Stocks Surge As The US Dollar Pulls Back From Its High

Originally published by AxiTrader

Welcome to my daily Markets Musings.

This is essentially my little black book, the diary of market moves I’ve been writing for myself since April 1988.

It’s not supposed to catch everything – just the things that help me build the fundamental narrative I need around what’s happening in the markets I watch, and which then readies me to take the technical signals when they come.

Feedback always welcome

Greg

Market Summary

Boom. It’s not all hype, this is not 1999, and the big tech stocks driving the US stock market higher look like the real deal.

That’s the clear, and only, takeaway from the results of the FANGS we’ve seen this earnings season. Certainly earnings, in general, have been solid but last week’s late week rally was about these tech giants. That saw the Nasdaq 100 close 2.91% higher Friday at a new record high of 6213. The S&P 500 was up 0.8% to its own record of 2581 and the much narrower Dow Jones Industrial Average lagged with a 0.14% gain.

Of course a 3% print for US GDP with the prospect of tax cuts adding to the outlook didn’t hurt stocks either at the moment

Stocks in Europe were also higher buoyed it seems by the weaker euro. The DAX was up 0.71% and the CAC rose 0.64%. The FTSE 100 in London was more circumspect with a 0.25% gain.

Locally that combination saw SPI traders put 34 points, 0.6%, on Friday’s close after a wild afternoon influenced by the High Court decision. Both the physical S&P/ASX 200 and SPI have resistance around 2950 and a break would signal a move toward 6000.

On forex markets the US dollar had a great week but pulled back from the highs Friday as traders booked some profits and rethought the pace of the move. This dollar rally has further to run based on economic and policy divergence. So this morning the Aussie dollar is at 0.7673 off a low of 0.7625. Euro is at 1.1608, USD/JPY is at 113.74 and the kiwi is at 0.6874. The pound remains under pressure at 1.3130 as traders await the BoE decision this week and the Canadian dollar is sitting at 1.2821 in USD/CAD terms.

US bonds sold off with 2's hitting another 9-year high and US 10's hitting 2.48% before rallying as Jerome Powell moved to the front of the pack in the race for Fed chair once again.

On other markets oil has broken higher and looks set to continue to rally. Gold found support near $1260 and copper fell out of bed with metals and iron ore more broadly.

No big data in Australia today but tonight’s PCE spending and inflation data in the US is going to be very important.

And then it’s a huge week this week for data and releases. Perhaps not here in Australia but certainly across global market LS traders will have plenty to watch. After the ECB meeting last week the BoJ, BoE, and Fed all make their interest rate decisions. The BoE is potentially the most market moving with questions of whether or not it raises rates an open question even within the BoE. Could a dovish hike satisfy both camps? Neither the Fed or BoJ are expected to surprise.

On the data front EU inflation, US wages and overall income data is important, along with Friday’s non-farm payrolls. And of course being the first week of the month we get a raft of global PMI data.

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

International

• US Q3 GDP was better than expected printing a pretty solid 3% annualised rate data realised Friday showed. That easily beat expectations of a 2.5% growth rate and was largely driven by a big increase in inventories and a smaller trade deficit. The June quarter data was revised to a print of 3.1% annualised meaning that it’s the first back to back 3%+ prints in US GDP since 2014. In the context of the Hurricane disruption, this looks like a very solid number and one which will continue to drive the Fed to expect that wages, and inflation, will eventually return and recover in the US. Thus the rate increase cycle remains intact.

US GDP Growth Annualised (Source:TradingEconomics.com)

• President Trump is enjoying the fact he gets to occupy centre stage as he decides who the next Fed chair is going to be. On Friday evening he tweeted a link to this short Instagram story. He promises to make the decision this week and that “it will be a person who hopefully do a fantastic job and I have someone very specific in mind. I think everybody will be very impressed” President Trump said. He then talked up the job this person will do and how things will look at the end of eight years. He also talked up how the economy is looking now. Who can argue? 3% annualised GDP growth in Q3 was better than expected and the possibility that tax cuts will add to that will have the president very excited. Traders are watching closely too. Bonds rallied and the US dollar dipped with fresh rumours of who the front-runner is pointing to Jay Powell not John Taylor

Instagram Screenshot

• While I’m on President Trump, this Russia probe is getting messy. Last week there were revelations that the funding for the dirt digging on the Trump campaign and the file that connected it with Russia came from the DNC. And over the weekend we heard special prosecutor Robert Mueller has charged one person in his investigation with the details to be released Monday US time.

• Moody’s was out Friday saying that President Xi’s iron grip on China may actually help economic reforms. “We believe this consolidation could increase the alignment of incentives between the central leadership and other officials, and thus could advance the process of economic reform and rebalancing,” Moody’s said in a report. Michael Taylor, Moody's chief credit officer for Asia Pacific, said “It remains unclear whether the increased centralization of authority will result in an acceleration of the pace of reform or a continuation of the gradual implementation of economic liberalization, which balances other policy objectives such as maintaining relatively strong growth and the strong role of state-owned enterprises observed in recent years”. For me the point is that Xi elevated the party, not the market, back to Centre Stage in China. So reform will continue, provinces will tow the line, and we’ll see more of what we’ve seen for the past few years. That is, slowing growth, more reform, and a focus on stability.

• On Friday data from China showed industrial profits surged 27.7% in September. That was up from a 24% year on year pace the precious month.

• The Catalan issue continues to garner attention with Parliament declaring independence Friday while the central government also invoked article 155 which imposed centralised rule on the province. Prime Minister Rajoy also called for fresh elections in the region. EU leaders – many of who are not immune to their own secessionist issues – swung in behind Madrid.

• And speaking of poorly executed independence referenda the President of the Iraqi Kurds has announced he’ll finish up on November 1 and won’t seek an extension to his term. Parliament accepted his proposal.

Australia

• Market assessment was that real political risk had come to Australia Friday after the High Court’s decision saw the Turnbull government lose its majority in the House of Representatives. That saw stocks come under heavy selling pressure Friday with the physical ASX200 falling to a low 5859 before quickly bouncing back to close the day down 13 points at 5903.

• That the knee jerk reaction reversed so hard and fast was the result of traders recognising that cross bench support remained for the government for confidence and supply – reiterated by Independent Cathy McGowan Friday – which meant there was little prospect the government would fall on the floor of the House. So it might be a less comfortable period of government for Prime Minister Turnbull and his colleagues until the result of the New England by-election. That of course assumes former deputy prime minister Barnaby Joyce is returned as the member for New England. If he’s not traders might react negatively.

• As it stands though, this morning it is the sharp rally in the S&P 500 and Nasdaq which saw SPI traders take prices another 34 points higher over the weekend. That suggests a move back to Friday’s high on the physical market at 5938 which that move is added to Friday’s close. Worth noting both the physical ASX 200 and SPI found support at my fast moving average Friday. Looking at the day ahead both the SPI and Physical market look to have resistance in the 5945/50 region if they can take out Friday’s highs. Here’s the SPI chart. Still no sell signal generated on my daily system so I’m safely out of harm’s way at the moment.

Forex

• The US dollar ended is best week Friday making solid gains against the euro, in US Dollar Index terms, and on many pairs. It’s opened this morning at 94.80 in DXY terms and with Euro at 1.1613. That’s off the euro low of 1.1573 Friday which only serves to highlight that the move was very swift. But as I wrote last week, and as I have been stressing lately, what we’ve seen since the Chinese freed up the yuan is that central bankers across the globe have effectively said “enough is enough” to US dollar weakness and their own currency strength. The latest round of central bank meetings – especially the Boc and ECB last week – have really seen central bankers seek to highlight the policy divergence between themselves and the Fed. This is what drove the moves last week and with Euro, and other currencies, positioning data showing a still very long market there is room for further US dollar appreciation.

• Looking at the euro it’s still the case that 1.1500/20 is the first target as the 38.2% retracement level of the big rally from April. Once that – assuming it does – gives way then there is every chance Euro falls toward the 200 day moving average at 1.1240.

• USD/JPY pulled back from Friday’s high as the Catalan issue garnered some attention and it and the Swiss franc gained a little better bid. USD/JPY is at 113.72 and USD/CHF is at 0.9973 as a result – both well off their highs.

• The pound ended the week on the back foot as traders await the BoE meeting this week and wonder if Mark Carney and his colleagues will indeed raise rates. GBP/USD is sitting at 1.3123 holding above important trendline support which comes in at 1.3030/40. We’ll know Thursday what the bank does. My sense is we’ll either see no move or a very dovish lift. Either are likely to pressure sterling.

• On the commodity bloc I’m a little surprised that the New Zealand dollar has held in so well this morning after the incoming finance minister Grant Robertson said in a TV interview Sunday said the changes the new Government is seeking to make to the RBNZ’s mandate could “potentially” lead to lower rates. “What it means is that when the Reserve Bank is making its decisions about the official cash rate, when it’s thinking about monetary policy, of course it thinks about managing and controlling inflation, and that’s vital…But also it thinks about other goals in the economy such as making sure that we maximize employment,” Robertson said.

• But this morning NZD/USD is still holding above 68 cents having bounced perfectly off support Friday. It’s currently at 0.6872 down just 0.12%.

• The Aussie bounced nicely Friday as traders seemed to bet that it had fallen too far too fast. Given the sell off in metals, the fall in iron ore, the dip in copper, and the strength of the US dollar the Aussie’s rally from a 0.7625 low to sit at 0.7673 this morning is pretty solid. Of course some of that is the reversal in the US dollar but it’s also because the Aussie looked a little stretch after falling 270 odd points in six sessions. The market is still very long though it seems. So there is still room for further weakness if US data continues to flow and support the US dollar.

Commodities

• Oil broke higher Friday as traders took out range highs pushing both Brent and WTI up more than a dollar each. That I was rhetorically bullish and my system already long was known to readers. But this break is an important one because it signalled a renewed belief in higher oil prices from traders in a market that was already long of oil. In no small part that is because OPEC and the Russians have been undertaking some important jawboning work about extended supply constraints via a production cap extension. Indeed over the weekend OPEC general secretary Mohamed Barkindo when referring to comments from both nations that it had cleared the fog as OPEC readies for the November 30 meeting.

• But the rally is also a result of a combination of factors which are impacting supply. Things like the materially lower volumes through the Kurdish pipeline and news on Friday that Iranian crude and condensate exports are likely to fall to a 19 month low in October. And, as I highlighted recently, while western oil can’t join the OPEC/Russia production cut the forces of capitalism look like they are taking hold both in the US shale business – where the focus is turning to returns not just production – and across the big oil companies. To this end CNBC reported over the weekend that Total CEO Patrick Pouyanne said “of course they do” when asked about an extension to the production cut. BP (LON:BP) CEO Bob Dudley seemed to agree saying it was “probable” OPEC extends its production freeze.

• At the very least it opens the way to the targets I identified over recent weeks at $62.50/70 for Brent and $55.61 for WTI. Here’s the WTI chart.

• Gold pulled up just above important support on Friday night as some concerns about the Catalonia independence and Spanish reaction together with a dip in US, and global, bond markets took the pressure off the downside. It remains the case that $1260.59 is the key area of support with a break triggering a potential run to $1223. At $1273 this morning gold is about 9 dollars below resistance at $1282.

• Copper is gone and my system went short Friday on the break of $3.11 a pound. It was a poor day for metals markets in many ways. Certainly the US dollar rally helped knock prices lower – which highlights how strong oil is right now - but on balance it’s as much the topping pattern in copper as anything else that precipitated the fall. $3.03, perhaps $2.95/96 seems a reasonable target.

Have a great day's trading.