Originally published by AxiTrader
Quick Recap
It’s a sea of red across global stock markets this morning with Europe’s fall accelerating in the US as oil reverses after the head of Rosneft has done something even US President Barrack Obama seems loathe to do. That is, Igor Sechin directly challenged Vladimir Putin’s claim that Russia is ready to join a production cap and it helped knock the price of crude a little lower – although it has shown remarkable resilience all things considered.
The USD dollar is stronger across the board as well with the pound collapsing again and the Aussie, Euro and other currencies under pressure. Rising expectations of a Fed hike are getting the blame for the stronger dollar but it feels like it’s a little more than that as the Dollar Index rises to its highest level in 6 months.
What You Need To Know
Here’s what I picked up
International
- Stocks are off as oil dipped as noted above but also I think because the market is focussed on the release of the minutes to the September FOMC meeting tomorrow morning Australian time. You’ll recall earlier this week I highlighted Fed vice-chair Stanley Fischer’s comment that the decision to hold rates steady had been a close call. That suggests the minutes could read more hawkish than the actual outcome appeared.
- So at 5.13am the Dow Jones Industrial Average is down 229 points, 1.25%, the Nasdaq 100 is off 1.69% and the S&P 500 is off 1.42%. In technical terms the S&P is just below the tentative trend line that goes back to the low for the year – but it’s more likely traders are watching the 2120 region as a key indicator of whether greater falls are coming for the US market.
- US 10 year Treasuries hit a new peak for this run at 1.78% overnight but they are back at 1.755% as stocks go off a little. But that’s not the greatest bid I’ve ever seen given the big falls in the stocks.
- New York Fed inflation expectations were out last night and they continue to show subdued inflation expectations with the 1-year rate falling to 2.5% from 2.8% while the 3 year rate fell to 2.6%. Wage growth expectations fell to 2% from 2.4%.
- It’s fear and loathing in the reportage and research notes surrounding Brexit at the moment. While I strongly believe the collapse in the pound will eventually be self curing for the economy there is much water to flow under the bridge and it seems that the UK is talking itself into economic weakness in the wake of what increasingly looks like a hard Brexit. So far spillover effects remain negligible – but it remains something to watch.
- It’s fair to say Donald Trump’s campaign has no chance given he is now going after Paul Ryan. As civil war breaks out it’s worth considering if there is now a chance the Democrats could win a greater level of control of the House or the Senate as the Trump toxicity spreads. I wonder what that might mean for investors?
Australia
- We eked out a 4 point gain yesterday on the S&P/ASX 200 to close at 5479. Again the 5500 region proved a level that traders didn’t have the gumption to cross with yesterday’s high of 5498. and the focus will be on the downside today with futures pointing to a big fall. The December futures are 46 points lower with losses expected across the board.
- Here's the chart of the physical ASX 200 where you can see it consistently failing at 5500 - the similar level in the SPI is 5487. The physcial suggests a move of 100 points from last night's low in time...the SPI has a similar target.
- Overnight miners and financials have been under pressure in New York and London which suggests a tough start to the day. Energy stocks could come in for some selling as well if traders decide the comments from Russia’s Rosneft mean a deal is less likely to be able to drive crude sustainably higher.
- On the data front the NAB Business survey was pretty solid yesterday and continues to point to an underlying strong Australian economy. What I particularly liked in the release was the strength of trading and profitability. Today we get consumer sentiment from Westpac and the Melbourne Institute.
Forex
- The question on forex traders minds at the moment is why would you buy the pound and the answer is you wouldn’t. That is not only impacting the value of GBP/USD but also the Euro and helping to drive the US dollar higher across the board. Of course you’ll here the US dollar strength is all about Fed expectations and the like. But I’d argue as much as that is a port of US dollar strength it’s also about the other sides of the crosses at the moment as well.
- Of course that’s obvious when it comes to the pound and Brexit. Sterling is down at 1.2126 as I write, a fall of 1.90% from 7am AEDT yesterday. As I’ve been saying in my morning videos why would you buy the pound. You just wouldn’t. There is no obvious circuit breaker to the fall and the Bank of England’s deputy governor Broadbent told us last week whatever the short term data might show it will ignore any strength because it thinks dark days are coming. So the pound falls and no-one wants to catch a falling knife. A retest of Friday’s low seems like a reasonable expectation.
- But EUR/USD is also threatened by Brexit’s spin off effects isn’t it. Indeed the catalyst for the pounds 10% fall last week was the FT front page with Francois Hollande calling for a hard negotiating stance to make Britain pay and protect the rest of the EU. Last night we saw Euro slip through the bottom of the recent range even though the ZEW survey showed a big lift in conditions (59.5) and sentiment (6.2) were stronger than expected.
- Naturally with the fall in crude, and the CRB commodity index the AUD/USD (0.7539), NZD/USD (0.7050), and CAD/USD (1.3246) are all lower. That the Kiwi is the worst performer of the group with a 1.2% drop is a reflection of the comments yesterday from the RBNZ’s McDermott that another rate cut will be necessary.
Commodities
- From a purely technical point of view this move in Crude Oil crude is perfect. Of course the 1.2% drop to $50.74 had its catalyst in the Rosnoft bosses comments that he can’t see why his company should join the OPEC production freeze – especially with so many members, like Iran, who won’t be taking part. But the fact that prices couldn’t take out the June high suggests lower levels are needed to confirm the move higher in traders minds.
- Overnight the head of OPEC said a deal for 6 months is close. But at present there is a lot of scepticism about it getting done. I believe the fiscal imperatives will drive agreement and compliance but perhaps traders need to see the ink on paper to take the price of crude above Junes highs.
Today's key data and events (all times AEDT)
- Australia - Westpac Consumer Confidence (Oct) (10.30am)
- New Zealand - Nil
- China - Nil
- Japan - Machinery Orders (YoY) (Aug), Machinery Orders (MoM) (Aug) (10.50am)
- Germany - Nil
- EU - Industrial Production w.d.a. (YoY) (Aug), Industrial Production s.a. (MoM) (Aug) (8pm)
- UK - Nil
- Canada - Nil
- US - MBA Mortgage Applications (Oct 14) (10pm); JOLTS Job Openings (Aug) (1am); 5-Year Note Auction, 3-Year Note Auction, 10-Year Note Auction (4am); FOMC Minutes (5am); API Weekly Crude Oil Stocks (7.30am)
Have a great day's trading