Stocks, Bonds And The US Dollar Higher

Originally published by AxiTrader

Market Summary

Global stock markets recovered overnight, bond rates rose, and the US dollar regained a bid after tensions between the US and North Korea seemed to cool a little - at least on the US side.

That emboldened the bulls to buy stocks once again with Australian, European, and US stocks all bouncing. At the close the S&P is up 1% to 2,465, the Nasdaq has risen 1.34% to 6340, and the Dow Jones Industrial Average rose 0.64% to 21,993. Buy the dip folks :S

That's helped the price of volatility dip back a little with the CBOE Volatility Index at 12.33 this morning.

The washup is that the big miners are higher offshore, which has helped lift the SPI by 23 points this morning.

Bonds are higher on the lift in risk appetite and comments from New York Fed president Bill Dudley that the market is right in expectations the Fed will begin its balance sheet reduction next month.

That helped the US dollar which is stronger across the board with the commodity bloc under particular pressure. The AUD/USD is at 0.7850 and the kiwi is back below 73 cents.

Oil collapsed on a combination of Chinese data and awful chart patterns while gold came under pressure from the stronger dollar and apparent relaxation in tensions over North Korea. That was after the US said it doesn’t want regime change. Copper is lower and looks biased lower still. Iron ore was down as well yesterday.

Today we await the RBA minutes in Australia with German GDP this afternoon a huge release for forex traders.

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

International

• How good was Japanese GDP data yesterday! The economy grew at its fastest pace in more than two years with a 1% quarterly growth rates fuelled by a 0.9% growth in consumption – not a typo. Capital expenditure surged as well. It was an all around shooting the lights out kind of print. It’s a result you have to wonder if it will be sustained. But it will be very interesting for the BoJ, for Japanese bonds, and forex markets. It’s more evidence that the global economy really is in the best state of growth we have seen for many years. Perhaps not spectacular, but certainly solid.

• Data out of China was less robust however with misses from retail sales (+10.4 v +10.8 exp), industrial production (+6.4% v 7.2% exp), and fixed asset investment (+8.3% v 8.6% exp) all contributing to what’s been a very apparent and recent softening in Chinese data flow. Indeed the Citibank Economic Surprise index for China has fallen from above 46 8 days ago to just +22 this morning. Chinese growth still looks relatively healthy – just slower than it has been.

• And speaking of slower growth EU industrial output data last night missed as well. The month-on-month print for Jun undershot by a mile with a -0.6% outturn. That dropped the year on year growth rate to 2.6%. Not terrible. But the EU data flow has been weakening for some time now. Even as the euro hit new highs.

• That, of course, is in no small part because of expectations about what Mario Draghi and the ECB might do at the September meeting. This morning German finance minister Schaeuble said he expects some sort of change in September. The folks over at ForexLive report that he said interest rates will remain low but there will be an end to ultra-loose monetary policy in foreseeable future and that most people expect the ECB to take a further step at September meeting toward exiting very expansive monetary policy. Interestingly he added the ECB needs to be careful when ending ultra loose policy saying "I hope it goes well. Yeah, thanks Wolfgang :S.

• On the markets if you were wondering why and how stocks had been levitating while the US dollar was thumped and bonds rallied the explanation seems to be the flow of money into passive investing. Those blind to valuation ETF’s that just allocate the money that flows into their coffers into the index. Reports overnight that already this year there has been $391 billion into these funds which is more than 2016’s massive $390 billion inflow. And it’s only August. CNBC has more here, and the FT takes a look at what it might mean in terms of a bubble. I’d add that what we are seeing is a change in behaviour and that will change the dynamics. It will keep stocks – in aggregate – more stable, hence the low CBOE Volatility Index, until a tipping point when all heck will break lose as retail investors head for the hills. Less volatility but bigger steps when it changes. Much fatter tails in other words.

• Readers know this is a market’s note but politics is integral to markets these days as the tensions over Korea have just proved. In the specific case of the US economy however, politics is particularly important given the market’s hopes for Trumponomics and the subsequent disappointment that it has stalled at the gates – at least in bond and currency markets. So as a behavioural economics and finance guy I can’t help but comment on what happened when the CEO of Merck (NYSE:MRK) quit the President’s business advisory council last night. Donald Trump immediately attacked him on Twitter. Any authority Trump has over business and the Congress to get his agenda up is being eroded at an accelerated rate.

• That has implications for the US economy, and for markets. Not terminal or catastrophic. Just a lower growth trajectory than many, me included, thought possible over the next couple of years for the United States under Trumponomics. It will have implications for the Fed, and ultimately even levitating US stocks.

Australia

• A good day yesterday on the local market should be followed by another solid rally after the strength in US and European markets over night. SPI traders have marked prices 23 points higher this morning to 5,692. That’s back toward the upper end of the recent range the SPI has been trading in.

• If prices can break 5750 (in SPI terms) we might see a run higher. But the SPI needs to take out 5800 and the physical 5,833 to really get a topside wriggle on.

Forex

• The US dollar is stronger across the board this morning as it cuts a swathe through forex markets. In dollar index terms it is only up 0.37% but the overnight performance is likely to reinforce that maybe the rally is not done yet. For that to happen though the highs of US dollar crosses, lows in currencies against the US dollar, need to give way. And we haven’t seen that yet.

• So the euro is lower this morning after more evidence the data flow from the EU continues to slip. That undermines the market's expectations that the economy is strong enough for the ECB to change policy soon. As I have written recently I'm less convinced than many given the ECB is a single mandate - inflation - central bank. It’s at 1.1780 which is still 100 points off last week’s low at the 38.2% retracement of the most recent EUR/USD surge. So let’s not get too excited.

• One area of potential excitement this morning, however, is the Australian dollar which looks vulnerable. After trading up above 79 cents yesterday the Aussie reversed course after the weaker than expected Chinese data dump and a recovery in the US dollar. That has AUD/USD at 0.7850, move than 60 points off its highs. But the reason the Aussie is vulnerable is not just a recovery in the US dollar, nor the recent softening of Chinese data. The Aussie is vulnerable because there is every chance the minutes of the RBA's monthly meeting - to be released today at 11.30am - will reflect a discussion on the negative impact of the strong currency on the Australian economy. With positioning mega long and most fundamental valuations suggesting the AUD/USD is fully priced it won't take much for the Aussie to trade down and through last week's lows to 78 cents - maybe lower over the next week.

• Elsewhere the US dollar bounced off the bottom of a well-established range in USD/JPY, pushed the pound lower, drove the Canadian dollar down and has knocked the kiwi well and truly back under 73 cents. I’ll write more in my Forex Today column. But for now the dollar looks bid again.

Commodities

• Crude utterly collapsed last night. After Friday’s downside range break and recovery the outlook was a little clouded even with the charts suggesting lower levels. Last night it seems traders grasped the news of Chinese refinery runs hitting a 10-month low and sold hard. Of course the technical didn’t help prices.

• So this morning we have WTI off 2.72% at $47.50 and Brent down 2.8% at $50.64.

• For WTI $46.87 looks like important support.

• Gold had a bad day of it as the US dollar caught a bid and tensions seem to have eased a little over North Korea. It’s at $1281 this morning.

• Copper's consolidation continued. Chinese data didn’t help much and the charts suggest lower levels are in the offing. It’s at $2.90, down just 0.4%

Have a great day's trading.