Today Will Show Us If A Pullback Has Begun

Originally published by AxiTrader

Market Summary

The combination of a Republican Party spat that could threaten President Trump’s tax cuts, earnings news, and rising bond rates was enough to see US stocks pause their record run in overnight trade. That saw the S&P 500 lose a reasonably hefty 13 points, 0.5%, to close at 2,556. The Dow Jones Industrial Average lost 0.5% as well to close at 23,339 while the Nasdaq 100 dipped 0.44%.

European stocks were universally lower as well with the FTSE off 1%, the DAX off half a per cent and the CAC down 0.4%. SPI traders are more circumspect however and have only knocked 11 points, 0.2%, off prices from where they were yesterday. That’s positive but today could be the day the topping pattern turns into a reversal for the local market.

On forex markets it’s clear the US dollar is not in a bull market as the pairs are being driven by the other side of the cross. That meant strong data in the US didn’t help the US dollar but solid German data did help the euro which is at 1.18 this morning. Likewise better than expected GDP data helped the pound rally sharply to 1.3250 while the Canadian dollar lost 1% on a dovish BoC – USD/CAD is at 1.28. The Aussie dollar lost a per cent as well after yesterday’s weaker than expected CPI and is at 0.7697 while the kiwi is down another 0.4% at 0.6872. The kiwi must hold 68 cents or it is a shot duck.

On other markets, gold was down but bounced back and is at $1277. Oil backed off from range highs after US inventory data printed a bulid not the draw the market had expected. WTI lost half a per cent to $52.19 as a result. Copper is down about the same amount even though base metals had a good day yesterday.

On the day today we have South Koreas Q3 GDP, Australian export and import prices, Singapore industrial production, Gfk confidence in Germany, a Riksbank decision in Sweden (could be interesting) and then the very important ECB decision and press conference tonight. In the US we get the trade balance, jobless claims, inventories, pending home sales, a speech from Neel Kashkari, and the Kansas Fed manufacturing index

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

International

• It appears to be a game of three. With the market coalescing on Janet Yellen, John Taylor, and Jerome Powell as the front-runners for the next Fed chair role. Taylor won a Republican Party straw poll and would be seen – although I don’t necessarily agree – as the more hawkish of the three front-runners. But if Yellen gets up we might see a little bond rally and US dollar sell-off given she's – unfairly – seen as a dove. I see her as the pragmatic chair of the Fed who was dovish when needed and is now relatively hawkish raising rates when many in the markets and colleagues like Neel Kashkari and James Bullard think she's on the wrong track. We’ll know in the next week apparently.

• Bonds again folks, they’re breaking higher. US 10-year Treasuries have taken out resistance at 2.42% and are trading at 2.44% this morning. 2-year notes are also higher at 1.60%. This is a move worthy of note in stock markets particularly if this move in the 10’s heads toward the 2.60/2.65% region. Yesterday I highlighted that I think markets might be underestimating the chance of a lift in inflation in the year ahead. Equally though what markets are not pricing is the reality of where the 2 and 10 year bonds rates should or will be if the Fed delivers on the dot plots 4 rate hikes between now and the end of 2018.

• It’s cognitive dissonance writ large folks. If the Fed is going to raise the funds rate to, or above, 2% then unless you are calling for a recession US 10's will be up near, or above, 3%. That’s a level I have heard many folks say will get conversations going about valuation in stocks, and the stock market. Don’t get me wrong, I’m not calling a crash in stocks. But it does seem to me that Fed policy suggests rates are heading to a level substantially higher than where we are right here and now. Here’s the 10-year chart again from Investing.com.

US 10 year rates (Investing.com)

• Bond guru Jeff Gundlach agrees that the bond markets “moment of truth has arrived”. Business Insider reports he tweeted that rates in the US “need to start rallying effective immediately or obituaries need to be written”. You can read Jonathan Garber’s article which followed Sam Jacobs one yesterday afternoon at BI.

• DATA WATCH - German Ifo was stronger than expected overnight as the business climate printed 116.7 from 115.3 in September. Likewise expectations for October and conditions were also stronger than last month – and expectations – at 109.1 and 124.8 respectively. In the UK GDP for Q3 printed 0.4% against expectations of a rise of 0.3%. year on year growth also beat but was a tepid 1.5%. In the US Durable goods were a strong beat in September easily beating expectations with a 2.2% headline print and 0.7% ex-transport. New Home sales also surged back in September up a ridiculous 18.9% as the Hurricane impact washed out.

• And China announced its new leadership team yesterday which suggested that president Xi is going to break from recent tradition and try for a third term in 2022. I say that because there is no clear successor among the members of his standing committee. And it was clear in his marathon speech to open the 19th National Congress that he has a long vision for China and is playing a long game. So it seems he may want to stick around a little longer to see that vision entrenched and executed.

Australia

• Today is the day folks. Today is the day we should know if this topping pattern on the S&P/ASX 200 and the SPI is going to morph into the retracement that inevitably follows such moves. Yesterday’s 8 point gain and close at 5905 for the physical ASX200 didn’t add anything to the debate. But the overnight price action in European and global stock markets, coupled with the price action on the SPI – which dipped 10 points overnight – suggests we now have a clear level to watch that will signal the pullback has begun.

• That level is 5864 in the SPI. A move below there, give it a few points for confirmation, will signal a move back toward 5780/5800 in SPI terms and 5820/40 in ASX200 physical terms has begun. Now don’t get me wrong, this is just a garden variety 38.2% retracement of what has been a very swift move in the local market. But the key to this Fibonacci retracement, if it comes, is that it is also the top of the previous range the local bourse was in for a few months. So it’s an important level and must hold if Australian stocks are to rally toward 6,000. Here’s the chart of the SPI 200.

• Yesterday’s CPI was a shocker. Whichever way you cut the only conclusion you can come to is that without the rise in energy prices Australia would have had virtually no inflation at all in the third quarter. Headline inflation missed to the low side of estimates with a 0.6% print for the quarter and 1.8% rise in prices year on year. The data showed tradables inflation dropped 0.3% over the quarter while non-tradable inflation rose 1% in Q3. That’s left their year on year comparisons wildly divergent at -0.9% and +3.2% respectively. To turn that into something useable for readers that means Australia is essentially importing low inflation from the globe while domestic factors are still putting pricing pressures on households and businesses in the local economy. It speaks to highly uneven outcomes across the economy.

• But the RBA has to manage the economy in aggregate and this headline print and the underlying CPI which which rose just 0.35% to leave the year on year rate at 1.9% means there is little to no chance that the RBA will be raising rates anytime soon. Of course that’s what they told us recently. The RBA does not need to follow other central banks because we have a different starting point and outlook. But some folks say the RBA should cut rates because inflation is well below its mandate. To those folks I say take the blinkers off, look around the globe and see what the impact of low and negative rates has been on inflation in jurisdictions where these experiments have been run. Low inflation remains a global phenomenon and dropping rates here in Australia won’t change that. It will simply goose the housing market and increase financial instability. Something I'm betting RBA Governor Phil Lowe would be happy to say “not on my watch”. The wash up is the RBA is on hold for some time. And the Aussie dollar is under pressure.

Forex

• This is not a bull market for the US dollar. Not yet anyway. The reason I say that is because the US dollar is not reacting to positive stimuli in the manner that you would expect if it were a US dollar bull market. Take last night’s data for example (see above) perfectly good solid data pointing to a good read on the economy when GDP is released tomorrow night. Indeed Goldman Sachs (NYSE:GS) upgraded their forecast by a tenth of a point and the Atlanta Fed’s GDPNow is still saying a relatively healthy pace of growth at 2.7% is expected for Q3.

• But the dollar is not rising. What’s especially notable about this is that the dollar is not rising event though US 10’s are breaking out. Naturally, that UK and European bonds are also rising is also important. But for me when you watch the way euro reacts to positive data, how the Canadian dollar has come under pressure from weaker data flow and then the BoC decision and comments overnight, how the Aussie got pole-axed yesterday on a weak CPI, and how the ebb and flow of Brexit/Economy/BoE feelings drives sterling then the key forex markets right now is that traders have assimilated the US economy, what the Fed will do, what a Trump tax cut may wrought and are instead focusing on the other side of the pairs against the US dollar. That’s entirely appropriate given that traders believe they have a clear picture of the US side – the Fed, growth, and tax cuts. It’s the other side where the volatility is. So it’s not a bull market for the US dollar – not across the board – but it is in some pairs.

• Looking at the main moves overnight euro is up 0.4% to 1.1807 after German Ifo business data shot the lights out and showed again – as if we needed further confirmation - that the euro is not a handbrake on business or economic activity in Europe’s largest economy. GBP/USD is up as well after the 0.4% GDP print was a little better than expected. That data turbo charged sterling which is up 0.9% again the US dollar at 1.3248 and half a percent stronger against the euro with EUR/GBP at .8908. GBP/USD is breaking out of its recent downtrend.

• The Canadian dollar lost a little more than one pre cent against the US dollar overnight and more against the euro and pound after the BoC left rates on hold and delivered a dovish statement and press conference. The bank highlighted “substantial uncertainty” for the Canadian economy around the NAFTA negotiations and said while the economy is operating near potential there is still slack in the labour market.

• So we now have USD/CAD hitting the FIbo target of the break of the recent high at 1.2803 which is through the 1.2770 region I was targeting. There is room for a pause but this break is a substantial one and USD/CAD would be expected to push higher. Q3 GDP tomorrow night will be important.

• The Aussie dollar was hammered yesterday with that weaker than expected CPI result. The headline print was below the range of the polls I saw so it caught the market by surprise. The initial move to support at 0.7730 held until European traders joined the fray and then the Aussie came under renewed pressure. It hit a low around 0.7689 and 0.7650/60 is the next level of support I’ve been watching. Though it is also clear that traders are watching the 200 day moving average which sits at 0.7689 this morning. The Aussie hasn’t traded below this moving average since June. A break and hold for a day would be decisive and a signal a deeper retracement may be underway.

Commodities

• Gold made a fresh low for this run overnight trading down toward $1270 before bouncing back to sit at $1277 as I write hardly moved on the day. There is quite a bit of stock weakness in this recovery from the lows. But overall if rates keep rising gold could struggle to sustainably rally.

• Crude is a little lower this morning after US inventory data printed a build of 856,000 barrels last week not the 2.57 million barrel draw the market had expected. Coming so close to the range high that knocked WTI back 0.53% to $52.19. But it’s worth noting Brent is up 0.15% at $58.42. It’s clear that traders are wary of punching through the range tops right now even as it becomes clear that the Saudi’s are trying to build consensus for an extension to the production deal. On that front it’s worth noting that Russian oil minister Novak said if the deal ends Russia will increase production once more. There’s OPEC’s incentive, right there. But it doesn’t help prices short term.

• Copper’s trading range continued. But it is down about half a per cent to $3.17 while most other base metals had a positive day. $3.11 is still the key level to watch for me.

Have a great day's trading.