Originally published by AxiTrader
Market Summary (7.12 am)
As traders and investors await Jerome Powell’s testimony on Capitol Hill tonight it seems the vote is for a continuation of what we already know about the fed and the path it has set out.
That much seems clear from the price action in US bonds where the 2's are back at 2.25% and the 10's at 2.86%. That’s continued to release the pressure on stocks with the S&P 500, Dow and Nasdaq 100 all up north of 1%. Likewise the weakness we saw in the US dollar during Asia washed away also with the US Dollar Index largely unchanged.
Data in the US was mixed with home sales down but the Dallas Fed manufacturing index higher. What’s going to interesting tonight as Powell is quizzed by lawmakers is how he frames the outlook for and strength of the US economy. That will be vital as the market parses his thoughts to garner even the slimmest of hints as to whether it’s 2, 3, 4, or more rate hikes by the FOMC this year.
My sense is he’ll play a straight bat. Or at least try to. But that it will be hard for him not to sound hawkish.
Back to the price action now and forex markets are best characterised as simply tooing and froing while they wait for Powell. Hi opposite number at the ECB, Mario Draghi, overnight signalled optimism but patience and a steady hand on the monetary tiller in the EU. That has EURUSD back at 1.2310 off a 1.2354 high.
The Aussie to is off its high of 0.7893, not quite the 79 cents I suggested yesterday in my Australian dollar piece but not far off. It’s trading 0.7850 this morning. The kiwi is at 0.7311 as it retains its resilient self while the Canadian dollar lost 0.36% at 1,2680 in US dollar terms. Its data has been horrible lately.
Turning to commodities now and oil is still well bid with both Brent and WTI higher by 0.58% and 0.37% respectively. WTI is currently trading at $63.92 and Brent is at $67.48. Gold is a little higher at $1332 while copper has dipped ever so slightly to $3.19 as the range stays intact.
On the day ahead we get HIA new home sales here in Australia, then tonight its Euro Area business, industrial, and economic confidence along with preliminary German inflation for February. But the big show, the very big show, is in the US. Not only is Powell speaking but we also have durable goods, and the goods trade balance for January. Case Shiller home prices are also out along with the Richmond Fed index and the Conference Board’s consumer confidence index.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Tariffs, a war over steel, indeed a trade war, became a little more likely last night after President Trump said he wanted to bring back steel jobs and if that meant via tariffs then so be it. Yes it’s against the orthodoxy of modern finance and trade relations and yes it could be the thin end of a trade war wedge. But President Trump is likely to believe it both serves and plays well in his base. So we might have to face this future. And as I wrote yesterday the Chinese are already getting upset with North Korean sanctions targeting Chinese firms so this is likely to be more fuel on the fire. Not to mention other countries like Japan, Korea, India, the EU and even Australia (via iron ore) which may be impacted.
- The world is coming to terms with what Chinese President Xi’s power grab means for global structures, alliances, and the economy. There are plenty of good angles but I like this one from Bloomberg that says the “world braces for more rule-bending by China”. This one at the FT was interesting as well. As traders and investors, we need to get our heads around this one. It’s going to be a monster macro theme.
- BoJ governor Kuroda was in parliament yesterday and said he has no plans to revisit why the bank had undershot its inflation target. I’m sure he, like many other central bankers, would love to know what the heck is going on.
- It’s a topic ECB President Mario Draghi ruminated about last night as well. Speaking to the European Parliament’s economic committee Draghi said, “given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures. This is particularly visible in the labor market”. He added optimistically however, “nonetheless, these factors should wane as the economic expansion continues and unemployment further declines. Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures”. That’s a message of patience and staying the course. Things at the ECB might change if Jens Weidmann takes the helm later this year. But for now Draghi is a steady hand on the tiller. One thing other thing Draghi did highlight was that an extension of QE has NOT been discussed.
- Rounding out my central banker coverage this morning is James Bullard, that Olympic level class dove, who said bonds should spike higher from here, and again reiterated that if the Fed raises rates “substantially” from current levels it could tip the economy over. Bullard said, “I have been a little bit concerned that the committee goes too far too fast. If we are going to do a lot of rate hikes we have to have data that supports that”. Yes indeed! I’m sure that his colleagues would agree if they are to shift from their “gradual” to Bullard’s “substantial”.
- And on the data front last night it was mixed in the US with new home sales underwhelming badly with another big fall in January. Coming after December’s 7.6% fall the 7.8% fall in January was well below forecasters expectations of a rise of 3.8%. On a more positive note however the Dallas Fed manufacturing index rose to 37.2 from 33.4 last and against expectations of a fall to 33. The CESI for the US dipped to 37.7. Europe is at -0.3, Australia is at +0.3, China +15.7, the UK +1.5 and Japan +19.7.
- The EU said last night it is ready to regulate Bitcoin. It was a positioning move before March’s G20 meeting but one the EU is likely to follow up on given Valdis Dombrovskis, the EU financial services boss said, “we do not exclude the possibility to move ahead (by regulating cryptocurrencies) at the EU level if we see, for example, risks emerging but no clear international response emerging”.
- And finally, on the global front, UK Labor leader Jeremy Corbyn has set up a showdown with PM Theresa May. Bloomberg reports “Corbyn said Labour supports a customs union with the European Union after the U.K. leaves the bloc, setting the stage for a showdown with May as it’s a policy pro-European rebels in her Conservative Party are willing to back”. Crucially he said this would avoid the need for a hard border in Ireland.
Australia
- It’s going to be another stonkingly good day on the ASX according to SPI traders who have added another 31 points to yesterday’s very solid close on the physical ASX 200 at 6042. So we’ll be edging closer to the 6070/75 region where the big sell-off happened in SPI terms. And we are edging closer to 6,100 in the physical.
- Of course, the local market has been supported by earnings, we saw that last week when the S&P 500 was down and the S&P/ASX 200 remained strong with a solid bid. But as we get closer to the recent highs its fair to say the global backdrop may play a bigger role. That said though, with the S&P 500 up another 1% there is a chance of an outperformance today here in Australia. If the SPI can climb back to it’s highs we might just see the ASX with a 6,100 print.
- I’m one of the refugees from Sydney who moved 200 kilometres up the coast around 18 years ago so it was interesting to see the yarn in the SMH yesterday about Sydneysiders leaving Sydney. It’s worth a look if you didn’t get around to read it. Essentially it’s all about amenity, something sadly lacking in many parts of my old home town. Why’s that important for this note? Infrastructure and growth. The NSW government is going to have to continue to build in Sydney and increasingly as the diaspora heads up the coast what we are seeing in Newcastle will have to be replicated in other areas. Sydney’s loss is overall the states gain – at least from an economic growth point of view.
Forex
- Citibank says that the fall in stocks in February will drive US dollar buying at month’s end. That’s something I picked up from Ant Barton at MNI News via Twitter this morning. It’s the reverse of what we saw at the end of January when readjustments were driven by the sharp rally in stocks. But we’ve seen a decent bounce in US and global stocks so my sense is this may not be as disruptive as when the team at Citi wrote the note – I’m guessing – late last week.
- And speaking of the US dollar it retains a precarious perch. It, in DXY terms is still close to that recent low at 88.26 when you scale out and look at the big picture. But as the euro chart shows the more immediate backdrop has the euro in the precarious position just shy of a break lower. That’s important because if the euro breaks down and through 1.2270, runs toward 1.22 and stalls or breaks, it will send a big signal about the outlook for other pairs.
- Yesterday I wrote a piece explaining euro weakening. It’s still relevant today, even though Powell is likely to dominate proceedings.
- Also still relevant is the EUR/USD chart and the 1.2259 low from last week as the key sign euro is heading lower – perhaps to the 1.20/21 region. Though it is worth noting that both 1.2259 and 1.22 need to break first.
Commodities
- Oil was higher again overnight as the comments from the Saudis I highlighted yesterday continued to resonate, as the US dollar came under a little pressure and after both WTI and Brent closed above their 61.8% retracement levels of the recent down move on Friday. It’s a reasonably bullish combination when you throw in inventory data that wasn’t too bad last week – at least against expectations. Both Brent and WTI are butting up against some weekly resistance but with the former above the $67.40 level I noted in my markets Morning video yesterday the chances of a run back to $70 or $71 a barrel are growing.
Have a great day's trading.