Originally published by AxiTrader
Market Summary
President Trump has agreed a deal to extend the US debt ceiling to December 15 relieving some of the timing pressure on US legislators this month and giving markets a salve to their worries about a government shutdown. That, along with the clear move toward negotiations on the North Korean situation, has helped stocks rally in Europe and the US and helped lift the SPI here in Australia overnight.
At the close the S&P 500 was 8 points, 0.31%, higher at 2,465. The Dow Jones Industrial Average rose 0.25% and the Nasdaq 100 was up a similar amount with a gain of 0.28%. Stocks in Frankfurt were o.75% higher, Paris rose 0.3%, but London dipped 0.25%. But SPI traders are happier and have added 21 points to yesterday afternoon’s close for a 0.37% gain.
On forex markets the US dollar fought back from weakness and is largely unchanged against the euro and pound but stronger against the yen and Swiss franc as tensions eased and stocks rallied. Of the commodity bloc the Canadian dollar did best after the BoC surprised most with another rate hike which took official rates in Canada to 1%. USD/CAD is down 1.2% as a result. The kiwi is half a percent lower this morning while the Aussie dollar is largely unchanged and sitting just below 80 cents.
On commodity markets oil continues to track higher but respect the myriad of overhead resistance – WTI is at $49.14. Gold is a little lower but might need a pullback while copper was up even though there was a lot of red on Shanghai metals markets yesterday. $3.10/11 a pound is the level to watch.
On the day here in Australia we get retail sales and trade for July. Tonight we get the ECB announcement on monetary policy along with German IP and EU GDP. In the US it’s jobless claims and productivity numbers.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Paul Ryan said the Democrats' idea of a short term increase in the debt limit was “ridiculous”. But President Trump went for the idea regardless, overnight agreeing to an increase in the debt ceiling and hurricane funding until December 15. "We have an extension, which will go out to December 15th. That will include debt ceiling, that will include (short-term spending for the coming fiscal year) and it will include Harvey, the amount of money to be determined," the President said on Air Force 1.
- Certainly this kicks the can down the road and certainly, it may make it more politically difficult at that point because it potentially means the cover conservatives had to pass a new ceiling with hurricane relief could be lost. But for markets this is a positive – because it takes away a negative and maybe, just maybe, signals that both sides of the aisle can work with the President to get things done. Or am I Pangloss???
- I’m comfortable I now have a reasonable probability that I can look to for war on the Korean Peninsula. I say that after listening to Tom Keene and Mike McKee talk to retired Admiral James Stavridis, dean of the Fletcher School of Law and Diplomacy at Tufts University, said that the risk of war had increased materially but that was off a low base. He said that he thought if there was usually a 5% chance of war on the peninsula that had increased to 10%. He further said the chance of nuclear weapons being used was lower still if a conflict did eventuate. So, a low probability of a catastrophic event – sounds a bit like fat tails in financial markets.
- And it’s clear that global leaders see negotiations as the way forward. The Chinese and Russian leaders have both again in the past 24 hours said that negotiations are the way forward. CNBC reports Putin told reporters at a joint news conference with South Korean counterpart Moon Jae-in that, “it is clear that it is impossible to resolve the problem of the Korean Peninsula only by sanctions and pressure". Elsewhere Reuters reports in a phone call Chinese President Xi told President Trump that it is focussed on resolving the tensions through talks and peaceful means. And President Trump himself said that military action in North Korea was not his “first choice, but we’ll see what happens”. That and a rally in stocks helps explain why gold has dipped and USD/JPY is up 0.5%.
- The Fed’s Beige book was out last night and given the comments of Neel Kashkari and Lael Brainard the night before I was interested to see what the book had to say about inflation. It reported that “prices rose moderately across the country” and that “the majority of districts reported limited wage pressures and modest to moderate wages growth”. So not much of a sign on inflation which is not unexpected given what we have seen but is unexpected given the apparent tightness in the labour market. My sense is the Fed will talk like it expects inflation to head back to/above 2% in the medium term when it announces its decision this month but that the confidence in another December rate hike might have faded a little. That said, if this is a normalisation process – which it is – then rates will continue to rise in 2018 unless the economy falls in a hole.
- And speaking of central banks the BoC surprised most pundits (me included) with another rate hike last night. That took the official rate in Canada to 1% with the bank highlighting the recent very strong flow of economic data (the Canadian economic surprise index is at an eye-watering +94.4 this morning) but also noting risks around excess capacity, subdued wage and price pressures, the strength of the Canadian dollar, and geopolitics. Naturally, USD/CAD was hammered and it’s off 1.12% to 1.2225 off a low at 1.2135. The bank said future moves would be data dependent and “are not predetermined” but rather will be “guided by incoming economic and financial market developments as they inform the outlook for inflation”.
- So to tonight’s ECB meeting. A Bloomberg story overnight caught traders attention as it seemed to suggest – just a day before the meeting – that the ECB will kick the decision on QE another month and that it will downgrade its inflation forecast.
- On the data front. German factory orders unexpectedly missed to the downside falling 0.7% in July against expectations of a 0.3% rise. The year on year print was consequently lower than forecast also. But at 5% it’s still pretty solid. US data showed that the ISM non-manufacturing (services) PMI printed a stronger than expected 55.3 while the Markit version of the PMI missed to the downside with a 56 print. Both numbers are solid however.
- Fed vice-chair Stanley Fischer announced his resignation overnight. He’ll leave in mid-October
Australia
- The S&P/ASX 200 had a poor day’s trade yesterday unable to even poke its head above 5,700 during trade as the banks came under pressure once again while the miners did okay. The close at 5,689 for a loss of 16 points could have been much worse with a low of 5,663 before the buyers returned.
- Overnight though the outlook has brightened with SPI traders adding 25 points to where prices were yesterday afternoon. That suggests the chance of a move back above 5,700 is very high today and the focus may actually turn to the topside and a break of a little downtrend line from recent highs.
- On the SPI that level is around 5,720 while on the ASX 200 it’s a few points higher at 5,723. So if 5,725 breaks we may get a move back toward 5,750 maybe higher.
- Australia’s Q2 GDP growth was solid yesterday with a 0.8%. Yes it was a little weaker than the upgraded forecasts from economists after the partials but such is the nature of GDP reports that it is often the case that even with the partials guesstimates miss. And yes there is much hand wringing about the year on year rate of 1.8% and the fact that it is one of the weakest outcomes since the GFC on that basis.
- But with infrastructure spending and household consumption the strong drivers of growth and with the September quarter 2016 contraction dropping out when the current quarter’s growth is reported later this year it’s pretty clear that growth is easily going to head back above 2% on a year on year basis.
- So I’m not going to join the hand wringing of many who say the economy is actually weak. I’m going to say, like Governor Lowe, that the economy is doing better, that growth will accelerate, but that there are challenges still ahead in the labour market, with wages, and with inflation. If governor Low is right then wages and inflation should improve. But let’s face it, as David Scutt pointed out at Business Insider yesterday the RBA’s optimism on growth in wages has been misplaced for 6 years will this time be any different?
- One thing that does interest me though is the collapse in the savings rate to 4.6% from 5.3% the previous quarter. It’s a derived number so it’s not perfect, but the trend to lower savings from Australian households is likely to have a limit at some point meaning that the growth in consumption will converge back toward wages growth. Something to watch for the future especially if – as the RBA contents – housing is moderating, “especially in Sydney”. Will households wish to run down savings if housing stops rising, or dips back a little in the quarters and years ahead?
Forex
- The US dollar is largely unchanged day on day with the US Dollar Index sitting at 92.28, not far above the important 91.55 support. That performance belies the early weakness which saw EUR/USD hit a high of 1.1949 – a zone which looks important on the short term charts. It’s back at 1.1918 now off a low of 1.1902 as traders await the ECB meeting and just what Mario Draghi and his colleagues might say about the impact of the euro’s strength on the economy, on inflation, and on ECB policy. It will be an interesting announcement tonight at 11.45pm AEST.
- In other currencies, the reduction in risk aversion has seen the yen and Swissie a little weaker. USD/JPY is up around half a percent at 109.31 as traders again respect the bottom of this years trading range. Readers know the McKenna Mantra – I respect levels and trendlines unless, or until, they break – and it’s clear so do many. Clearly a break would be horrific for the US dollar bulls. But it has to break first.
- The Swissie is doing a little better with USD/CHF just 0.2% higher at 0.9567. IN the UK Sterling reversed off a high at 1.3080/85 and is back at 1.3043 this morning for a small 0.1% gain.
- Of the commodity bloc the Canadian dollar swept all before it after the BoC caught most traders by surprise. You can see the impact clearly in the move on the USD/CAD 5 minute chart. The low around 1.2135 was close to important 50% Fibonacci support so we might see some consolidation above that level for a few days, or a while. USD/CAD sits at 1.2220 as I write down 1.2%.
- The Aussie is back where it was this time yesterday just under 80 cents. At 0.7995 it’s unchanged on the day after making a high around 0.8015 pre-GDP release and then falling to 4 hour trendline support at 0.7960/65 overnight. The kiwi is down half a percent at 0.7196. Traders didn’t like that run to the mid 72 cent region yesterday and the kiwi is back below the neckline of this putative head and shoulders pattern.
Commodities
- WTI continues to recover after Hurricane Harvey and just as Hurricane Irma bears down on the Caribbean and Florida. WTI is up another per cent to $49.15 and just below important overhead resistance zone. Brent is at $54.22 up 1.57%.
- XAU/USD is sitting at $1333.98 down just 0.33% but Gold might need a pullback if tensions are easing and stocks are rallying again. That’s the message I get from my charts this morning. $1,326 is the key to a potential fall of close to $20 an ounce if it breaks. That would drive it back to my fast moving average. And then we’ll see where the buyers are.
- Lots of red on Shanghai metals markets yesterday. Copper has done well though and is up 0.83% to $3.13 a pound. A break of $3.10/11 might get ugly though
Have a great day's trading.