retail sales data. That naturally pushed back market pricing and expectations of an RBA tightening which in turn changes percpetions about relative value for the Aussie dollar. It looks biased toward 0.7750 and then 0.7650 at present even though global growth is on the up.
- The kiwi and Canadian dollar have lost 0.70/75% each and are trading at 1.2566 and 7114 respectively. Both have broken big levels and I’m now looking for significant moves technically. A move under 70 cents for the Kiwi and above 1.27 for the Canadian dollar.
Commodities
- Oil traders finally reacted to some of the bullish catalysts that have been building overnight. But it took comments from Saudi Oil minister Al Falih with regard to the Kingdom having an open mind to Vladimir Putin’s notion the production caps could be extend across all of 2018 to get thinks moving. “In the kingdom, we have to keep all options open, President Putin agreed with us on this and expressed his readiness to extend until the end of 2018 if this is agreed, and if this is the best option” Al Falih said.
- Comments from Turkish President Erdogan, who was meeting Iranian leaders to discuss the Kurdish independence vote, also highlighted the chance that the Kurds oil pipeline - 500,000 barrels a day - could be shut or restricted also helped sentiment.
- So this morning WTI is up 1.52% at $50.74 while Brent is 2.13% higher at $56.99. Price action is getting messy now but as long as WTI holds above yesterday’s $49.74 low it can run up to the high above $52.
- Gold is down half a percent at be $1268 and looking increasingly like lower levels beckon in this increasingly hostile environment for risk assets. I know that sounds back to front but as I’ve been highlighting recently strong global growth, rising interest rates, central banks withdrawing policy accommodation, stocks rising, and increased investor risk appetite are all bad news for gold. $1263 has to hold otherwise we could see a move to $1240, perhaps $1204.
- Finally. After building a solid base copper has finally played catchup to the rallies in other markets and the solid pointers to global growth in the year ahead. US copper is up 2.8% to $3.02 a pound. It’s looking a little overdone short term after having gone nowhere for a few weeks. But the other side of that debate is that copper has built a solid base.
Have a great day's trading.