Stocks In The Red As Aussie Crushed

Originally published by AxiTrader

Market Summary

For the most part, markets spent the past 24 hours or so reflecting on what the FOMC's decision and more hawkish than expected tone means for them.

That's meant that the US dollar is a little weaker against most pairs - but not the Aussie dollar - as traders bet the Fed will struggle to deliver on its rate rises. For stocks, the question is whether the rundown of the balance sheet is a paradigm-shifting move.

So US stocks ended in the red with the S&P 500 closing down 0.3% to 2,500. The Dow Jones Industrial Average dipped 0.24% at 22,359, and the Nasdaq 100 was about half a percent lower at 6,422. Europe, save the FTSE 100, were mostly higher so they'll have some catch-up selling to do this afternoon when they kick off.

Here at home after an appalling day of intense selling on the S&P/ASX 200 yesterday with the market falling 54 points to close at 5,655 - SPI traders have marked prices up 17 points overnight.

On forex markets, the US dollar pulled back a little from the post FOMC surge. Euro is at 1.1938, up 0.4%. The pound gained 0.65%, USD/JPY is higher, but off its highs at 112.48. But the Aussie and kiwi were absolutely poleaxed with AUD/USD down at 0.7932 for a loss of more than 1% since 7 am yesterday.

Amazing what a central bank governor intimating he won't get harassed into raising rates will do to bullish expectations.

Elsewhere US 2's and 10's remain relatively elevated at 1.44% and 2.27% respectively. Gold is down below support at $1291, copper likewise is under pressure and iron ore collapsed in Shanghai yesterday. Crude is a little stronger as we await this OPEC meeting tonight.

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

International

• Germany's economy is expected to bounce back from the lull at the start of Q3 the Ministry of finance said overnight. Reuters reported that recent economic data indicate that the solid upswing will continue also in the third quarter," the ministry said, adding that business morale remained high and German exporters were expected to benefit from a global economic recovery. Yep the global recovery is real which makes things very interesting for markets as a central banks move to withdraw stimulus.

• Also last night the release of EU consumer confidence pointed to the economic recovery underway across the zone. The EC said confidence rose from -1.5 to -1.2 this month which was a better than expected outcome.

• China's credit rating was downgraded yesterday afternoon by S&P from AA- to A+. That puts S&P on the same footing as the other two big global ratings agencies. The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China's economic and financial risks," S&P said.

• The BoJ was on script again yesterday with its decision to hold policy where it currently sits. BoJ governor Kuroda said at his press conference that "price moves remain weak and there's still some distance in achieving our price target. The BOJ will continue its powerful monetary easing to achieve 2 percent inflation at the earliest date possible...We will take further monetary easing steps if necessary."

• The new kid on the block though - BoJ board member Goushi Kataoka - dissented from the decision (which was 8,1 to hold) and is in favour of even more stimulus to get inflation higher. It's clear the BoJ will be the global central bank laggard.

• The clampdown on banks, companies, and countries that do deals with North Korea appears to be gaining currency. The PBOC has told its banks to implement the sanctions according to sources who spoke to Reuters yesterday. Treasury secretary Mnuchin said no banks should be dealing with the DPRK and President Trump is using an Executive Order to further tighten the screws.

Australia

• An awful day in which only 35 stocks of the S&P/ASX 200 index closed the day higher speakers volumes to the deterioration in sentiment across the market as a whole her in Australia. The close at 5,655 was down 54 points on the day as the banks, miners and pretty much every sector came under pressure.

ASX200 Daily (Source: Investing.com)

• SPI Traders have somehow found 19 points they want to mark prices higher for the day ahead and perhaps we will see bottom feeders come in at the lower end of the trading range. But the only positive thing I can really say this morning is that at least the market closed off its lows.

• Turning to the RBA now and for the second day in a row an important voice at the RBA talked positively about the global economic recovery. For me though it was the discussion of the local outlook and in particular the high level of debt in Australian households.

• Governor Lowe is widely assumed to be the kind of central banker who didn't want to add any speculative fire to the economy by lowering rates in Australia recently. That's even though he has said a couple of times the economy could have benefitted from cuts at the margin. But yesterday he also showed himself to be a central banker not inclined to raise rates of rock the apple cart too much either.

• The impact of debt on household consumption is also an area he has paid attention to and yesterday he said "It is likely that higher levels of household debt change household spending patterns. Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long. Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to".

• On its own that's fairly interesting but benign. However when you add his last couple of sentences from the speech there seems to be a clear message that rates aren't rising in a hurry. "In its decisions, the Board has been careful to balance the benefit of providing this support with the risks that can come from rising household debt. As things currently stand, we look to be on course to make further progress in reducing unemployment and moving towards the midpoint of the medium-term inflation target. This would be a good outcome," Lowe said.

Forex

• Lots of moving parts in forex markets overnight. The overall synopsis is that within an overall more positive tone toward the US dollar individual currency pair events, news and sentiment dominated this US news.

• As I wrote in the introduction that's in some part because traders don't exactly agree the fed will raise rates as much as they say they will. But it's very interesting that the market wants to disavow the Fed's actually moved and embrace the ECB's prospective moves. That's a real risk for these US dollar bears over the medium term.

• Anyway, the euro is higher this morning but off yesterday's pre-FOMC highs. The pound leapt as traders bet Theresa May is softening Brexit - It's at 1.3577. USD/JPY is above the 200 day moving average and sits at 1.1243. That's about 30 points below the high.

• Of the commodity bloc the Aussie was absolutely belted yesterday. It's at 0.7932 now down 99 points - 1.23% - from yesterday's highs. In my pieces yesterday I said I thought lower levels beckoned and had penciled in 0.7850 as a target. I retain that view and will expand on it in my Aussie dollar piece this morning.

• The kiwi is down in sympathy, and I think some concerns about a possible Greens/Labour coalition forming government at tomorrow's election. NZD/USD is at 0.7310 down about 0.6%

Commodities

• Gold is down and through support as traders grapple with the impact of the Fed's decision - and I think the trend to higher global rates the RBA has spoken about two days in a row - and what it means for the precious metal. The settling of tensions - to a certain degree - on the Korean peninsula has also sapped golds strength as have higher bond rates, and a stabilisation in the US dollar.

• Gold's rally has been very coincident - that is it's been driven by short-term fears and price action in other markets - so its pullback has to run the course as these coincident drivers recede until real long-term value emerges, or fear rises once more.

• WTI is sitting at $50.55 and ready to roar if there is anything remotely bullish out of this OPEC meeting.
  

• Copper is dropping had a bad day with much of the metals complex and iron ore which dropped 3% in the past 24 hours. At $2.91 a pound copper has now taken out the suppoprt and a run to $2.83 is possible.

Have a great day's trading.