Originally published by AxiTrader
Welcome to my Daily Markets Musing – coming to you from Singapore.
I’ve written this Sunday so it could be a little out for the Monday morning open. Especially if Kim Jong-un follows through on what the Russians say is his next planned test of an ICBM capable of hitting the west coast of the US. Or if traders get wi=orried about President Trump’s weekend tweet.
Feedback always welcome, have a great day
Greg
Market Summary
US non-farm payrolls fell by 33,000 last month. That’s the first fall in 7 years. But that weakness belied an otherwise positive take on what was a messy, hurricane impacted, release of the single most important data point in the globe each month. Unemployment fell to 4.2%, a 16 year low. And wages growth accelerated to a 2.9% yoy pace after Septembers 0.5% gain on the month.
Initially, it helped the US dollar surge and US bond rates rise. But traders backed off as worries again surfaced after Russian politicians who had just been to Pyongyang said Kim Jong-un was readying his next ICBM test – one that could hit the west coast of the USA.
So in the end the US dollar closed well off its highs, US 10-year treasuries backed off an important break at 2.4%, while the S&P 500 and Dow Jones Industrial Average printed in the red for the first time in almost 2 weeks. To wit the S&P 500 was 0.1% lower at 2549, the Dow dipped by the smallest of margins – 0.01% - to close at 22,773 and the Nasdaq 100 eked out a 0.12% gain.
On bond markets US 2's closed at 1.5120% and US 10's closed at 2.36% after peaking at 2.4020%. The curve is at 85 points.
On currency markets the US dollar's reversal saw it finish at 93.795 in US Dollar Index terms and 1.1733 in euro terms after a low around 1.1668 – just above important support. USD/JPY had another failure above 113 and closed at 112.63, while the pound was largely unchanged. The Aussie and kiwi bounced from their lows but remain well offered on rallies it seems. The Aussie closed the week at 0.7769 – a little more than 100 points off the week’s high and 40 points off Friday’s low.
On commodity markets the Saudi and Russian clarification of their position on an extension of the production cut deal and another Hurricane hitting the US saw WTI prices collapse close to 3% to $49.29 while Brent had an ugly outside day and closed at $55.62. Gold found a bid in North Korea tensions and a turnaround in the US dollar it closed the week at $1275, while copper dipped a little but finished at $3.01 as traders await the return of Chinese markets from their week off.
Looking at the week ahead the Caixin PMI’s today are going to be big. I’m looking forward to tomorrow’s NAB business survey and Wednesday’s Westpac Consumer Sentiment survey to see if they confirm or deny last weeks awful retail sales data.
But this is really a week of central bankers who are seriously busy chatting in numerous speeches from important ECB, BoC, BoE, and of course Fed speakers. Check your calendar - it’s out of control the number of central bank speakers we see this week. And that’s even before and important data week including German and Chinese trade, monthly inflation in a raft of countries including the US PPI and CPI, plus retail sales from the US.
We’ll have a much better feel for the outlook for foreign exchange and bond markets by the end of the week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Before I get to non-farms we’ve has an escalation in tensions again between the North Koren’s and the US. On Friday US time Anton Morozov, a member of the Russian Duma, who had been in Pyongyang with two other parliamentarians said the DPRK is “preparing for new tests of a long-range missile. They even gave us mathematical calculations that they believe prove that their missile can hit the west coast of the United States," He went on “As far as we understand, they intend to launch one more long-range missile in the near future. And in general, their mood is rather belligerent”.
- Of course, that was always going to get a reaction from President Trump who said “only one thing will work”. Let’s hope not.
- US non-farms unexpectedly fell by 33,000 in September when forecasters had been expecting a rise of around 80,000 jobs. But while the headline tipped non-farms into the red for the first time in years it was the growth in wages and the fall in the unemployment rate which is the big story. At 4.2% the unemployment rate is the lowest since Fed 2001 and in a region where except for the most dovish policymakers genuine concerns can be aired about an eventual uptick in wages inflation. And as if on cue we saw the second half a percent monthly rise in hourly earnings in the past 3 months which took the year on year rate to 2.9%.
- So is it any wonder that we again heard from Fed speakers talking up the chances of a rate hike in December and then more rate hikes again in 2018. Of course, ST Louis Fed president James Bullard is not on board and it’s unlikely Neel Kashkari is either. But many other Fed speakers are. NY Fed president Bill Dudley highlighted what I think is the majority view Friday when he said “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually”. Remember this is a Fed that watched rates held too low for too long after the early century rate reductions cause the GFC. It does not want to preside over a similar outcome somewhere else in the financial system. And as Janet Yellen and other colleagues have said recently it is better to hike gradually than have to play aggressive catch-up and risk tipping the US economy into recession.
- Besides the global economy is growing in a synchronised way not seen for more than a decade. Increased rates won’t hurt too much. That’s something Bill Dudley highlighted Friday as well noting that in the US financial conditions “have eased rather than tightened” during this Fed rate hike cycle.
- Elsewhere quickly:
- Spain’s apology to Catalonia for the heavy handed approach during and since the referendum quieted markets a little on Friday. We’ll see what happens with regard the Catalonian authorities declaring independence this week. But it’s worth noting the basques might be watching along with some folks in Belgium, Italy, and lets not forget the Scots.
- German industrial order jumped 3.6% in August. Easy to see the ECB’s problem in this synchronised growth cycle. It has to act in manner – as the BoJ has – which signals clearly to markets it is not in lock step with the fed if it wants euro to weaken.
- Apparently the Republicans are already squabbling over the tax cuts. We’ll see how things work out up on the Hill and whether this worry of a derailed tax cut worries traders.
Australia
- A stonkingly good rally Friday for the S&P/ASX 200. The rise of 59 points, 1.04%, was way north of what I had expected and I guess it simply again reinforces the short term forces that are driving this market. Certainly it’s a fairly tight range of a couple of hundred points. But the volatility within which the market is moving fairly screams “short-term players”.
- Perhaps this might be a better week for the local market though. The S&P was higher for the 4th week in a row. It has broken back up and above a trendline that stretches back to 2011 and which acted as support for this rally between 2011 and 2015. So maybe the buyers of this laggard Australian stock market might finally come for it.
- Certainly, that’s a chance given the utterly contemptable underperformance of the local market versus the S&P 500. As I have highlighted previously a lot of this has to do with the weighting of the local bourse to banks, property, and miners. That means we lack the companies that are powering ahead in the US and which will benefit the most from US tax cuts and a repatriation hair cut. But global growth is synchronised right now – and solid. That’s usually a positive for the local market. Surely it’s time for a comeback. Surely?
Forex
- The US dollar finished off its high Friday night in price action that may suggest to many traders the first leg of this US dollar move is over and resistance has held. Given the failure to hold above 94.15 in DXY terms or punch below 1.1660 that would be a reasonable assertion on the face of it. Indeed last Monday I received a raft of US dollar buy signals from my weekly system. They were second tier buys which requires a lower amount at risk on the trade and thus a smaller position. But most were triggered in the five days till Friday. It’s been a long time since my system generated a US dollar buy. So even if it retrace some of last week’s gains in the week ahead I remain cautiously bullish the US dollar. Both technically and because the economy is clearly doing well, the jobs market is tightening, and that wages jump suggests that maybe the delayed reaction to this tightness in higher wages has begun. At the very least, amid a messy release, it will give the hawks at the Fed something to worry about for the first time in years.
- But let’s face it, the key here for the dollar is euro and its ability to hold above the 1.1660/80 region I’ve been highlighting for some time now. The ECB has – mostly – been at pains to stress that even when it decides to withdraw monetary accommodation by reducing its bond buying – QE – program that rates will stay low and policy stimulatory because inflation is quiet. The trouble of course for central bank right now is that the re-emergence of economic growth synchronicity has seen European data lift with US and other jurisdictions. So if traders know – believe at least – that a December hike is locked and loaded at the Fed then this is priced in. That means the ECB has more work to do to dissuade traders it really is serious about leaving policy accommodative so as to be sure the euro doesn’t strengthen too far.
- We’ll be able to judge the efficacy of their battle for a weaker euro by whether this 1.1660 level remains supported or rather, as would be my base case, breaks and EUR/USD heads to 1.1500/25. Mario Draghi has two opportunities to send this message before the ECB next decides interest rates on October 26. He speaks this week and then again on the 23rd.
- Looking elsewhere in the currency space and USD/JPY has had another ugly failure above 113. That’s two week’s in which every foray has been chased back. Naturally a little risk aversion helps the Yen. But the reversal from Friday’s high of 113.42 to close at 112.63 is an ugly one. USD/JPY still looks like it’s topping and I now have a sell order from my system.
- Looking at the commodity bloc we see the Aussie and kiwi remain under pressure. Off their lows certainly but under pressure nonetheless. The kiwi closed the week below it’s 200 day moving average for the first time since June which is a a bearish signal. An eventual move below 70 cents looks on the cards. NZD/USD finished the week at 0.7092. The Canadian dollar was pressured early with USD/CAD above 1.26 at one point but it closed at 1.2525 after a big reversal.
- And the Aussie. It made a low around 0.7730 where a nest of support sat. It bounced to close at 0.7769 but still under pressure. The reality is that the Aussie is under pressure on two fronts. Worry about the domestic economy and the US dollar. On the former the NAB business survey will be important this week along with Chinese data. But the reality is that having satisfied my initial target of 0.7750 the chance of the Aussie hitting my stretch target of 0.7650 really depends on whether the US dollar’s run has ended, or rather is simply in hiatus.
Commodities
- What a mess the psychology of oil traders is at the moment must be. On Friday both the Russians and the Saudi’s seemed to walk back from what had been a strong signal during the week from president Putin and Saudi Oil minister Al Falih that they were working toward an extension to the production cuts. Rather now the case – according to Al Falih – is that the Saudis are interested in building consensus before the next meeting in a month’s time. That’s nowhere near as bullish.
- So throw in the 4th Hurricane to make landfall in the US in recent months and we had the preconditions for a reversal. It was ugly. WTI looks like it could be biased to $48.36 perhaps even $46.98 if that price action over the past few weeks was a little head and shoulders pattern.
- Gold is hostage to the US dollar an risk aversion. The reversal of one and the revival of the other helped Gold lift to end the week at $1275. After making a low just above $1260 Friday. Some reversal. If gold can recover above $1288 it might have legs. Otherwise this is a reversal in an otherwise falling trend.
- Copper is at $3.01 and just waiting for Chinese metals markets to reopen. Would it be cynical of me to suggest we’ll see much positivity this week in Chinese financial markets before next weeks 19th national congress?