Originally published by AxiTrader
Market Summary
The S&P 500 set a new record and topped 2,500 for the first time Friday as traders continue to bet that the administration is refocusing on, and heading toward, some of the much-vaunted stimulus and tax cuts which were so much a part of the Trumponomics rally earlier this year.
There is also a little bit of momentum and “what doesn’t go down must go up” in this latest rally in stocks which also lifted the Dow Jones Industrial Average to a record 22,698 and the Nasdaq 100 to 6,448 for gains of around 0.3% apiece. Stocks in Europe missed the party with small falls across the board. So they’ll have to catch up this afternoon when they open – assuming nothing new from the North Koreans.
Catch up is what local SPI traders did marking prices another 16 points higher after Friday’s awful fall.
On forex markets the weak US retail sales and industrial production roiled the markets and hurt the US dollar while a Bank of England dove turning hawkish saw the pound soar above 1.36 at one point. Things have settled down a little but the US dollar still lost a little ground in US Dollar Index terms. The Aussie dollar is hanging tough at 80 cents but there are some signs the worm might, stressing might, be turning for it (see below).
Gold and copper were lower again Friday and oil is on the cusp of a very important breakout as futures approach expiry this week. That should make it interesting.
Bond rates were higher with the US 10-year closing the week above 2.2% for the first time since mid August and UK gilts rose sharply on the hawkish chatter from the BoE's biggest dove.
Also making it interesting will be a talk from BoE governor Mark Carney in Washington tonight, the FOMC meeting Wednesday, Kiwi GDP Thursday, and then the BoJ meeting and announcement Thursday as well. Here at home, it’s all about the RBA. Minutes and then speeches from Luci Ellis and Phil Lowe.
Here's What I Picked Up (with a little more detail and a few charts)
International
- It’s likely to be a while before we get “clean” economic data from the US, free of the impacts of Hurricane’s Harvey and Irma. And its Harvey that seems to have impacted retail sales and especially industrial production in August. IP tumbled 0.9% in August which was the biggest drop since May 2009 with the fed attributing 0.75ppts of the decline to the storm disruption which “temporarily curtailed drilling, servicing, and extraction activity for oil and natural gas”. Retail sales were harder to isolate the Commerce Department said with some stores reporting positive impacts while others they’d been negatively impacted. More problematic was that the 0.2% fall in August came with downward revisions to June and July’s sales data.
- Taken together the result is that forecasters will be downgrading their estimates for Q3 GDP growth in the US – with some give back in Q4 most likely. Worth noting the Citibank Eco surprise index for the US is sitting at -19 while the Atlanta Fed’s GDPNow estimate of growth was pushed down from 3% to 2.2% on Friday.
- What happens when a BoE dove releases its inner hawk? Why the pound roars to 1.36 of course. That’s what happened Friday after MPC member Gertjan Vlieghe said “Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise.” And he added a timing element saying that (my bolding), “If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in bank rate might be as early as in the coming months”.
- The natural response of bond traders in the UK was to hit the sell button. And that is exactly what they did with UK 10's up 10 points to 1.33%. That also put mild upward pressure on European rates while in the US the 10-year Treasury closed at 2.20%. That’s the first weekly close above that level since early August.
- Also readying the market for a move in policy is the ECB. Or at least the hawks on the ECB are. On Friday we heard again from ECB board member Sabine Lautenschlaeger who said “The buoyant growth coupled with the monetary accommodation will take us back to an inflation rate which is in line with our goal. There's little doubt about that. Hence, it is time to take a decision now on scaling back our bond purchases at the beginning of next year”. Who can disagree really?
- And as if on cue EU wages data Friday showed they grew at the fastest pace in two years during Q2. Eurostat reported hourly costs rose by 1.8% yoy in Q2 up from 1.4% in Q1. That was part of the outcome that showed wages rose 2% yoy during the quarters from 1.3% in Q1.
- Keep an eye on North Korea again folks. Traders took last week’s missile launch in their stride but the rhetoric from Washington is hotting up. Over the weekend President Trump’s national security advisor H.R. McMaster said at a press conference with Nikki Haley, the US Ambassador to the UN, that “We’ve run out of time…there is a military option”. While Haley herself said on CNN Sunday “we have pretty much exhausted all the things that we can do at the security council at this point” and it might be time to hand over the North Korean problem to the Pentagon. The US doesn’t want war…we consistently hear that from the Administration’s leadership. But what choice is Kim Jong-un giving the US, indeed the globe? Can the world’s leadership sit comfortably knowing a rogue state will have the ability to deliver a nuclear payload over thousands of kilometers and likely sell that technology to the highest bidder? My guess is the chances of conflict have ratcheted up a notch or two.
- And reports over the weekend say that Japanese Prime Minister Shinzo Abe is considering an early election. No doubt he’s seeking to take advantage of the better atmospherics his handling of this Korean issue has brought him.
Australia
- Awful, appalling, ugly. There seems no lack of negative adjectives to describe the performance of the ASX200 not just Friday but over the course of the week. To Friday first though and we saw across the board selling which drove the physical S&P/ASX 200 down 44 points, 0.76% to 5,695. That left the local index up on the week but down more than 80 points from Wednesday’s high around 5776.
- Sectorally the banks came under pressure from the renewed focus on money laundering and overall compliance issues. And by extension my guess would be the growing chances of a Royal Commission eventually for the sector. Basic Materials, where the miners sit, was also down with Fortescue Metals Group (AX:FMG) announcing that its CEO would leave in 2018, but the weakness was spread across the sector. Indeed the selling was across the market with Technology the only one of eleven sectors which finished in the black Friday.
- The one positive we can draw from Friday’s move is that at least traders respected the little old trendline the ASX200 broke up and through on Monday. SPI traders plunged through the similar trendline – but closed above. On the physical market 5,686 – Friday’s low – is the level to watch on the downside. But SPI traders marked prices higher by 16 points Friday after another positive day’s trade in the US, and S&P 500 record close at 2,500. Will they be right? Charts would suggest as long as 5,685 holds on the physical and 5,680 for the SPI.
- Looking at the data this week in Australia we see it’s dominated by the Reserve Bank with the release of the minutes to this month’s board meeting and speeches by assistant governor Luci Ellis and RBA governor Phil Lowe Wednesday and Thursday respectively.
Forex
- The US dollar was hammered by the weakness in retail sales and industrial production on Friday but recovered thee worst of those losses to be only down 0.3% in DXY terms. As it stands in early Asian trade this morning the euro is sitting at 1.1930, USD/JPY is at 111.09, and the pound, which surged above 1.36 at one point Friday, is sitting at 1.3569. Like the yen the Swiss franc hasn’t gainied any traction from the US comments on the DPRK over the weekend and it hasn’t hurt the commodity bloc with the AUD/USD at 0.7999, USD/CAD at 1.2187 and the kiwi at 0.7276.
- The Australian dollar is ostensibly doing quite well here at 80 cents or thereabouts. But that is largely because the US dollar hasn’t really kicked on with its recovery and also that the global growth backdrop has been so solidly in the Aussie dollar’s favour for some time now. But one thinig that caught my eye over the weekend was that one of my indicators of sentiment for the AUD/USD – the relative performance of MSCI metals and mining shares versus the overall performance of the MSCI global market – reversed. Indeed this ratio of the relative performance went backward for the first time since mid-June. Of course, that reflects the price action of metals themselves. But it’s possible pointer to the fact that investors focus might be moving to other assets once more.
- Naturally, it doesn’t guarantee the Aussie will fall as there are still many positives. But it is a warning sign.
Commodities
- Crude oil is almost up and away. I say almost because we have the front WTI contract sitting below resistance at $49.89 while the second contract – which will become the front contract this week – is sitting right on resistance in the $50.45/50 region right now with a close Friday at $50.44 a barrel. You can see how that looks on a continuation chart from our oil contract at AxiTrader which has already switched contracts to avoid this week’s roll.
- If WTI can trade up and through $50.50 after the expiry of the first contract this week then we’ll know the bullish fundamental news from last week on demand and the hangover impacts of the Hurricane Harvey disruption are washing away and a push higher has begun. Or not, as may be the case, it depends on the price action.
- Gold was down again Friday. It’s at $1319 this morning an heading back toward the bottom of the uptrend channel which comes in at $1310. Thursday’s low was $1315 so support would be expected to be found below $1320 – especially with those comments from Nikki Haley and HR McMaster on Korea over the weekend.
- Copper is back testing support again and looking a little wobbly. China metals remain a little pressured and as I noted above this is being accompanied by the first under performance of global metals and mining shares to the overall market since mid-June.
Have a great day's trading.
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