President Trump Remains Under Pressure

Originally published by AxiTrader

Market Summary

The US dollar has been absolutely hammered overnight. In two waves of selling the dollar has lost substantial ground - against the dollar bloc in particular – after President Trump disbanded his advisory councils and then the FOMC minutes were read as extremely dovish on inflation.

That also helped reverse some of the previous day’s selloff in bonds with the 10-year Treasury falling four points to 2.23% while the 2-year dipped to 2.23%.

Stocks on the other hand were positive with small gains at the close of between 0.14% and 0.2% for the S&P 500, Nasdaq, and Dow Jones Industrial Average. That was however off the highs for the day and European bourses put in a stronger 0.7% gain in London, Paris, and Frankfurt. That’s helped SPI traders bet that we’ll build on the solid gains of the past few days with another 16 points added to yesterday afternoons close.

That would put the S&P/ASX 200 into the 5,800/5,840 resistance zone.

And speaking of resistance there wasn’t much put up by the US dollar overnight. The Aussie had already caught a bid in Asia after bouncing off a critical juncture and finding support from a very solid base metals rally in China. It is now at 0.7928, a rise of 1.38%, after US dollar weakness and the Fed minutes. The kiwi and Canadian dollar are both up more than 1% at 0.7306 and 1.2620 respectively.

On commodity markets, oil fell again despite another impressive drawdown in US crude oil inventories. It’s down 1.66%, and through important technical support, at $46.76. Gold surged on a weaker US dollar while copper – and Chinese metals – is where things kicked off yesterday. The metal with the Phd is up 2.84% to $2.96 a pound.

Today’s Australian jobs data is going to be an important event for local markets.

Here's What I Picked Up (with a little more detail and a few charts)

International

• President Trump has dissolved two of his business advisory boards overnight as they continued to haemorrhage members as business leaders left amid a growing chorus of disquiet over his comments in the wake of the Charlottesville incident and death last weekend. The President has been directly condemned by some business and political leaders and indirectly condemned by Paul Ryan and the two former presidents Bush. He’s even copped a serve from British PM Theresa May.

• I’ll leave your own judgements on the issue to you, personally I’m very much with Jamie Dimon and Larry Fink, but the key point for this note is the impact on markets and the Trump economic, tax, and infrastructure agenda. On this front it is worth noting the press conference at which the President suggested the moral equivalence of the two sides was actually supposed to be about infrastructure – that’s why Steve Mnuchin was standing beside President Trump in the footage of the presser. Anyway, Greg Vallliere, Horizon Investments Chief Global Strategist, wrote overnight that the President is losing corporate America, that his polls are in free fall, and he now has a tattered agenda. I couldn't agree more.

• But the key takeaway traders took from the release of the minutes this morning at 4am Sydney time was that there is enough division among the members of the FOMC to potentially forestall another rate hike. There was also a signal in the minutes that the Fed will soon announce the tapering of the balance sheet, and that the group still has faith in the economy and labour market. But traders focussed on the inflation disquiet. That’s why bonds rallied and the US dollar took its second leg lower for the night (the first had been at the announcement of the disbanding of the president’s business advisory groups).

• So it’s back to the Fed as the key driver of markets, the economy, and sentiment. So on that front, the release of the minutes to the last FOMC meeting couldn’t have been more timely. While it is worth noting the data has picked up since the meeting there is a clear sense of disquiet among the members of the FOMC at the lack of inflation in the US economy. Certainly, there are members who still think it will return with gusto given the tightness of the labour market.

• And while I’m on central banks, it’s worth noting that news hit the wires last night that Mario Draghi won’t be delivering anything relating to changed ECB policy at his Jackson Hole speech this week. Interestingly though Ardo Hansson, a member of the ECB’s governing council, told an Estonian newspaper that the ECB will soon end the QE programme because of the pick up in economic growth. And you can see the message the ECB will eventually delive that rates will stay low and the balance sheet won’t be tapered because he added “After the completion of the purchase of bonds, the reinvestment of bonds already bought will continue for some time; that is, when the earlier purchased bonds expire, new ones will be bought instead”.

• Unemployment and wages data was out in the UK last night. The data showed that unemployment fell to 4.4% which is the lowest since 1975. But wages growth is stuck in neutral with just a 2.1% print. It's the same story in so many developed markets as the Australian data showed yesterday.

Australia

• The challenge for Australian economic growth at a time of very high household debt, and the headwind that poses for consumption, was writ large yesterday with another quarter showing aggregate wages growth slipping to a new record low of 1.78%. Sure it was only 0.01% lower that the weak wages growth shown in Q1 2017.

• What the data did was highlight why the RBA remains worried about this combination of low wages growth and high debt - so no material inflation adjusted assistance in reducing the debt burden - is a clear and present danger for the economy. But to me the most important salve for the economy, at least domestically and abstracting a weaker Aussie dollar, is the strength of the Australian jobs market. Strong employment growth means more Australians earning - even at lowish wages – and more Australians spending. So more money circulating through the economy.

• That's a great segue into today's labour force data for July. The market is expecting an increase of 20,000 jobs during July and an unemployment rate of 5.6%. It’s a notoriously volatile data series, so nothing is certain with this print. But traders will be watching closely to see what the Australian employment market is signalling about growth, and its potential.

• Turning to the market now and it was a good day on the ASX with a 27 point rise, (0.48%) which saw the ASX 200 close up at 5,785. That’s close to the recent highs around 5,800 and the fact the market closed on its highs is a rare bright spot for the local market recently. There remains much wood to chop between 5,800 and 5,830/40. But overnight SPI futures have rallied another 14 points implying the market will open around 5800 inside this resistance zone.

• From a purely technical point of view if the ASX200 can get up and through 5,840 would be a very bullish sign. Likewise on the SPI (which I prefer because it trades right around the clock not just 6 hours a day) if prices break up and through 5,800 (it’s at 5759 this morning) it would be an equally bullish signal. But readers know the McKenna Mantra – I respect levels and trendlines unless or until they break.

Forex

• I’m out. Out of all long US dollar, short currencies against it, positions after stops took me out last night on what remained of my positions. The price action of the dollar is a strong sign that traders are not certain that they believe the dollar is where they want to be. Of course that’s always the way for the first wave of a move. The second is the uncertainty leg as traders wonder if the previous trend is actually ended or the reversal is just a hiatus before that bigger trend reasserts itself.
  

• Behaviourally that is exactly where we are right now. The US dataflow has improved materially in the past month. Indeed it has been stronger since the FOMC meeting that last night’s minutes reflect. But the FOMC has signalled that it is uncertain about inflation even with strong jobs. And that has traders wondering about the outlook. So unless we see some solid data out of the US again soon there is a chance that the US dollar drifts again.

• Technically that fundamental position is supported in a number of currencies. The euro has held above the 38.2% retracement level of the recent upmove since last week’s lows. The Australian dollar has just had a very powerful rally of its own 38.2% retracement level, and Sterling has held onto an important uptrend. So the dollar is not out of the woods yet.

Commodities

• Crude oil has broken down and through support overnight even though the inventory data from the EIA showed another massive 8.945 million barrel draw. Traders appear to befocusedd on the lack of draw in gasoline and the fact that a big part of the crude draw was on the West coast. US production was also higher.

• Inventories will eventually get a price response if OPEC solidarity holds. But the price action speaks volumes about sentiment in crude oil markets at the moment.

• Which is why we've seen this big fall after a range break last week morph into a break of trendline support.

• Gold is higher on the back of the weaker US dollar.
  

• Yesterday I said that it looked like "Copper is topping as traders again worry about the outlook for Chinese growth". WRONG, WRONG, WRONG. And not by a small margin but by the length of the Flemington straight. Copper rallied with base metals in Shanghai as traders switched from steel to zonc and other commodities. Overnight the big global miners surged as well.

• Anyway I'll hold of on prognostications for a minute of two...but the charts suggest copper might, might, run to $3.10. Maybe.

Have a great day's trading.