Stocks Bounce Alongside ECB Confusion

Originally published by AxiTrader

Market Summary

Markets rallied in the US overnight with a big bounce from support in the Nasdaq which is up 1.43% this morning. The S&P 500 is up 0.88% to 2,440 and the Dow has risen 0.68%.

That rally in stocks belies the move toward tighter policy we are seeing from the globe's central bankers.

The Fed’s path is already set. But we are now seeing the Bank of England, Bank of Canada, and ECB (reluctantly) all recognise that the time for emergency interest rate settings has passed. From such low levels stocks aren’t threatened. But a new survey showing record global debt levels means there might be a handbrake on growth down the track.

Anyway in other markets, the pound surged as Mark Carney acknowledge the BoE is going to have to discuss higher rates. Euro is still strong despite Mario Draghi sending his minions to unwind his previous night’s hawkishness. And the overall tone of positivity is helping the commodity bloc. The kiwi is back above 73 cents, the Canadian dollar is strong as oil and the prospect of rate rises buoy, and the Aussie dollar is on the cusp of a breakout at 0.7640 this morning.

On commodity markets, it was a sea of green across base metals and iron ore. Gold is becalmed and oil is higher despite data showing a draw in inventory levels. WTI is at $44.80 this morning.

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

International

• Stocks are higher again this morning with the banks in the US and tech stocks leading the way higher. It’s a continuation of the buy the dip theme we consistently have seen for some time now. But I wanted to draw your attention to the Nasdaq 100 (similar outlook if you prefer the composite) which broke down through the Trumponomics trend line with yesterday’s close. But as I highlighted in my look at the break yesterday the Nasdaq needed to break the recent lows to confirm the trendline break.

• More importantly for traders what the Nasdaq did was fall to the recent lows and then bounce. So we have the market both back above the trendline and we also know the level traders are watching as key support. If that level gives way eventually a move to my garden variety 38.2% retracement level could open up. But we’ll respect the level unless or until it breaks. Here’s the daily chart:

• Mario Draghi seems to have pitched his speech badly if the rally in euro and “sources” at the ECB are correct. Reuters reports this morning that they were told Draghi was trying to signal tolerance for this period while inflation dips – he did highlight central banks could look past it – rather than signal an imminent tightening in policy. That the EU economy continues to need accommodative policy was also clear in Draghi’s speech as I highlighted yesterday. But it was equally very upbeat. It was a cracking speech. Yet Reuters reports sources told them "the market failed to take note of the caveats in Draghi's speech”.

• We’ve been to this rodeo before folks. Recall in pre-ECB meeting chatter the euro ran toward 1.13 before Mario Draghi, his deputy Vito Constancio, and ECB chief economist Peter Praet all signalled the bank would be on the dovish side at its meeting. Constancio was out last night trying to do the same again. He said there could be more slack in the EU economy than thought, that unemployment may be higher than the headline figures suggest and, as a result he said “That being the case it justifies fully what the president (Mario Draghi) said at the end of his speech (on Tuesday) that we need persistence. If we want to bring inflation to our target of below but close to 2 (percent) then we have to persist in the type of monetary policy that we been adopting.” Now Mr Constancio and Mr Draghi would like someone to please tell forex traders because this run toward 1.14 is tightening policy in the EU.

• Also in the Jim Nabors hall of fame over night – surprise, surprise, surprise - were comments from BoE governor Mark Carney which contradict what he said just a week or so ago. Rather than reiterate his “now is not the time” to raise rates comments Carney followed up his pseudo tightening – the lift in bank capital requirements the previous day – by saying the Bank of England will be having the debate about when rates will be increased – “in coming months”. Readers of this note won’t be surprised by that. But sterling traders were – GBPUSD is up almost 1% at 1.2931.

• And rounding out the central bank speakers we had BoC deputy governor Lynn again sending hawkish signals. In a speech overnight she said the drag from lower oil prices on the economy has run its course and rate cuts have done their work. “Two years later, it is our view that these cuts have helped facilitate the economy's adjustment to the oil price shock and that the economic drag from lower prices is largely behind us,” Patterson said in Calgary.

• Does German finance minister Wolfgang Schaeuble know something Mario Draghi doesn’t want forex traders to know? Speaking about the German budget overnight Schaeuble said “Our mid-term fiscal plans take into account the possibility of moderate interest rate rises and we set aside provisions”.

• And while all this hawkishness is washing around central bank land a report was released overnight showing global debt hit a new record high. The Institute of International Finance (IIF) said debt rose $500 billion to $217 trillion. That’s now 327% of annual global GDP. Chinese debt is now $33 trillion the IIF said.

• Data was light overnight but US mortgage activity fell to an 8 month low and pending home sales in May printed -0.8% versus 0.8% expected. The US economic surprise index is still languishing at -76.4. This needs to improve to assist both the US dollar and underline the Fed’s outlook for the US economy. The first two week’s of data flow during July will be very important in this respect.

Australia

• 41 points. That’s the gain that seemed to come out of nowhere yesterday as the S&P/ASX 200 finished at 5756. That’s right at the top of the recent range and the SPI traders overnight have taken prices up another 31 points in concert with the powerful rally on Wall Street. Utilities is currently the only sector of the S&P 500 that is in the red so there is every chance SPI traders have this right. It would be a weird end of financial year if we didn’t see some sort of recovery in the local market which has lagged the global equity market rally and disappointed investors over the course of 2017.

• We’ll see but the chance of a run back toward the recent high around 5,830 has to be high over the next two days to end the week and year. 5,800 is actually the level that the little downtrend line comes in at today so we’ll see how the market trades at that level. But a break would suggest a solid run higher.

• In SPI terms the level to watch is 5,750/55. Here’s the chart:

• You would have seen the coverage of former HSBC Australia chief economist and Ex-RBA board member John Edwards claim that the RBA is getting set to raise rates. Writing earlier this week for the Lowy Institute Edwards suggested rates might rise as many as 8 times over the next few years. Is that possible? Of course, it is on the outlook he suggested. Is it likely? That’s the more interesting question. IF the RBA is right about the outlook for growth then the chances of rate rise late next year and into 2019 will rise materially.

• So let's not discount him out of hand. For me, the key remains consumers. What they earn, what they spend, and how they approach their massive pile of debt. In many ways we should all hope Edwards is right. That would be a good economy to be a part of.

Forex

• Central bankers to the fore once more. That’s the story of currency markets again overnight as Mark Carney appeared to do a monetary backflip and Mario Draghi sent out his minions to do a pirouette. I’ve highlighted what both central bankers communicated above and the end result was a higher euro and stronger sterling over the past 24 hours.

• GBP/USD is at 1.2927 at present with a gain of 0.88%. The high overnight was around the levels of the June highs before the pullback in the pound and this will be a level traders are now looking at. A break and we’ll see the pound back testing very important resistance at 1.3050/60 where many levels over multiple time frames converge.

• Euro dipped after the “sources” story broke. But at 1.1377 it’s still up 0.35% on the day. There is important overhead resistance which combined with the ECB pirouette could provide a gap on gains going forward.

• Elsewhere the Canadian dollar is having a cracker and has driven USD/CAD down to support around 1.30. It’s at 1.3031 down 1.37% this morning. The yen is largely unchanged at 112.26, the Kiwi is back above 73 cents at 0.7309 up 0.55% and the Aussie is roaring.

• At 0.7640 the Aussie is on the cusp of a great leap technically. This level was the Fibonacci projection from the original rally which stalled below 0.7515/20. If the Aussie can hold above here then the next technical projection comes in at 0.7740. That sound ridiculous in many ways. But when you have a recovery in iron ore, base metals, and risk appetite (stocks rally) then the preconditions are there for a higher Aussie. Throw in this potential technical break and a weaker US dollar and who knows. The Aussie might just surprise everyone and catch up with the majors.

Commodities

• Oil is higher again this morning with WTI up 1.15% to $44.75 and Brent up 1.48% to $47.34. These rallies were despite EIA inventory data showing an increase in crude stockpiles of 118,000 barrels compared to forecasts for a 2.6 million barrel draw. You know you back in a market with a bullish bent when that is ignored. It fits with what I’ve been writing about the pessimism that pervades oil markets toward the end of the 5-week slide.

• Rather than worry about the surprise build in inventories traders focussed on EIA data showing US production fell 100,000 bpd in the week the data was collected. That, together with the much bigger than expected gasoline drawdown of 894,000 barrels were what traders focussed on rhetorically.

• In price terms though, we are seeing a reaction from the weakness. I wrote of the turn and my system going long already this week. Now that the 23.6% retracement level and my fast moving average have been best the focus now shifts toward the 38.2% level at $45.78 as the next target. Here’s the daily chart:

• Gold is a little higher but lagging as bonds rallied and stocks shot higher. It’s at $1.249 this morning.

• Copper, base metals, and iron ore have had a good couple of days. The base metals complex is a sea of green with the exception of tin while iron ore was on fire again in Chinese trade yesterday. Copper itself is at $2.67 and climbing. $2.69 is first resistance and then it could climb toward $2.75.

Have a great day's trading.

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