Stocks Higher As Global Manufacturing Lifts

Originally published by AxiTrader

Market Summary

A good night for global stock markets with rallies across the board in Europe after solid EU GDP, and still strong PMI data gave the bulls something to cling to. Stocks in the US were also higher, although less so than their European counterparts.

At the close the Dow Jones Industrial Average set another record with a 73 point gain to close 0.33% higher at 21,963. The S&P 500 rose 5 points, 0.2% to 2475 while the Nasdaq Composite was 0.16% higher at 6,358.

The positivity has missed SPI traders however who seem to feel yesterday’s 50+ point rally on the ASX 200 fully prices overnight moves. Or at least that’s the takeaway given the SPI is currently down 5 points - from where it was yesterday afternoon – at 5,708 this morning.

On forex markets the US dollar made fresh lows in US Dollar Index terms but has stage a mild recovery against the euro and yen and given the commodity bloc currencies a bit of a beating. The Australian dollar is currently sitting at 0.7968 off around 0.4% from 7am yesterday but around 80 points off the high.

Oil was lower after reversing off important resistance. WTI is down a little less than 2% this morning. Gold is still hanging in, but also testing resistance, while copper's stellar rally recently is stalling for the moment.

Looking at the day ahead we get New Zealand employment data, Australia has building approvals data and then tonight there are a couple of Fed speeches, EU PPI, UK construction PMI and of course the EIA inventory data in the US.

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

International

• EU wide GDP data for the second quarter released overnight showed a qoq print of 0.6% and yoy rate of growth of 2.1%. That’s pretty solid really all thing considered and shows why we are seeing EU wide unemployment data fall to its lowest level since 2009. Of course, growth could still be stronger, unemployment has a long way to fall, and inflation remains largely absent. But things are heading in the right direction. The ECB is a single focused central bank with a mandate based on inflation. But this data will continue to change the conversation around the ECB governing council table when it meets. There is no rush to change policy. But the need for emergency policy has more than passed now.

• US data was a little lacklustre overnight. Indeed the Citibank Economic surprise index for the US actually dipped back a point to -44.8 last night. What drove that was prints which showed consumer spending rose just 0.1% last month, personal incomes were unchanged, and manufacturing PMI’s slipped back. Of note the ISM manufacturing print of 56.3 was still very solid, but lower than last month’s 3 year high of 57.8.

• China’s private sector Caixin manufacturing PMI was higher than expected yesterday printing 51.1 from 50.4 last month. It’s another sign the economy is still holding in well and supports the official data the previous day which shows a slowing but continued expansion.

• Former Fed chair Alan Greenspan said overnight the bubble is not in stocks it’s in bonds. Okay, thanks Al. But if he’s right, if these super accommodative policies eventually do see and inflation tipping point and bond rate surge, then that is going to be felt in stocks too. Watch bonds folks – often that’s where the trouble starts.

• And speaking of bonds it was an interesting night’s trade. US U.S10's finished at 2.25% but they printed a high of 2.32%. Likewise German 10's hit a high of 0.55% before closing at 0.49%. Honestly I’m not exactly sure what’s going on here. But in the case of German 10’s that’s a bottom side range break which could usher in a further rally. Something to watch.

• Overall global manufacturing PMI hit a three month high in July the composite index produced by JPM and HIS Markit showed. The print of 52.7 was accompanied by expansion in all of the sub-indexes. No wonder the Aussie has been bid and the RBA governor gave a warning on a higher Aussie dollar, but of a hysterical one.
  

Australia

• RBA governor Lowe crafted a very solid statement yesterday. He reiterated that Australia continues to face a positive economic outlook with “the central forecast is for the economy to grow at an annual rate of around 3 per cent”. That’s around where the RBA sees the potential growth rate for the economy which is why the RBA sees inflation and wages eventually rising again.

• But governor Lowe also highlighted the handbrake the Australian dollar – if it rallies hard from here – would pose to that growth. My take for forex markets was that the positives of the outlook slightly outweighed the possible negatives of a higher Aussie given it is the global backdrop, as well as the strength of the domestic economy, which is actually driving the Aussie dollar – along with US dollar weakness which the RBA cannot counterbalance effectively in an enduring manner.

• Specifically on the exchange rate governor Lowe said, “The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast” In other words, a higher Aussie dollar tightens financial conditions in the economy and acts as a defacto rate hike. So rates in Australia won’t be going up anytime soon.

• I’d expect Friday’s SoMP to explore the risks to the economy stronger Aussie poses – which may be a risk to the outlook for the currency all other things equal.

• A stonking rally on the ASX 200 yesterday with a rally of 52 points, 0.91%, to close at 5,772. All sectors of the market were higher to kick off the new month with utilities and energy the standouts. But even after two solid days of gains, where the index has put on around 70 points, the 200 index remains trapped inside this ever tightening wedge formation.

• With solid rises in European and US stocks overnight the chances are that even though SPI 200 traders have prices down 6 points from yesterday afternoons close that traders try to take the market topside and test resistance when the physical market opens this morning. The key level to watch is 5780 (the wedge line) and then last week’s high of 5799/5800. 5,833 – the top of the wedge – would then be the level to watch. As earnings season here in Australia really kicks off now is the time for the recent range trade to break – if that’s what is going to happen – Rio Tinto (AX:RIO) is the headline act today.

Forex

• Despite strong European data on growth and despite data in the US disappointing a little the US dollar actually fought back from fresh lows against the euro, and in DXY terms, and is actually a little higher this morning. That’s and important sign in the topping process for the euro, bottoming process, for the US dollar.

• For mine, it is now time for a pause in this US dollar selling. I say that both rhetorically and with reference to many charts across many pairs where the angle of the rally, or US dollar fall, has become more vertical. This is usually a sign of either a pause in time – sideways trading – or a pause in the rally – price consolidation – of the asset I am looking at. I still contend much is baked into the US dollar weakness cake.

• Looking at the euro specifically I’m yet to actually generate a sell signal, let alone get triggered given that last nights high around 1.1830/35 was only around 10 points below the previous night’s zenith. At 1.18 euro is hardly weak. So I’m watching and waiting – here’s the chart.

• On other pairs sterling is doing relatively best after UK manufacturing PMI bounced back with a print of 55.1 beat economists guesstimates of a 54.4 print. This is not weak by any stretch of the imagination and will add to the debate at the Bank of England this week when it sits down to discuss interest rates. It suggests to me there is a chance of a EUR/GBP rotation.
  

• Price action in the yen suggests the chance of a pause. There is now much focus on the future of prime minister Abe who has become embroiled in scandal recently. But, like the euro and many other pairs, this is about the US dollar right here and right now. For the moment at 110.27 USD/JPY is still biased lower on the charts but can build a base if 109.94 holds.

• Looking at the commodity bloc we see some of the bigger moves in forex markets. At 0.7969 the Aussie dollar is down around half a percent from 7am yesterday morning and 80 odd points off the highs of yesterday around 0.8040. My system is still short Aussie. The kiwi is down 0.6% this morning at 0.7469, while the Canadian dollar has lost 0.45% as USD/CAD continued to rally and is now sitting at 1.2531. My system is long USD/CAD.

Commodities

• What goes up, must come down, the spinning wheel got to go round. Those lyrics from the Blood Sweat and Tears song seem to me to perfectly sum up the price action in oil overnight. Sure there are lots of explanations being given this morning why WTI crude was down 3% at one point (prior to the API data) before bouncing back to to be down less than 2% Folks say it’s the OPEC production data. But we knew about that a day ago didn’t we? Likewise Brent’s fall of was sought to be explained by fundamentals.

• At least the unexpected 1.779 million build in API inventories - released at 6.30am this morning Sydney time - give a narrative for price falls for those who need it.

• But as I highlighted yesterday WTI and Brent have charted beautifully in recent years, noting overhead resistance in the $50.40 region for WTI. $50.40 was the high before the selloff. Here’s the chart – technical rule today.

• Gold too is having a technical battle. The overnight high around $1274 is coincident with overhead trend line resistance from the low last year around $1122. So it’s a level worth watching. Gold is a US dollar story right now – so where it goes very much depends on whether it really is time for a rest in the dollar’s collapse.

• Copper is still hanging tough. At $2.88 this morning it has been buoyed by positive global growth and supply issues in its market. But as I highlighted in yesterday’s video it looks like a pullback could be in the offing given the recent vertical lift in prices.

Have a great day's trading.