Originally published by AxiTrader
Quick Recap
Oil’s march higher continued overnight with Crude Oil up 2.2% and Brent Oil up 1.9%. That’s helped stocks in the US but equally the solid print for the US behemoth services industry is supporting stocks as well. That strength is also pushing the US dollar higher and it’s now solidly above 103 against the Yen. That drove Sterling below 1.27 for the first time since 1985 overnight.
US bonds are higher in yield as well, which is another support for the US dollar. It adds pressure to Gold and the Aussie dollar, although the uplift in risk appetite supported the Aussie on the dip under 76 cents and it’s largely unchanged on the day.
What You Need To Know
International
- The combination of data and an oil price surge is helped US stocks defy the weaker European lead. The Dow Jones Industrial Average is up 0.62%, the Nasdaq 100 is up 0.5%, and the S&P 500 is up 9 points, 0.43%, at 2160. It’s still trapped within an ever-tightening short term daily wedge and a break out must be looming soon. Oh we have non-farms Friday night.
- All sectors except Utilities and Telco’s on the S&P are higher, which augurs well for Asian and Australian markets today.
- I wrote a piece yesterday, which is yet to be published at Business Insider, about the end of the secular bond bull market. It will be published at some point today, But I raise that because US 10’s are back up at 1.72% and moving through trendline resitance. I’m cresistance 75% the key level in a trading sense. But if that level goes then a move to 2%/2.1% is on the cards. I’m not alone in my view bond rates are headed higher JP Morgan and Goldman Sachs both are also suggesting that rates can move to 2%. That’s important for gold (bad) and for stocks (a weight) and it’s also important for the US dollar (a boost).
- As I write US 10’s are at 1.70%, up 1 point and off the high which tested the trendline. German 10’s are at -0.004% up 4 points, while UK gilts are at 0.715% up 3 points.
- The big news overnight, the really big news on the economic data front, was that the US services sector is still strong. The ISM non-manufacturing index ripped almost 7 points higher to 57.1 against expectations of 53 and from 51.4 in August. September’s 57.1 is an 11 month higher and great news for the economy because the service sector is so large and all pervasive in the US (and most developed economies). Separately the Markit services PMI printed 52.3 from 51.9 last, factory orders were up 0.2% against expectations of a 0.1% fall but ADP private payrolls missed a little to the downside with a print of 154,000 against 166,000 expected – or should I say forecast.
- On the Fedspeak front Richmond Fed president Jeffrey Lacker is on the hustings saying that he sees signs that inflation is heating up. He said following a policy rule retains confidence and pre-emptive action will help the Fed retain credibility. Clearly he thinks rates should rise. Interestingly he also noted that asset prices are relatively high and long term interest rates will have an impact on stocks.
- Also speaking over the past 24 hours were Chicago Fed president Charles Evans who said in New Zealand yesterday that he is fine with a December hike if the data stays firm. But he also followed the clear message the Fed is trying to get out about the expected shallow path of rates. “I am less concerned about the timing of the next increase than I am about the path over the next three years,” Evans said. Minneapolis Fed president Kashkari also spoke but about equality not monetary policy. He said growth since the GFC (what he called the great recession) has “contributed to exacerbating the persistent and wide gaps in income among our country's racial and ethnic groups”.
Australia
- The Australian market was pressured yesterday as the gold miners were absolutely hammered and the overall tone of negativity prevailed. The Banks were mixed as ANZ Banking Group (AX:ANZ) CEO Shayne Elliott faced parliament with Elliott’ s firm down 0.18% while the National Australia Bank Ltd (AX:NAB) was 0.25% lower. Westpac Banking Corporation (AX:WBC) was up 0.67% and the Commonwealth Bank Of Australia. (AX:CBA) finished up 0.4%. Rio Tinto Ltd (AX:RIO) and Fortescue Metals Group Ltd (AX:FMG) were hammered losing 1.11% and 1.63% respectively.
- But it should be a better day today if the futures traders are right. The Dec SPI 200 contract is higher with the move in US stocks up half a pre cent, 27 points this morning.
- Yesterday’s retail sales data was solid with a 0.4% rise in August. Combined with the lift in the AI Group’s manufacturing survey (49.8 from 46.9 last) and the release yesterday of the services index (48.9 from 45 last) relieves some of my concerns about the weakness that emerged a month ago in these high-frequency economic indicators. Certainly many are cutting up retail sales and saying they are slowing and its really weak – but you can cut up almost every data point every time. And of course both the manufacturing and services indexes are improved but still below the 50 delineation between expansion and contraction. But for me the key is that things aren’t as bad as I feared.
- And of course my favourite indicator of Australian’s attitude to discretionary spending - the break out of the Café/Restaurant/Takeaway sub index of the retail sales data (see I do it too) has been on the improve lately. So I remain alert but not alarmed about domestic household spending and the economy overall.
- Today we'll be watching the trade data.
Forex
- The US dollar is steady on balance but stronger against the JPY/USD and the NZD/USD. Sterling has steadied after its dip below $1.27 and the AUD/USD is back from a brief foray below 76 cents. But the CAD/USD is still failing to catch the updraft from the strong rally in oil. Euro is getting support from rising bond yields it seems but it is still trapped in a very tight range.
- Looking at GBP/USD the fear of a hard Brexit continues to weigh on the pound and was the cause for the overnight move it seems. British PM May’s comments questioning the efficacy, and the side effects, of ultra low rates and money printing seem to have helped the pound a little but it has become oversold on the short term time frames which also offers support. I’d add the UK economic data helps a little and service sector PMI with a print of 52.6 beat expectations.
- Looking at the Yen and the break higher in USDJPY continues as US data improves and expectations that the Fed will indeed hike this year grows. I’m bullish longer term, 110+, but for the moment USDJPY needs to clear the August high of 104.30 to really kick on
Commodities
- Oil continues to climb this wall of worry and against all the naysayers who say a deal can’t be done. Crude Oil is up 2.16% at $49.74 while Brent Oil is up 1.75% now at $51.76. The catalyst for the overnight move was a big draw of 2.976 million barrels of crude in the EIA report overnight against expectations of a 2.68 million barrel increase in inventories. Equally though yesterday we heard from Venezuelan president Maduro who said the Russian oil minister is coming to visit this week and the chances of an OPEC non-OPEC deal being done are strong.
- On my video yesterday I said I’d take around 50% of my oil longs back (sell) as prices looked a little stretched on a short term/daily basis. So I’m giving myself an upper cut about now. But I retain my belief that oil is heading toward $55 medium term. That’s something Goldman Sachs seems to believe as well. They reaffirmed their $43 target recently but Bloomberg reported overnight that “Oil’s rally will stall at $55 a barrel as U.S. shale drillers get back to work and a “wall of supply” from investments made over the past decade hits the market, Goldman Sachs Group Inc (NYSE:GS). said”. The fact they are talking about the level gives power to this move.
- Anyway here’s the chart – it’s still a little overdone short term but the reverse head and shoulders pattern remains clear and that target is around $55
- Gold remains pressured and my theory about negative interest rates, or interest rates in general being important found some support overnight. Bloomberg reported that “Bloomberg Intelligence analyst Michael McDonough, there is an extremely high correlation between the price of gold and changes in long-term interest rates. As the 10-year yield moves higher, gold moves lower”. Here’s his chart
- Anyway gold made a low at $1261 overnight and is back at $1266 now.
- Copper is at $2.1565
Today's key data and events (all times AEDT)
- Australia - Imports (Aug), Exports (Aug), Trade Balance (Aug) (11.30am)
- New Zealand - Nil
- China - Foreign Exchange Reserves (MoM) (Sep) (n/a)
- Japan - Foreign bond investment (Sep 23), Foreign investment in Japan stocks (Sep 23) (10.50am)
- Germany - Factory Orders n.s.a. (YoY) (Aug), Factory Orders s.a. (MoM) (Aug) (5pm)
- EU - ECB Monetary Policy Meeting Accounts (10.30pm)
- UK - Nil
- Canada - Building Permits (MoM) (Aug) (11.30pm)
- US - Challenger Job Cuts (YoY) (Sep) (10.30pm); Continuing Jobless Claims (Sep 23), Initial Jobless Claims (Sep 30) (11.30pm); EIA Natural Gas Storage change (Sep 30) (1.30am)