Three Percent US Growth Drives Stocks And The US Dollar Higher

Originally published by AxiTrader

The last day of winter – enjoy

Market Summary

Stocks rallied and the US dollar's recovery from this week’s lows continued in the wake of the stronger than expected print of 3% for second quarter GDP in the United States.

At the close the S&P 500 was 0.42% higher at 2456,the Dow Jones Industrial Average was up 0.12%,and the Nasdaq 100 rose 1% to 6368. The data was certainly supportive of the market but so too will be President’s Trumps tax plan if traders get wind that there is any chance of his desire for a 15% tax rate for companies has a chance of getting up.

SPI traders are non-plussed however and have only marked prices up 3 points from yesterday afternoon.

On forex markets the dollar is stronger. The euro is back under 1.19 after the high of 1.2070 just two nights ago. The yen has come under pressure with USD/JPY back above 110 and more than 200 points off its lows for the week. Sterling is hanging tough. While the kiwi, Canadian dollar, and Swiss franc all came in for heavy selling. The Aussie is doing relatively well against this backdrop but it is sitting at, or just below 79 cents and at risk of a break down should today’s data print weaker than expected.

Oil markets continue to be roiled by the aftermath of Hurricane Harvey. 24% of US refining capacity is now shuttered and that continues to exert downward pressure on WTI which in turn saw Brent play catch up overnight falling more than 2%. With President Trump saying talking is not the answer when it comes to North Korea gold has stayed relatively firm at $1308. Copper has reversed off the $3.10 level and is at $3.06 this morning.

Today we get Capex and private sector credit in Australia and its official PMI day in China. German retail sales and employment data are out tonight along with Canadian GDP, US personal income data, and pending home sales.

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

International

• The latest read of US Q2 GDP growth was upgraded to 3% data released overnight showed. That was an upward revision from the previously reported 2.6% and showed that the consumer and business investment sectors were strong in the three months to June 30. Looking specifically consumer spending grew at a 3.3% rate from the previous estimate of a 2.8% run rate. The PCE inflation measure (ex food and energy) was static at 0.9% from previous reports while business investment was strong. The data showed spending on equipment jumped at a rate of 8.8 percent while investment in “non-residential structures” accelerated to a 6.2% pace from the 4.9% reported previously.

• All around a pretty solid result. And it is one that, along with the higher than expected 237,000 increase in ADP payrolls during August, has seen the Citibank economic surprise index for the US to rise to -21.2. That’s its best print since late April, early May. And given estimates for Q3 growth are at or above 3% this data is consistent with the Fed tapering the balance sheet in September and signalling another rate hike in December.

• President Trump says the time for talk with North Korea is over. Using his preferred communication method of Twitter the President tweeted “The US has been talking to North Korea, and paying them extortion money, for 25 years. Talking is not the answer!”. That was in direct contrast to defence secretary Mattis who said the US had not run out of diplomatic options. That’s not necessarily inconsistent though. Maybe Trump is playing bad cop to Mattis’ good cop.

• For the most part markets are reacting as though the worst is already behind us for this latest escalation in US-DPRK tensions. But bonds and gold suggest some genuine residual fears remain.

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• And while I’m talking about the convergence of growth and President Trump I’ll highlight a story in the AFR this morning. The paper reports that “market investors risk missing early signs that the Trump administration is becoming an against-the-odds success for the US economy, says S&P Global's chief economist, Australian-born Paul Sheard, who believes many are too quick to write the President off as a lunatic or narcissist”.

• Indeed. He makes a good point. Much coverage reads like opinion wrapped up as reportage and as the consumer confidence data I highlighted yesterday shows – second highest read since 200 during August- the machinations of Washington and the White House appear to matter less to the real economy than they do to the press and political operatives. There is always a risk in markets. And if you extrapolate Shead’s argument for the US dollar bears, those who think the President can’t actually get anything done that risk is that the US economy continues to do well, that tax cuts eventuate, and that the Fed continues to tighten.

• EU economic sentiment has lifted in August the European Commission reported overnight. Sentiment in those countries using the euro rose to 111.9 from July’s upwardly revised 111.3. The EC’s measure of the business climate was also higher rising to 1.09 from1.04. Also out last night and upping the ante on the doves at the ECB was German and Spanish inflation data which printed 1.8% and 2% respectively which were both higher than expected.

• President Trump made a speech on tax this morning as I was writing and said he wants to bring the tax rate down to 15%. That might be a stretch at 15%. But it is another sign that this president – unlike the Australian cricket team – just keeps batting on in the pursuit of his agenda regardless of what slings and arrows he may face. That’s something traders and investors should keep an eye on as I’ve pointed out above.

Australia

• A flat day yesterday with a gain of less than 1 point and close on the S&P/ASX 200 of 5669. That wasn’t a bad close in the end considering the pressure the index came under intraday from individual stocks and sectors which were under pressure early. Indeed the physical ASX 200 index fell again toward the bottom of the recent trading range making a low around 5654/5 before recovering.

• It was a similar story for the SPI which has again recovered from levels toward the bottom of the range Positive price action from Europe and the US should set us up for a better day locally.

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• Capex is out today and there are two numbers the market will be looking at. First is the increase in Q2 Capex from Q1's spend. And on that front economists are all over the place with their estimates which are in a range of more than 6% from-4% to +2.5%. It all nets out to a forecast of +0.3%. But there might be some room for a big miss of beat based on the range.

• The second number is the forward looking one. The 3rd estimate of Capex for this financial year which is expected to leap higher to $95.9 billion.

Forex

• The answer to the question I posed about whether we’d seen the pessimistic crescendo needed for a reversal in the US dollar has been answered in the affirmative overnight. The US dollar is up strongly as a result of the combination of positioning, stronger than expected data, and a renewed focus by some traders and investors that maybe the ECB WILL be worried about the euro at these levels. I’d hold the minutes told us they already were its just that no one Friday evening in New York or in the early part of this week wanted to buy dollars.

• So euro ran to 1.2070 two nights ago. But it back at 1.1887 this morning, down 0.7% since 7am yesterday morning. Data has been something that I’ve been saying is crucial for the US dollar to recover. Last week’s swoon coincided with a softening in data as well as the other catalysts of Draghi’s speech and North Korean tensions. But GDP and ADP data overnight sets up the potential for a strong rise in the dollar later this week should non-farm payrolls print strongly.

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• In the meantime, the reversal of dollar weakness continues.

• USD/JPY is up half a per cent at 110.32, GBP/USD is holding firm at 1.2919,and the Swiss franc has lost 0.8% against the US dollar as USD/CHF rose to 0.9640. On the commodity bloc the Kiwi is getting hammered and has falled below 72 cents this morning. It’s at 0.7192, down 0.85%. RBNZ governor Wheeler will be pleased after he called for a lower kiwi yesterday. The Canadian dollar is down as well with USD/CAD up 0.89% to 1.2622.

• The AUD/USD is down 0.6% at 0.7900 and slipping below the trendline that stretches back to the start of the rally which took the Aussie above 80 cents. Yesterday’s data was strong. But that doesn’t matter this morning because the US dollar is sweeping most currencies before it. So the Aussie is lower. Today’s release of Capex data will be an important determinant in the Aussie ability to hold up. Next support is 0.7865.If that breaks we might see another run down toward 78 cents.

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Commodities

• Brent played catch up last night as traders pummeled prices down more than 2% to $50.86 as the spread to WTI continued to widen with the fall in US prices. WTI was down 0.97% as traders continue to react and adjust to the implications of Hurricane Harvey on US demand and production. As I write WTI is at $45.99 and firmly in its current downtrend.

• Inventory data is irrelevant for current prices and the current outlook given Harvey and the fact that 24% of US refining capacity is off line at the moment. But EIA data released overnight showed inventories in the US fell 5.4 million barrels in the week to August 25 which was significantly more than analysts forecasts for a 1.9 million draw. The data also showed that refinery utilisation increased to96.6% of capacity pre-Harvey which is the highest print since 2005. It doesn’t, and won’t, matter for a while yet. But the market was tightening before the storm as OPEC wished.

• With a low of $1305 overnight gold is holding above important support. Unlike the euro, which appears to have had a blow off top, gold has a reason to hold above $1300 – geopolitics. President Trump’s tweet saying “talking is not the answer” simply highlights why some sort of safe haven insurance is still being pursued by traders and investors right now.

• Copper is down a little as it reverses off resistance at $3.10 and as the US dollar rallies. It’s at $3.06 a pound down 0.54%.

Have a great day's trading.
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