Originally published by AxiTrader
Market Summary
Safe haven assets caught a bid over the past 24 hours after the DPRK threatened the US territory of Guam in response to President Trump's threat of fire and fury. The uncertainty surrounding the two protagonists fed some big moves in Asia.
But that settled down a little in European and North American trade. At least it didn't extend in currency markets.
But stocks in the US and Europe are lower this morning as traders took some cash off the table. So at the close the Dow Jones Industrial Average is down another 0.17% this morning at 22,048, the S&P 500 is off not much at all with a tiny 0.04% dip to 2474 (but I wonder have we seen the top?) and the Nasdaq 100 lost 0.28% to close at 6,352.
European stocks were lower as well with big falls of more than 1% in Frankfurt and Paris while London lost 0.6%.
The wash up is that SPI traders have added just 1 point to prices from yesterday after what was an unexpectedly strong performance on the S&P/ASX 200.
Looking at forex, the Swiss franc was the best performer with a gain of more than 1% against the US dollar. The euro was under pressure early but fought back to be in the black – just. While the bid in the yen disappeared a little so that it is back near 110. So as forex trade stabilised a little the Aussie was able to recover from a low in the mid 7850’s and is back at 0.7885 this morning.
Gold was a major beneficiary of the uncertainty and is up $17 from this time yesterday. Oil is higher after another big inventory drawdown, and copper showed the first sign it might have made a top.
The RBNZ at 7am is the big event in our time zone today, before UK IP and trade and US PPI.
BREAKING: The RBNZ kept rates on hold and delivered quite a dovish statemetn.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Defence Secretary Mattis joined his boss warning the North Koreans of the folly of their path toward nuclear weapons. While Mattis didn't use the President's "fire and fury" language he warned of the destruction of the DPRK and its people. Mattis said the North Koreans should stop “isolating itself” and “should cease any consideration of actions that would lead to the end of its regime and the destruction of its people”.
- And President Trump was at it again. Boosting of the US nuclear arsenal as if it was a shiny new gold elevator the President tweeted “My first order as President was to renovate and modernize our nuclear arsenal. It is now far stronger and more powerful than ever before. Hopefully we will never have to use this power, but there will never be a time that we are not the most powerful nation in the world!”
- That came after the DPRK threatened to attack US bases in Guam yesterday.
- China warned that the situation on the Korean peninsula is “complicated and sensitive” with China’s Foreign Ministry saying the parties should avoid “words and actions that escalate the situation”. Secretary of State Rex Tillerson, visiting Guam, did his best to scale back the rhetoric overnight.
- Tensions are high. Markets have taken a little notice. But while this now feels like a real crisis many market analysts are saying there is nothing to really worry about - with the caveat of "yet" added in most cases. But any student of history, or casual observer of game theory, knows there is a chance for miscalculation as Trump and Kim Jong-un shout at each other.
- Chinese CPI and PPI data yesterday didn’t really move markets. At 1.4% and 5.5% respectively the data suggests a moderation of price pressures but the stabilisation of the PPI in particular is a signal that the economy is doing okay.
- On stocks I think there is a good probability we see a decent pullback in US markets over the next month or so. I don’t say that just because of the North Korean issue. Rather as I highlighted yesterday there are signs in the internals of the market that there is a a bit of exhaustion creeping into this rally. To that end there was another great article over at Business Insider overnight which highlighted something I’ve noticed this earnings season – company beats are not really being rewarded.
- Research by BAML analysts shows “Companies beating on both revenue and earnings have performed completely in line with the S&P 500 over the one- and five-day periods following their report. Normally an earnings report like that would have them beating the market. It’s the first time since 2000 that these companies have seen absolutely no reward for exceeding expectations” Joe Ciolli reports. Here’s the chart:
Australia
- The local stock market was higher yesterday as the Commonwealth Bank Of Australia's (AX:CBA) massive profit result helped assuage the fears traders had concerned themselves with over the Austrac court case. That helped the rest of the banking sector and the local market stands out as the only major stock market in the black over the past 24 hours.
- SPI traders are betting that we see a fall of 6 points today which sounds like a fair bet given the weakness in the US and European markets overnight. But then again if anything is true about this market right now it is that for the tooing and froing we have seen in the market in aggregate and in regard to specific sectors and companies the ASX200 is going nowhere. That’s how we’ve ended up with this wedge the 200 index is trading in right now. Again yesterday we saw the highs rejected once they ran into the top of the wedge.
- It will break eventually, but unless I see the SPI break 5750 or 5590, there is every chance the Wedge just morphs into a range.
- Looking at the data now my sense is that consumers are not as downbeat as the Westpac Consumer Sentiment survey would have you believe. While the index fell by 1.2% to 96.6 in August from July’s 95.5 a look at the internals suggests the outlook is more positive than the headline reading.
- Sure the headline is lower but the forward looking indicators, the ones I’d argue will impact behaviour, were far more positive than the backward looking ones. To that end I contend that if the RBA is right about growth, if the Aussie dollar doesn’t go too high, nor fall too low, and while the combination of factors keeps the RBA on hold that consumer sentiment at these levels will not be a material handbrake on the domestic economy. But it is one which will depress company pricing power and inflation where consumers have discretion.
Forex
- It was all about the safe havens and risk currencies over the past 24 hours. The Swiss franc is 1.11% stronger with USD/CHF at 0.9635, the yen has also gained but the proximity to the potential conflagration has seen it only gain 0.31% with USD/JPY at 109.99. The flip side of that was selling of “risk” currencies like the commodity bloc.
- That saw the Aussie trade down to 0.7854 at one point yesterday. It has recovered a little to be down just 0.32% at 0.7886. The kiwi, awaiting the RBNZ at 7am, is basically flat now at 0.7331, and the Canadian dollar has lost a little more ground even as oil markets rallied a touch and housing data gave a positive surprise. USD/CAD is now sitting at 1.2701.
- The euro had a bit of a ride finding support at an important technical level. It’s at 1.1755 this morning. The pound had an inside day and even though it dipped back under 1.30 it’s up 0.10% to 1.3003 now.
- What’s clear from the price action of the past 24 hours in forex is that with President Trump at the helm the US dollar doesn’t necessarily benefit from safe haven flows in the manner it might in the past. The Swiss franc and gold are likely the best representations of trader and investors fears.
- And naturally the South Korean won got hammered yesterday at 1138.56 USD/KRW is up 0.92%.
Commodities
- There was another big draw of US inventories over the last week data from the EIA revealed last night. But the 6.415 million barrel draw (against the 2.72 million expectations) and the fact that capacity utilisation at refiners hit a 15 year high seems to have been overshadowed by the build in gasoline inventories of 3.4 million barrels.
- So the rise in WTI of 0.79% to $49.56 kept prices within the recent range and below overhead resistance. Brent is up 1.11% to $52.72.
- It’s still the case that a consistent drawdown in inventories is for me the best indicator of the tightness coming in the oil markets which can feed prices higher in time. And the Saudis continue to work on their partners to improve the efficacy of the production cuts. Last night Saudi oil minister Al-falih tweeted a picture of himself greeting his Iraqi counterpart and directly referenced the oil market.
- Perhaps more interesting in a medium term sense however for the oil outlook is some research done by Reuters columnist John Kemp of the reports of US shale producers. He deduces from his analysis that the break even price for US shale is $50 a barrel. No wonder the Baker Hughes rig count has flattened out and US producers have slowed down adding capacity recently.
- Gold caught a bid in the wake of the North Korean tensions. It’s up $17 an ounce from this time yesterday and testing resistance. A break would add $20 pretty quickly. Here’s the chart showing that this is still solid resistance for the moment. Personally I hope my long is wrong. It would be a much safer world. But we’ll see.
- Copper may have put in a top. That’s the way the chart looks – too early for my system to trade however – with the rally to $2.9535 giving way to a pullback to $2.9305 as I write. We’ll see.
Have a great day's trading.