Originally published by AxiTrader
Market Summary
It was a volatile day to end the week Friday with the ousting of Trump adviser Steve Bannon from the White House initially giving US stocks a lift. But that bounced faded as investors still wonder if the Trump agenda has any chance of reaching the legislative phase.
So at the end of play the S&P 500 was marginally lower posting a 0.2% fall to close at 2,425. The Dow Jones Industrial Average was down 0.35% at 21,674 while the Nasdaq finished at 6216, down 0.1%.
On forex markets theUS dollar's volatile consolidation continued Friday. The Aussie is back above 79 cents at 0.7926, the kiwi and Canadian dollar are likewise stronger. Euro had an inside range day and the yen again tested toward the bottom of the 2017 range. The question on most forex traders lips right now is whether the recent recovery of the US dollar has ended. The jury is still out. We need to see a break of recent ranges.
Gold hit its highest level since US election night trading near $1301 before backing off to sit at $1,284 this morning. Oil surged 3% in a combination of a weaker dollar, a 5 rig fall last week of US shale producers, and I'd suggest a delayed recognition of the importance of the recent draws in inventories. WTI is at $48.51 while copper rallied back to $2.94.
It's not a big week of data with only UK GDP, EU flash manufacturing PMIs and Japanese CPI of any real interest over the week. That is except for the discussion around what central bankers might say at the annual Jackson Hole confab which is on at the end of the week.
BUT it is also worth noting that annual US – South Korean military exercises start today. That’s often been associated with North Korean missile tests and already we’ve see the DPRK up the rhetoric and said the US is causing “uncontrollable phase of a nuclear war” with military drills.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Steve Bannon has left the White House. He’s going to fight the good fight on the outside he says because the Trump presidency – the one he helped get elected – is already over. So expect plenty of hand grenades from outside, from Bannon, and from his website Breitbart News.
- Last week was a mess for the President, the presidency, and his agenda. Stocks are finally starting to wake up to the news that forex and bond markets noticed some months back. Friday’s price action on the S&P 500 suggested an attempt to buy the dip. But the fact that prices faded, failed to break back above the trendline for this years rally, and finished in the red is a price indication that the outlook has soured for stocks.
- My sense is 2,400 is the key. A test is possible without really threatening the outlook. But if that breaks then a move back to 2,312 is on the cards. My system is short.
- And speaking of the US, I want to highlight something I read in this week’s Barron’s. Well regarded US researcher Jim Bianco said one of the real wins that the Trump administration is having is on regulations. “We believe the effect of regulation on the economy is underappreciated, maybe because it is boring and not as interesting as tax cuts”, Bianco said.
- The article then noted (my emphasis) “despite the chaos of the Trump White House, played out daily on cable news, deregulation is going on behind the scenes. That has been evident in high levels of business optimism seen in surveys, such as the sentiment poll of the National Federation of Independent Business. Its reading vaulted higher after the election and has stayed there—even as the president’s approval ratings have sunk to record lows.
- Which is a point I keep making – President Trump, and his administration, are still prosecuting their policy agenda. Yes it has less chance of getting through the Congress. But as Treasury Secretary Steve Mnuchin effectively said in his response to 350 Yale class mates who called for his resignation – there is still much work to be done and he is going to stay the course. Interesting commentators like Greg Valliere at Horizon Investments – among others – are suggesting that the GOP members of Congress will effectively put Trump to one side and work with Gary Cohn and Mnuchin to get the agenda through. They have no choice if they want to deliver – we’ll see.
Australia
- We had another down day Friday on the local market. But it wasn’t as bad as it could have been with the market down only 32 points – as opposed to the 51 SPI traders had bet on. The market was nicely off the lows, but the local market continues to go nowhere.
- The wedge we were watching for a while has now morphed into a range. With some pretty clear parameters as you can see in the chart below. What will shake the local market from its slumber – at least in aggregate – is difficult to predict. Naturally if the S&P 500 trades down to, or through, 2,400 the overall tone in stocks across the globe will weaken. That will likely knock the ASX back toward its lows.
- But there is little reason – other than fear – that the local market should break the bottom of that range given its months of under performance of US and other stock markets across the globe.
Forex
- The dollar lost ground across the board to end the weak on the back foot, but actually higher – at least in US Dollar Index terms.
- As I have been writing recently, forex traders are in two minds right now about the outlook for the US dollar. Are we at the point where the recovery is over and a new wave of US dollar weakness is set to begin. Or, are we in the hiatus after the initial spurt before the US dollar rallies again.
- That depends on many things – not least of which is whether the Trump Cabinet can stay the course, what the ECB does – or does not – do, tensions with North Korea, and of course how the data flows. After selling off for months a few short days is not enough to give us the answer.
- In pure price action terms however the determinant of the outlook is more straight forward. We have seen currencies like the Aussie, euro, yen – and others – respect important technical levels and then consolidate. We effectively have the parameters on which we can judge the question of the next leg of the US dollars move – up or down – by these clear levels.
- I’ll outline more in the Forex Today column – for the moment though one of the more interesting battles is USD/JPY. It’s at the bottom of the 2017 range again. And while it has a little room to run to make a new low the outlook is clear if it breaks. Here’s the chart:
- Looking at the Australian dollar the lack of catalysts locally means that its fortunes are going to be driven from offshore. By the moves in Shanghai metals markets, by sentiment toward the US dollar, by what traders think about the prospects for the US dollar are going forward. 0.7960 looks like a tough top for the moment. But a break would signal a run toward 0. 8020
Commodities
- Gold's level to watch, and where supply is, was patently clear on Friday night as prices were chased back from $1300/05.
- Crude Oil soared Friday as a combination of factors coalesced to drive prices up 3% in WTI terms to $48.51. Brent is at $52.72. Friday's rally came as the US dollar weakened, Baker Hughes reported 5 rigs less on the week than previous and I think the fact that falling inventories, and the continued draw in inventories combined to open the path higher.
- At $48.81 WTI is not expensive by any stretch of the imagination. And the battle between the bulls and bears continues. This next chart - form my Eikon - neatly highlights the draw in inventories (green line) versus still high US production and rigs (orange and purple lines respectively). Can it get back to $50?
- Copper is looking for the next shoe to drop. It's at $2.94 after what was a mild recovery on Friday in Shnaghai and then again on US futures markets.
Have a great day's trading.