Originally published by AxiTrader
Market Summary
Stocks were in positive territory again overnight but the announcement effect of President Trump’s tax cuts faded on bond and forex traders as the dollar lost ground and rates reversed sharply of the day’s highs. That was despite the fact the administration rolled out heavy hitters Gary Cohn and Steve Mnuchin to talk up the impact of the plan on growth and the print of Q2 growth which was a little better at 3.1%.
So at the close we have the S&P 500 up 3 points to 2,510, the Dow Jones Industrial Average is at 22,381 up 0.18%, and the Nasdaq 100 was flat at 6,453. European stocks were higher and here at home SPI traders have added 13 points to yesterday afternoons close. Surely we can have a solid day to celebrate the end of the quarter today.
On forex markets the US dollar was bid aggressively in early European trade. But the sellers returned and it’s ended the day well off its highs. The US Dollar Index is down 0.25% at 93.14 while the while the euro, pound, yen, Canadian dollar, and kiwi are all up between 0.3% and 0.55% day on day. The Aussie is only up 0.1% at 0.7856. But that’s a solid bounce off the early Europe low of 0.7799.
On commodity markets oil is lower again with WTI down 1% and Brent off 0.41% even though the isolation of the Iraqi Kurds continues. Gold recovered from its lows as the US dollar dipped and is at $1287 up half a percent while copper is up 1.73% to $2.96. Iron ore looks like its recovered a substantial portion of yesterday’s big falls.
Japanese inflation, UK GDP, German retail sales and the US PCE data are the highlights for me to end the week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The US administration had the heavy hitters out talking up the economic impacts of the Trump tax plan overnight with both Gary Cohn and Treasury Secretary Steve Mnuchin saying that the tax cut will be paid for by the uplift in economic growth. Cohn told CNBC that “we think we can drive a lot of business back to America, we can drive jobs back to America, we can make ourselves very competitive. We think we can pay for the entire tax cut through growth over the cycle.” Cohn also said “all of these things lead to higher GDP. We think this is very attainable." Statement Mnuchin echoed according to Reuters.
- RBC economists agree with CNBC reporting that they see a 0.5% lift to US GDP growth and that this will impact the outlook for stocks. The bank said “we think the fact that tax cuts are coming at the mature stage of the cycle and not in a typical post-recession means the 'propensity to spend' could very well be higher than historically observed … Over a decade, the level of GDP could be 5 percent higher than a baseline forecast”. That’s huge folks and I’m with them. Think about what that does to valuations for US stocks, for the outlook for the Fed and by extension bond rates and the US dollar.
- In Europe it was an interesting night for central bankers as the ECB rolled out a raft of speakers all of who intimated that the bank isn’t going to end QE any time soon and all off who suggested the EU still needs substantial stimulus from the ECB. Finland’s cebtral bank boss said the ECB’s “policy target is symmetrical” noting that “It is of equal importance to act effectively on inflation levels that are above or below the price stability objective”. In layman’s terms that’s a clear signal that policy needs to be very accommodative until inflation rises. ECB Governing Council member Francois Villeroy said overnight that the ECB is “facing today a simple requirement linked to our mandate of maintaining price stability and the progress towards our inflation target”. And that means even as the ECB reduces its QE program “while also keeping overall our monetary policy significantly accommodative”.
- And it is also something that ECB chief economist Peter Praet highlighted as well. “Things are going on the real (economy) side much, much better," Praet said in Berlin. “But the job is not yet done. Now we are talking about recalibration. The end of the story is not yet written”. Indeed it’s not and he also had a warning for those who believe in the primacy of markets saying “We know that markets can over-react. That is why we are prudent…How prudent? ... That is the debate we have in the governing council.” Forex traders didn’t care last night though.
- Perhaps that because the European Commission’s latest read on EU wide economic sentiment in the countries that share the euro lifted to 113 in September up from 111.9 in August. That’s the highest level since July 2007.
- Interestingly Sweden’s central bank chief agrees with the ECB speakers. Faced with what looks like an economy that is heating up Governor Stefan Ingves said monetary policy needed to remain accommodative to ensure the recent rise in inflation back to the Riksbank's target level didn’t prove ephemeral. “Monetary policy needs to remain expansionary for inflation to continue to be close to the target," Ingves said..
- In the UK though it seems that rates are rising. Yesterday morning BoE chief economist Andrew Haldane said the rise in interest rates would be a good thing. That’s something I highlighted in yesterday’s note and he’s right because what he’s implying is that rising rates means emergency measures are not needed. Overnight BoE governor Carney suggested the path is higher as well not that neither the bank nor monetary policy could cure all ills but they did have a role in the distrubtion of any pain. “Even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises,” Carney said.
- China is working hard to impose the sanctions on North Korea a US State Department Official told Congress overnight. It echoes comments from a Chinese official overnight as well. This has to be a good sign that the bluster between the leaders of the DPRK and the US is just that and that the global community is working collegiately for a non-military solution.
- The move toward the isolation of the Iraqi Kurds in the wake of the referendum continued last night with access to their international airport effectively being closed from today. Equally the Iraqi prime minister announced that in a phone call with his Turkish counterpart they had agreed the Turkish government will only deal with, and through, Baghdad when it comes to Iraqi oil. So far the Kurd’s pipeline hasn't been cut off though.
Australia
- Another day and another disappointing day for the local index yesterday as the collapse in Chinese iron ore and rebar futures weighed on stocks and technical traders ruled the roost. I say that because it’s clear in the chart below that the selling re-emerged when the S&P/ASX 200 hit the current downtrend line. Thus the feedback loop between overall index weakness and individual sectoral or stock seems to have remained intact.
- SPI traders are having another go at predicting a better day ahead and have added 13 points to the close yesterday afternoon. Yesterday wasn’t the day to break – will quarters end be today? Maybe, yes.
ASX200 Daily (Source:Investing.com)
- Australian job vacancies hit a record high in August. The ABS reported yesterday that job vacancies jumped 6% to 203,700sa in the 3 months to the end of August, from an upwardly revised 192,200 in the three months to May. It’s confirmation that the lead of solid jobs growth in the NAB’s business survey is the right one. And it speaks to continuing strength in the labour market in the months ahead.
- RBA deputy governor Guy Debelle had a lot to say about central banking and the burden of expectations that are placed on central banks across the globe in a speech overnight. He highlighted the fact that many saw central banks, and monetary policy, as the "only game in town" as being unreasonable - and he's dead right. It's effectively what Mark Carney said as well.
- In a clear signal to the political class - and fiscal policy - Debelle said "Central bank independence does not imply the complete delegation of demand management to the central bank. The achievement of the output and inflation goals of the central bank is very much a function of the fiscal response too". Indeed it is.
Forex
- The peak for the US dollar, low point for the Aussie dollar, euro, yen, and many other pairs came as UK and European traders got their feet under the desk and hit the sell dollar’s button. But, perhaps as we near quarters end, or perhaps because there is still residual scepticism about the Administration’s ability to deliver dollar sellers re-entered.
DXY Futures Daily (Source: Investing.com)
- So even though the US dollar is only off around 0.3% in DXY terms it's clear this is a big pullback with a high around 93.66 before the move back toward 93.00.
- That reversal in the USD lifted the Aussie from just below 78 cents, euro from around 1.1720 and knocked USD/JPY back from 113.20. So this morning the US Dollar Index is down 0.3% at 93.11, the euro is up 0.29% at 1.1783 and USD/JPY is off 0.35% to 112.41 as the yen strengthened. The pound, Canadian dollar, and Kiwi are also higher.
- Certainly, the surge in Eurozone sentiment to a 10 year high in September helped the Euro and thus was a contributing factor to the US dollar’s turnaround in European trade. Let's get through the quarter end flows today/tonight and then it's on to the monthly data dump and non-farms next week. The US dollar needs some more strong data to convince traders who clearly don't want to believe in this recovery, give up on the euro's strength, or take heed of the myriad of warnings from the ECB.
Commodities
- Oil is looking toppish now. At least in the short term and at least in WTI terms. Even though thinigs are hotting up for the Kurds and their 500,000 barrels through Turkey, and even though there was market talk about the looming attack season - if I can call it that - against the Nigerian oil fields both WTI and Brent posted falls.
- WTI is down 1.05% at $51.59 but that's off a high of $52.83 overnight. So it's an ugly reversal. Brent, on the other hand, is down 0.5% at $57.60 after breaking and then recovering to the trendline I highlighted yesterday. Both look like lower levels beckon technically to test support.
- If WTI takes out last nights low at $51.20 it will also break the recent uptrend line and possible fall another dollar to support at $50.20/25.
- Gold was under pressure around the same time the Aussie, euro and others were getting hammered by the US dollar. It bottomed out around $1277 before recovering to sit up half a percent at $1286. It's all about the US dollar.
- Nothing like a a few days of base building to get a market moving. And that's what we've seen from copper over the past week and then last night it rallied 1.73% to $2.96. It could head back toward the trendline it broke down and through and test $2.99/3.02.
Have a great day's trading.