Originally published by AxiTrader
Quick Recap
Volatility is volatility. But it’s also two way as plenty of traders were reminded over the past 24 hours. Stocks rallied hard after Fed governor Lael Brainard remained dovish but they didn't recoup all their losses nor did bond rates rally.
So traders aren't exactly clear and free. But another interesting day beckons
What You Need To Know
Here’s what I picked up
International
- Asia and Europe had a tough day at the stock market but US markets bounced nicely with the Dow Jones Industrial Average up 239 points, the Nasdaq 100 up 81 and the S&P 500 31 points higher. It’s all a result of the waters being further muddied by competing comments and the fact that Lael Brainard remained steadfastly a monetary policy dove (see below)
- Volatility is two way and today’s recovery doesn’t necessarily mean we’ll settle back into quiet trade even though that would be a nice result. Volatility clusters usually and the proximity of the Fed could push traders to the side making trad a bit more skittish.
- On thing worth noting, before I move onto the Fed directly, is that US 10’s remain elevated and USD/JPY is still under pressure. Just something to watch.
- I recently watched Marvel’s Civil War movie which pitted Captain America against Iron Man. And I have to say that comments from Lael Brainard overnight, when read against the defence of the regional Fed system from Fed presidents last week on Capitol Hill – including that it was a good counter to Washington – reinforce the view that there is a real dichotomy of thinking within the Fed.
- Brainard essentially said there is no need to raise rates now because inflation hasn’t picked up and the labour market can keep expanding without pushing inflation up. “The response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response” she said. Clearly Brainard remains an unreconstructed dove which meant all the worry over this speech was misplaced.
- That’s something Stephen Stanley, chief economist at Amherst Pierpont Securities picked up on in a note according to Reuters. “She spins any fact, positive or negative, as a reason to stay easy” he wrote meaning the idea she might have had a road to Damascus hawkish moment “preposterous”.
- In the end the key phrase, among many, was Brainard saying “Today's new normal counsels prudence in the removal of policy accommodation”
- Elsewhere Neel Kashkari, president of the Minneapolis Fed, was his dovish self urging caution and patience while Dennis Lockahart, the Atlanta Fed president, said “I believe the economy is sustaining sufficient momentum to substantially achieve the Committee's monetary-policy objectives in an acceptable medium-term time horizon” and as a result “I am satisfied at this point that conditions warrant that serious discussion”
- It’s going to be one heck of meeting – but we get no more leads from the Fed itself.
- Retail sales on Thursday night and CPI Friday now take the preeminent position as the key markets drivers. Implied probability of a September hike has fallen to 15% this morning - so no one really thinks it will happen. Besides maybe me. But even I acknow;edge the Fed has nothing to lose - except credibility - by waiting again.
Australia
- I prefer to look at the SPI 200 when I’m evaluating Australian stocks from an index level. The reason for that is the SPI trades around the clock, like forex, and so picks up the full moves in global markets and the reaction and impact on Australia. So while the S&P/ASX 200 broke important uptrend support yesterday at 5250 the SPI did not. Rather it found support in out day trade and then it has bounced with US stocks overnight.
- That means that local stocks get a double whammy today of a 79 point gain in the SPI 200 after yesterdays 120 point fall with left the ASX 200 at 5219. The second whammy is the bounce of the SPI of support. Today we’ll see the physical bounce back above 5250 creating a false breakout and then we should see it back at 5300 by the close.
- That said here is the SPI chart showing the uptrend from the Jan lows remains intact.
- Fundamentally today we’ll get an updated read on the Australian economy from a speech from RBA assistant governor Chris Kent around 8.30am and then the NAB business survey at 11.30. The NAB is of particular interest given that we saw some weakening in the headline conditions and confidence index last month as well as the sub indexes.
Forex
- The Australian dollar found solid support in the accumulation zone between 0.7520 and the August low of 0.7487. The actual low, according to my MT4 terminal, was 0.7493. Certainly the Aussie was supported by the little bit of weakness from the US dollar which lost 0.2%, but it was fundamentally supported by the reversal in risk appetite we’ve seen in US stocks even if US 10 year bonds are holding near Friday’s close.
- Interestingly, in the context of the risk recovery after Lockhart and Brainard’s comments USDJPY is 0.84% lower perhaps reflecting that not all traders are completely confident the fear trade is over nor that the Fed is out of play for the month. USDJPY is almost always the bellwether for risk sentiment in global forex markets and its move back under 102 (its at 101.83) suggests residual concerns that the two day spike in volatility may not be the end of it. 101.90 is the support level.
- Elsewhere on forex markets the USD/NZD is up again to 0.7349, the USD/CAD is largely unchanged at 1.3049 and the EUR/USD is at 1.1232 also largely unchanged.
Commodities
- Oil’s volatility ticked higher last night as it responded to the recovery in stocks (not the other way around as many traders had become used to). Having made a low at $44.70 West Texas Intermediate rallied all the way back to sit around $46.10 this morning – up 0.48%. Volatility is two way folks.
- The recovery was despite the news from OPEC that its competitors are likely to increase production in 2016 and 2017. OPEC said new fields from US shale oil producers would come on line. “It is expected that there will be higher non-OPEC production in the second half of 2016 compared to the first half," the organisation said. That comes when OPEC is also forecasting lower daily demand in 2017 of 32.48 million barrels per day down around 530,000 from the last forecast.
- OPEC members themselves are pumping at near record levels. So the question that poses is whether it puts more pressure on the Saudi’s and Russians to get a deal across the line at this months meeting. Or, whether it suggests the futility of such a move as having a sustainable impact.
- Turning to Gold now and it’s interesting that the yellow metal has been relatively quiet given all the volatility over the past two days. That suggests to me that my working hypothesis that Gold’s rally is in part a result of the move into negative rates by so much of the global bond curve is not far from the money. Even with overhead resistance near last week’s highs given the big fall in stocks on Friday in the US and then in Asia and Europe yesterday gold should have reacted. Something to watch.
- Techincally support is $1302 and resistance is $1352 for the moment.
- Copper, having looked decidedly wobbly at one point yesterday is back and sharply so at $2.1025 a pound this morning.
Today's key data and events (all times AEDT)
- Australia - RBA Assistant Governor Kent Speech (8.30am); National Australia Bank's Business Conditions (Aug), National Australia Bank's Business Confidence (Aug) (11.30am)
- New Zealand - Food Price Index (MoM) (Aug) (8.45am)
- China - Urban investment (YTD) (YoY) (Aug) (12pm); Retail Sales (YoY) (Aug), Industrial Production (YoY) (Aug) (3.30pm)
- Japan - BSI Large Manufacturing (QoQ) (Q3) (9.50am)
- Germany - Wholesale Price Index (MoM) (Aug), Wholesale Price Index (YoY) (Aug) (n/a); Consumer Price Index (MoM) (Aug), Consumer Price Index (YoY) (Aug), Harmonised Index of Consumer Prices (MoM) (Aug), Harmonised Index of Consumer Prices (MoM) (Aug) (4pm); ZEW Survey - Current Situation (Sep), ZEW Survey - Economic Sentiment (Sep) (7pm)
- EU - ECB President Draghi's Speech, ZEW Survey - Economic Sentiment (Sep), Employment Change (YoY) (Q2), Employment Change (QoQ) (Q2) (7pm)
- UK - Retail Price Index (MoM) (Aug), Retail Price Index (YoY) (Aug), , CLG House Price Index (YoY) (Aug), Producer Price Index - Output (MoM) n.s.a (Aug), Producer Price Index - Input (YoY) n.s.a (Aug), Producer Price Index - Output (YoY) n.s.a (Aug), PPI Core Output (MoM) n.s.a (Aug), PPI Core Output (YoY) n.s.a (Aug), Producer Price Index - Input (MoM) n.s.a (Aug), Core Consumer Price Index (YoY) (Aug), Consumer Price Index (YoY) (Aug), Consumer Price Index (MoM) (Aug) (6.30pm)
- Canada - Nil
- US - NFIB Business Optimism Index (Aug) (8pm); Redbook index (MoM) (Sep 9), Redbook index (YoY) (Sep 9) (10.55pm); 52-Week Bill auction, 4-Week Bill Auction (1.30am); 10-Year Note Auction (3am); Monthly Budget Statement (Aug) (4am); API Weekly Crude Oil Stock (6.30am)
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader