Safe Haven Assets Rally As Trump Dials Up The Rhetoric

Originally published by AxiTrader

Market Summary

Stock traders across the globe have found the building tensions between North Korea and the USA as a reasonable catalyst to finally take some money off the table. That’s seen some decent falls overnight in Europe and the US.

In Europe the FTSE lost 1.44%, the DAX fell 1.15%, and the CAC dropped 0.59%.

Across the Atlantic, the Dow Jones Industrial Average lost 205 points for a 0.93% fall. But it was the S&P 500 and the Nasdaq where the volatility materially increased with losses of 1.44% and 2.13% respectively.

Naturally, that’s shot the CBOE Volatility Index higher with both the 1 and 3-month measures above 16% for a 44% gain on the day. (Editorial - useless coincident indicators!!!).

And equally naturally SPI futures have been hammered lower. They are currently sitting 68 points, or 1.19%, lower than yesterday afternoon's close.

Forex markets, having already reacted to the face off, were a little calmer. The yen played safe haven catch up to the Swiss franc while the US dollar lost ground against both these currencies and the euro. The pound, Aussie, and Canadian dollar were all lower while the Kiwi continued to react to RBNZ comments yesterday and was hammered. The AUD/USD is at 0.7874 as I write.

Gold has caught the safe haven bid, crude collapsed on Russian comments, and copper is lower.

Tonight is huge folks, at least for expectations about what the ECB and Fed might do. We have a raft of CPI data in Europe and in the US CPI is also out after what was a lower than forecast PPI outcome last

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

International

• After North Korea said yesterday it would develop a plan to shot missiles across Japan and within 30-40 kms of Guam president Trump has doubled down this morning saying that perhaps his fire and fury language wasn't tough enough.

• President Trump said (my emphasis), “The people that were questioning that statement, maybe it was too tough, maybe it wasn’t tough enough… It’s about time somebody stuck up for the people of this country and other countries…We’re backed 100% by our military”. It’s a fair bet Kim Jong-un really needs to get the message that Defence Secretary Mattis, and the President, are delivering that he’ll get annihilated, his people will too, if he keeps pushing.

• No doubt though somewhere in his brain he’ll be thinking they won’t possibly do that and risk a confrontation with China. That’s what worries me. North Korea can overplay it’s hand and force a response. The very notion they’ll shoot a missile across Japan to drop just 30 or 40 kilometres from Guam is dangerous enough. There is room for mistakes and missteps here. Rex Tillerson, and the Chinese have a job to do.

• Naturally the impact has been negative for risk assets and positive for safe havens. Stocks seem to have embraced the belligerence between the two leaders as the catalyst for selling. Bonds are lower as well in the US and particularly Germany. But the stock market weakness is starting to kick off toward what could be some heavy selling. Over the past couple of days I've outlined the fundamental pointers that suggested exhaustion in stocks and last night’s move below a level I've been watching closely for a few weeks now (2456 on the Axitrader CFD and 2458 on the physical S&P 500) could be an indication that - as I intimated earlier this week - the high for this run is in.

• 2423 in CFD terms (2425ish for the physical) is the next level to watch is a trend line stretching back to last November as support. My system is short on the break of the above levels last night.

• On the data front in the US PPI undershot expectations with a fall of 0.1% in July against expectations of a 0.1% increase. Core PPI was the same result, the same miss. With year on year PPI in headline and core terms falling to 1.9% and 1.8% respectively. It really looks like it will fall to wages to drive US inflation back to the Fed’s 2% target.

• And on that front, New York Fed president Bill Dudley said overnight “Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2 percent”. You can see how some of the headlines that flashed over the wires suggested Dudley was on the dovish side.

• I’ve run out of time but keep an eye on the actions of authorities in China over the steel market price jump. They are trying to rein it in. Equally I’d say that the rally in iron ore – following steel higher – makes no sense when you think about why steel has been going higher. Just something to watch.

Australia

• I don’t need to say much about the local stock market this morning. Yesterday’s price action said it all. Again the fraidy cat market couldn’t kick on with things. No of course the ASX’s rally petered out around the same time as the AUD/USD faltered at the 4 hour down trend line at 0.7910 yesterday which suggests the buying might have been from offshore. And the coincident fall in the prices of both the S&P/ASX 200 and the Aussie suggest once the buyer stepped back the tractor beam of lower prices in Asia and concerns about the North Korea-US face off were to the fore once again.

• Here’s the chart of break and then close back inside the wedge. You’ll not I’ve added an extra line coincident with the recent false break tops which constrained prices yesterday. As I think I wrote here, but certainly said in my morning video – which is very good by the way – I expect the wedge to flatten out to a range.

• That’s as long as US and global stocks don’t kick off into a deep funk. That is a strong possibility if that S&P 500 trend line I’ve highlighted above breaks. SPI traders have marked prices down 68 points from yesterday’s close. And while the ASX has had some weird price action – marching to the beat of its own bongo drum – lately, it will be hard to resist the weakness in the US and Europe.

• Watch the SPI. If 5,590 (yes I know miles away) gives way then we’ll see a big fall. But as the range low 5,590/5,600 would be expected to hold initially. On the physical, the levels of support are 5,525/55.

Forex

• As I noted yesterday, the US dollar is not benefiting from safe haven flows at the moment because it is one of the protagonists. Europe is not and is far enough away to stay out of the mess, Switzerland certainly is a real safe haven, and even though Japan is caught between the two belligerents the very nature of its national balance sheet means the yen too is acting as a safe haven.

• So this morning we have the US Dollar Index down 0.2% at 93.36, EUR/USD is up 0.17% at 1.1777, while the yen played catch up and has gained 0.77% with USD/JPY falling to 109.21. USD/CHF is down 0.17% at 0.9619.
  

• The Aussie hasn’t done too badly against the US dollar – all things considered - and is, along with the pound, down about 0.17% against the dollar at 0.7869. But that is 40 odd points off the high of yesterday. GBP/USD is at 1.2977 after another bout of poor UK data. The Canadian dollar continues to suffer and is down 0.32% after oil collapsed and house price growth slowed. USD/CAD is at 1.2738 up 0.31%.

• And last but not least the kiwi has been hammered over the past 24 hours. That comes after a dovish RBNZ statement and comments from governor Wheeler that he’d like a lower NZ dollar. He’s got that today with NZD/USD off 0.85% at 0.7275. Ouch.

Commodities

• We know that Russian president Putin was keen to be part of OPEC’s efforts to stabilise the oil market. But on many occasions we’ve also heard from the Russians, and from Russian oil producers, that once the deal is complete and free production reigns again that Russia will prime the pump. But markets have ignored that for the moment as the Saudis worked hard to get the focus on the inventory drawdowns and the discipline within the OPEC/non-OPEC deal.

• But last night traders focussed on comments from Gazprom (MCX:GAZP) which said it considers it “economically feasible” to resume production at one of its shuttered fields after the end of the OPEC/non-OPEC deal.

• So this morning WTI is right at the bottom of the recent range, down 2.25% at $48.45. Brent is at $51.79 off 1.69% overnight.

• Gold is a natural safe haven at times like these as I have been writing for some time. It’s up another $8 an ounce at $1,285 this morning. It has now broken the trendline I’ve been talking about is on track to test $1295/$1300. Last night gold got a filip from two big hedge fund managers, Ray Dalio, and Jeff Gundlach both who – in their own way – said it’s going higher and should be part of an investors portfolio.

• Yup, copper is showing all the signs the top might be in for this run as I suggested yesterday morning. It’s off 0.84% this morning at $2.9055.

Have a great day's trading.