Originally published by AxiTrader
Market Summary
Political uncertainty in Germany and increased tensions on the Korean peninsula - as the DPRK accused the US of declaring war on it – are the key drivers of markets overnight. That’s seen a mild risk-off tone with stocks mostly lower, bonds bid, gold higher, while the US dollar and the yen are both higher.
At the close the S&P 500 is down 0.23% to 2,495, the Dow Jones Industrial Average is off 0.24%, and the Nasdaq 100 is off 0.96% as tech stocks game under pressure and Apple (NASDAQ:AAPL) flirts with “bear market” territory. In Europe the DAX was essentially flat but there were small losses across the rest of the region.
Somehow though SPI traders have seen 14 points of gains in all the action and lifted prices higher from yesterday afternoon’s tepid close. Maybe energy stocks will provide some oomph?
On forex markets the euro is down 0.85% and breaking out of the 6-month uptrend in the wake of the weekend’s election and Pyrrhic Victory for chancellor Merkel. The sterling, Aussie (0.7934), and Canadian dollar are all down mildly but the kiwi has been hammered 1% lower on its own election uncertainty as traders await the formation of a the next government. The yen and Swiss franc have naturally resisted the US dollar’s strength given North Korean tensions.
And those tensions have pushed long bonds lower and also flattened the yield curve with US 10's now at 2.21% and the 2-10 curve at 79.
On commodity markets gold caught a bid and is up 1% at $1310. Oil surged as traders sense OPEC really is achieving its goal of a tighter market WTI is up 3%, Brent 4% and at a new high for 2017. Copper is mildly lower and iron ore was off again.
Nothing in Australia of note other than the ANZ consumer confidence survey today.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The rhetoric has gone to a dangerous level with North Korean foreign minister Wu saying that the US has effectively declared war on it and the nation would be within its rights to shot down American planes - even in international waters. “The whole world should clearly remember it was the US who first declared war on our country,” the North Korean foreign minister said adding “since the United States declared war on our country, we will have every right to make countermeasures, including the right to shoot down United States strategic bombers even when they are not inside the airspace border of our country”.
- Who knows if they’d follow through on that, who knows if they could do it – naturally we hope not - but the White House has said that’s not the case that the US has declared war on the DPRK and spokesperson Sarah Huckabee Sanders said the Administration simply wants a denuclearisation of the peninsula.
- The Chinese have again warned both sides it’s time to take a step back. UN Ambassador Liu Jieyi told Reuters overnight “we want things to calm down. It's getting too dangerous and it's in nobody's interest…We certainly hope that (the United States and North Korea) will see that there is no other way than negotiations to solve the nuclear issue on the Korean Peninsula ... The alternative is a disaster."
- Which is effectively what Russian Foreign Minister Sergei Lavrov said on Sunday as I pointed out yesterday.
- Japanese Prime Minister Shinzo Abe is dissolving parliament for new national elections this week. He announced the decision yesterday, along with plans for his cabinet to come back on how to inject 2 trillion yen into the economy.
- German chancellor Angela Merkel is clearly taking the election result hard. Overnight she took the blame, saying her immigration policy had polarised the nation. She’s trying to cobble together a bit of a rainbow coalition, which is making traders nervous given the opposing positions on issues between prospective parties. And highlighting the uncertain nature of German politics right now, the leader of the AfD announced last night she will not sit in the Bundestag with her colleagues.
- And speaking of opposing views, we seemed to get two from the Fed overnight. While Chicago’s Charles Evans did say he agreed with the path of rates in the US back toward 2.5-3% he highlighted he’s less convinced about the need for rates to rise this year – he wants to see inflation. But the New York Fed’s Bill Dudley reckons inflation is on the way back and we’ll see it at the Fed’s target of 2% in time. Both men are voters this year.
- Mario Draghi was also speaking last night and said while he see the uptick in growth and inflation moving in the direction he wants he’s worried about the euro and so wants to keep policy as accommodative as possible to guard against the chance that a euro rally derails things in the EU. Via Reuters ,“Overall, we are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialise," Draghi said. He added later that “most notably, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring…We therefore need to be patient and persistent."
Australia
- Another awful day's price action for the S&P/ASX 200 yesterday with early strength giving way to an afternoon fade and gain of just two points. Again it’s a story of sectors cancelling each other out which conspires to hold the index back. But the mild bout of risk aversion certainly didn’t help yesterday, nor did the moves in Chinese iron ore markets.
- If you look at the price action on the ASX200 yesterday you can’t fail to see another bearish long tailed candle where the gains disappeared by the close. SPI traders are suggesting a 7 point rally at the start this morning but the overall tone of the market might make it difficult. Also when I look at technical on the key underlying stocks and sectors which make up the ASX I see some resistance. Of course we don’t trade or talk about specific stocks at Axi and frankly I’m a macro guy so I spend my time on macro trades. But that said my analysis framework for currencies, bonds, commodities, and stock indexes is all about a ground up approach to distil into key drivers so these individual sectoral and company moves remain important.
- Looking at the SPI now – rather than the ASX200 for a change – and it is roughly mid-range of the box the market has been in since May (it’s a similar story for the ASX200). That gives us little overall direction other than to say 5,580/85 is support with 5,785/5,800 resistance.
Forex
- The US dollar continues to recover with the US Dollar Index close to confirming the break as the euro weakens. Political uncertainty is often poison for currency levels – traders hate it especially when that uncertainty comes with attendant policy uncertainty as it appears to in Germany at the moment. So the single currency is down 0.89% at 1.1845 this morning. That’s not yet below the 1.1820 level I’m using as confirmation of a EUR/USD top. But given the Euro is sliding out of its 6-month uptrend it’s an important move.
- I have a test toward 1.1660/80 penciled in.
- Elsewhere sterling looks like a top is in place now as well and it’s down just 0.2% at 1.3464 but well off the recent highs. The yen and Swissie are 0.2*% and 0.24% stronger against the US dollar on the back of risk aversion with USD/JPY at 111.66 and USD/CHF at 0.9665.
- Of the commodity bloc the Kiwi has fared worst with a loss of 1.08% and a fall to 0.7262. I have a test of the uptrend line at 0.7190/7200 penciled in for the kiwi to see where real support lies. The Aussie is lower as well down at 0.7935 for a loss of 0.33% and off a high of 0.7975ish. The Aussie still looks biased toward support at 0.7850 but 79 cents has proved very strong recently so we’ll see how it fares there first. The Canadian dollar is also lower off 0.29% with USD/CAD up at 1.2373 even though oil is sharply higher.
Commodities
- Oil markets have a better tone at the moment as the notion that the OPEC non-OPEC production deal is gaining traction and the market is rebalancing. It’s a notion we were discussing here and on my daily video and one which Hurricanes Harvey and Irma shifted focus from. But with Brent breaking through the 2017 range highs to trade at $59.03 it’s clear they focus is back on the tightening market. WTI is also sharply higher at $52.08 and both look toppy but solid.
- That notion of market tightness has been judged along by comments from Iran in compliance and future recognition of Libyan and Nigerian supply as well as a BP (LON:BP) oil trader telling a conference Monday the market had turned the corner. Throw in a threat from Turkish president Erdogan to turn off the tap from Kurdish oil fields - as the Kurds march toward referenda and independence - and you get a chance for more rightness.
- Gold is up, despite the stronger US dollar, on the tensions in North Korea. It’s back above $1300 an ounce at $1308 which means it’s also taken out the $1304 level I highlighted yesterday
- Copper is at $2.92, still pressure but hanging in at present.
Have a great day's trading.