Originally published by AxiTrader
Market Summary (7.56 am)
Global stock and bond markets were under simultaneous pressure again overnight while the US dollar lost the early European gains it made despite the weaker than expected inflation data in Europe.
It’s been a rough start to the week for stocks with the S&P 500 down another 0.89% to follow yesterday’s 0.67% fall. At 2,829 the S&P is off its lows but around 80 percent of the 500 stocks in the S&P are down over these past 2 days – so the selling is broad based. Elsewhere the Dow has lost 1.2% to 26,118 and the Nasdaq is off 0.7% to 6,939.
As you’d imagine Europe had a crook day with the FTSE down 1.1%, the DAX off 0.95% and the CAC down 0.87. Asia too saw weakness yesterday after the previous night’s lead so it looks like another day of red screens across the region's bourses today.
Likewise here in Australia, SPI trader have knocked another 14 points off prices from yesterday’s close and that could be the thin end of the wedge if Asia gets going and this weakness across global markets turns to fear.
On forex markets, it was an interesting 24 hours. The US dollar was a little stronger in Asia, stronger yet in Europe, but then lost its mojo as European data (inflation weaker than expected, GDP in line) hit the screens. It’s a sign of how skewed the market's view of the US dollar is that it couldn’t gain on this or Steve Mnuchin continuing to walk back from last week’s comments.
So as I write the euro has gained about 0.12% to 1.2396, the yen is back at 108.80 in USDJPY terms and sterling is higher once more at 1.4142, up 0.5%. The Aussie, kiwi and Canadian dollar are all holding in relatively well given the risk off tone and the selling in oil and other commodities. The Aussie is at 0.8080, the kiwi is at 0.7330, and USD/CAD is at 1.2329.
And speaking of oil, the selloff intensified with WTI losing 1.59% and Brent losing 0.56%. Euro and stock bulls might like to note what happens when everyone gets on one side of the bullish bus. Gold is a little lower $1339 while copper is largely unchanged this morning.
Today is a big one for Australian traders with the release of the Q4 CPI. It’s crucial to the outlook for the RBA, rates, and in turn the Aussie dollar. The market is expecting a headline of 0.6% for the quarter and 2.0% for the yoy number.
Offshore the highlight is the Fed decision tonight. No one expects a change in rates but whether, and by how much, the fed becomes a little more hawkish given US economic strength will be the key thing traders will be looking for in the statement that accompanies the decision. But it is also China NBS PMI day. So that will be important in our timezone while EU employment and inflation will also be watched closely.
And of course we have President Trump’s State of the Union address during trading today.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Stocks are down again in what looks like it could turn into a deeper retracement. My own system has generated a sell signal at yesterday’s NYC close and a break of 2,810 – my fast moving average – would suggest that a fall toward 2750/60 then 2,700 is on the cards. Now, of course, this market has shown itself to be one where you either want to be long or square. So the bulls will not have given up yet. Equally, it’s month end so we could be seeing some position adjustment weighing on prices.
- But with sentiment so positive this month and with MarketWatch sharing a story overnight which says folks are taking screenshots of their 401k plans and sharing the balances it seems we might be “all in” now on equities. That means we might lack the buyers to drive this higher again for a little while.
- Interestingly, well known and very long-term trader Peter Brandt tweeted this morning that the Dow is now in for a 10-15% fall as it’s broken the parabolic advance it was on. That might make things a little interesting. Likely a little self-curing though too as bonds would likely slow their rise and perhaps even rally back. Not yet though – the 10 year Treasury is at 2.72%.
- Looking at the data last night and you’d wonder why the euro is stronger this morning and the dollar on the back foot again. US consumer confidence rose again in January to hit 125.4 against December’s 123.1. Consumers powered US growth in Q4 and this suggests that can continue. I’m really interested in what the Fed says in its statement tomorrow morning as a result. In Europe, German state inflation underwhelmed and undershot and then the Federal number missed expectations with a 1.4% harmonised yoy rate after a bigger than expected 1% fall in mom during January (-0.7% expected). To be fair though Euro Area growth did printed okay with a 0.6% qoq print and 2.7% yoy outturn hitting expectations.
- On the central bank front, Dutch central banker Klaas Knot took the ball up for the hawks declaring the ECB should end its QE program after September as growth is driving inflation higher. “Given the current pace of economic expansion I’m confident that in the medium term euro area inflation will return to below but close to 2 percent,” Knot said. Now I want you to ask yourself one question, why do Euro bulls believe the hawks in Europe on inflation and thus what it implies for rates but do not believe the Fed and when the hawks talk. BECAUSE we are seeing a cognitive bias writ large here. It’s called confirmation bias and it’s driving the momentum – has driven – the one side trade in EURUSD recently. We’ve seen these trends in currency markets many times where traders cherry pick the data – the period after the Euro’s introduction always stands out to me as a classic – but reversed – version of this. But I raise it because it does set up the potential for the turn once the trend to a weaker dollar loses momentum.
- Mark Carney said something interesting about currencies last night in thanking President Trump for his comments. It tells you just how titchy global central bankers are about the leakage of growth to the US that the weaker dollar can cause if sustained longer term. Carney said, “I appreciated the president’s comments of last Friday on the dollar”. But he did add a note of clarification which helps explain why traders have been buying other pairs. “The US economy is very strong, but relative to a strong U.S. economy, and arguably a strengthening U.S. economy, are others strengthening more, or in a more surprising way? And then there’s an adjustment. But certainly the fundamentals at present in the US are quite robust,” Carney said. Translating from central bank speak that’s I think the period of adjustment higher in GBP and euro might be ending and that the strength in the US economy will right the US dollar soon. Anyway, Carney still hates Brexit and said it has made the UK poorer. Yup.
- Folks, don’t forget there is an election on in Italy. It looks messy based on polling and may come into traders vision as we get closer to the March vote.
Australia
- Yesterday’s NAB Business survey SOLID!!! – all caps and exclamation marks from where I sit. Key for me is that while I always focus on the conditions side of the survey the fact that confidence bounced 4 points is a solid indication of what businesses see coming down the pipe and in the operating environment. When we see the numbers for trading, profitability, and employment there is a clear picture of an Australian economy in fine fettle.
- And while the CPI release is going to be very important for traders and the RBA outlook the strength of this survey is likely to find itself into the RBA’s discussions at next week’s meeting. Indeed it seems possible that the RBA takes the opportunity to upgrade its outlook for the economy in the year and years ahead – given the domestic and international economic outlook – when they release their quarterly Statement on Monetary Policy when it is released at 11.30am Friday week, February 9. That will be important for interest rate and currency traders.
- But an upgraded growth and economic outlook won’t help the stock market today though. As I wrote yesterday I was struck by my bearishness when I looked at the SPI chart in my daily video Monday. Now I find myself looking ominously at a SPI chart which is on support and at risk of a big break lower. It’s a risk of course not a certainty because the McKenna Mantra is always to respect lines and levels, unless or until they break. And while this is a different underlying contract for the CFD the 5930/35 level has been the base since early November 2017. So either a break – or hold – would be significant. A break would suggest 150 point fall back to the top of the old range. The level to watch in the S&P/ASX 200 physical is 5,990/6,000.
Forex
- It seems US Treasury Secretary Steve Mnuchin is still trying to walk back his comments from last week cheering the fall in the US dollar because of the boost to trade it gave the United States. Overnight I’ve seen reports that he reiterated the comments he made on CNBC Friday that a strong dollar is in the long tern interests of the United States. Such is the asymmetric bias of forex traders at the moment against the dollar though that that didn’t really help overly much with the US dollar largely unchanged after a reasonably volatile night of tooing and froing.
- Were it a bull market for the buck the dip in EU sentiment combined with the decent miss in German state and Federal inflation data overnight would have seen the dollar make significant gains. In fact as that data – the state numbers – was coming out the US dollar was simultaneously losing the gains it had made in Asia. Certainly EU growth did print on expectations of 0.6% for the quarter and 2.7% for the yoy number (a little better than the US) but German yoy inflation of just 1.4% - against expectations of 1.6% - suggests while growth will certainly end QE this year there is little chance rates will be increased any time soon.
- Indeed despite the protestations of the hawks – why is it we mostly only hear from the hawks in public – it seems clear as a single mandate central bank with inflation as its monetary mandate the ECB will not be following the Fed anytime soon. But the key to this move, the key to why the euro is still rising even though inflation is still undershooting, is that traders are betting that growth will ultimately drive the ECB to hike rates. Just look at the relationship between the euro and the 2 year forward euro rate.
- It’s not the whole puzzle obviously. Capital flows (trade AND investment) for me are always the key drivers of forex. But it does show that interest rates still matter to a certain extent. Just forward expectations rather than the current spot bond price or bond differentials everyone’s been looking at.
- Anyway, that’s the euro bull case. But like fashion, data, and sentiment the drivers tend to move in trends so it’s worth noting that the US dollar is making a decent fist of trying to stabilise here at 89.21 in DXY terms, around 1.24 in Euro terms, and 108.60/80 in USD/JPY terms. It still a big week of events with the Fed tonight and non-farms on Friday. But if it can get through the week without making new lows we might be having a different conversation next week. Note though I said if and might.
- Today’s forex chart of the day in light of all that has to be euro. I’m getting all the classic signs that a top may be in place for this run. Now it’s worth noting I’ve been caught once or twice on this run higher recently. But if Euro takes out last night’s low around 1.2334 then the chance of a 100+ point fall grows. For what it’s worth my system generated a sell yesterday and I am small short.
Commodities
- When everyone is on one side of the boat what happens? It starts to list and everyone is at risk of toppling into the water. That’s essentially where we are in oil markets at the moment after buyers appear to have bought themselves to a standstill. Worth noting again what Tom DeMark says about bull (and bear) markets – they don’t end in selling (or buying in the case of bear markets) but rather when the buyers become exhausted. And with CFTC data showing fresh record speculative longs and chatter about Canadian shale rising it seems the buyers have stepped back a little. There is also some expectation inventory data might provide some negative news and certainly the proximity of a 10 million bpd print for US oil production is out there in traders minds as well.
- Anyway the result is lower prices which lok biased lower yet based on the charts. WTI, like the Brent chart I’ve been sharing lately, has now broken the recent uptrend and is below my fast moving average for the first time since early-mid December. So it has a bearish bias now too. Here’s WTI.
Have a great day's trading.