Originally published by AxiTrader
Market Summary (7.49 am)
Donald Trump’s announcement that he’ll impose a 25% tariff on steel imports and a 10% tariff on aluminium overshadowed the second testimony of Fed chair Jerome Powell in the early hours of this morning my time – early afternoon New York Time.
Coming on the day Vladimir Putin talked up Russia’s new nuclear desires, perhaps capability, Trump’s announcement not only increases the spectre of a global trade war but also neatly highlights the fracturing of the global compact that has been in place over recent decades.
Naturally, with trade wars come beggar-thy-neighbor policies. That’s something governments around the globe have, for the most part, steadfastly avoided since the Financial Crisis. It’s something they’ll probably seek to avoid again in this instance with many nations following the South Korean lead and heading to the WTO and dispute resolution. For the moment it’s just the US. But for how long?
So to the markets and the S&P 500 has lost more than 1.32% now (low was around 1.8% down) as the technical outlook deteriorates further. It’s at 2,677. The Dow and Nasdaq 100 are both off similar amounts losing 1.5% and 1.55% respectively. Europe had already had a shocker with the DAX down 2% the CAC off 1% and the FTSE around the same amount.
So you won’t be surprised that the SPI is suggesting a really ugly end to the week today on the S&P/ASX 200. After yesterday’s 42 point loss the SPI is down 56 points at 5,924 – off a low of 5883.5 this morning. Already hit my 5,884 target from yesterday morning.
Forex markets are mixed and confused. There is absolutely no reason why the US dollar should benefit from the sort of policies President Trump is now following. By that I mean trade protectionism shouldn’t help the US dollar against the euro, or the yen, nor the Swissie necessarily. Against the Aussie dollar, that’s different story because of the impact the policy has had on risk assets and potentially on growth expectations.
So the battler has traded up to 0.7760 around 4 am this morning, back down below 0.7720 before 6am and it’s rising back at 0.7760 now. Euro is up at 1.2262 – off a pre-announcement low of 1.2150 while the yen is at 106.21 and on its way to 103, 101.50 and maybe even 98 if this all keeps up.
On commodity markets, gold fell but is back at $1318 as markets go into a funk. Oil is down around 1% in WTI terms and 1.3% in Brent terms. Copper is down for the third day in a row losing 0.6% overnight.
And of course with all of the above you’d be surprised if bonds weren’t lower in yield. US 10's are trading 2.81%, the 2's are at 2.22% and the curve is at 59.
Korean retail sales are out today along with manufacturing and industrial production data. Tokyo CPI and Japanese unemployment are also out and tonight it is German retail sales and import prices along with EU PPI. The big event though is Canadian GDP.
Tonight’s price action is crucial. We are really setting the tone for a very weak March already.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Tariffs. President Trump continues to tick off the list of campaign promises he made during the election with the latest fulfillment being the planned imposition of steel and aluminium of 25% and 10% respectively. He’s under the impression that the tariffs will aid in the advancement of the American worker and bring jobs back to the United States. I’m not sure one way or the other – but they might.
- Equally though the bigger picture here is that President Trump continues to prosecute the argument that the USA has been taken advantage of and continues to be taken advantage of by countries using cheaper labor to hollow out his base, move jobs offshore, and then ship back cheaper goods to then imperil what is left of US industry. It’s a clear and long-standing view he appears to hold. And with the elevation of Peter Navarro this week, traders, markets, and business leaders are likely going to have to get used to these types of views continuing to shape policy. And let's face it, Trump is not exactly 100% wrong when it comes to the impact of globalisation on US workers. Or put another way, he’s right enough that on the week he announced his campaign manager for the 2020 election he is reinforcing his credentials to the very base that might get him over the line again in a couple of year’s time.
- Oh and want to follow the impact of president Trump’s policies? Reuters has this little “Trump Tracker” which might be worth a save in your favourites. Or you can just read my morning note
- KaPOwell, or not as may be the case. I thought the Fed chair tried to temper a little of the tone that we all took away from his testimony earlier this week in his second trip up to Capitol Hill overnight. Powell told lawmakers that he didn’t think the US economy was overheating. Interestingly this time he actually seemed to work against the hawkish tone he took Tuesday saying that even though a 4.1% unemployment rate is “at or near, or even below” full employment “we don’t see any evidence of a decisive move up in wages ... Nothing in that suggests to me that wage inflation is at a point of acceleration”. It begs the questions why markets got so excited by the January jobs and wages data a month ago doesn’t it. That’s quite an interest comment really in the context of an otherwise optimistic stance Powell has taken on the economic outlook. He did say however that the Fed did not “get behind the curve”.
- And on that front Powell said the Fed will continue to “gradually raise interest rates…That is the path we have been on and my expectation is that will continue to be the appropriate path”. What’s gradual? Well NY Fed president Bill Dudley said 4 hikes this year is still gradual during a speech in Brazil overnight.
- US data wasn’t terrible overnight. The ISM manufacturing PMI rose to 60.8 from 59.1 against expectations of a 58.7 print. The employment guage jumped to 59.7 from 54.2, new orders eased a bit to 64.2, but backlogs rose to 59.8. Prices paid is also very interesting rising to 74.2 the highest since May 2011. Timothy Fiore, chairman of ISM’s factory survey committee, said “all indications are that demand will continue to grow”. Indeed. Also out was the PCE data which showed prices rose 0.4% - the biggest increase in 4 months – but the yoy rate stayed at 1.7%. Core PCE was up 0.3% - the largest gain in a year. We are starting to see a subtle acceleration in the pace of increases however with base effects subduing the yoy numbers at the moment.
- EU PMI’s were on balance still good but a little weaker than they have been. And while I’m in Europe the French, who increasingly see themselves as Europe’s leader these days, have said that the next ECB president does not need to come from a Northern country. Sorry Herr Weidmann.
- Is there an election on in Russia? Oh yes, I think there might be. I say that after Vladimir Putin last night changed the script on what folks had expected by announcing that Russia has developed missile which could overcome any defences deployed. He said these nuclear weapons were “unstoppable”. It’s the second comment from Russia in as many days as it is clear both that Putin is trying to encourage a bigger turnout at the election and that he is rattled by the US and NATO at present.
- Putin said, “efforts to contain Russia have failed, face it…I hope that all that was said today will sober up any potential aggressor. And any such unfriendly step towards Russia, like the deployment of ABM systems, the closing in of NATO infrastructure towards our border etc, becomes ineffective from a military point of view and unjustifiably costly from a financial point of view, and as a result becomes simply useless for those who initiate it”. Why’s it matter for traders and markets? Geopolitics is getting more fractured and in a way many folks won’t have seen in their careers, which likely encompasses a more benign period of relations. It’s just another sign of potentially elevated volatility across markets. My sense is we have seen a very distinct volatility regime change. And I don’t just mean in stocks.
- And speaking of elections. Italy goes to the polls this weekend. The nation appears to have lurched to the right but markets seem to be placated by the French election result last year, the fact it forced a change in some of the more radical 5-Star policies, and the fact that the fractious nature of Italian politics will render governing difficult and thus hinder any EU destabilising tendancies from the outcome. Lets hope so. But Italian unemployment ticked back up to 11.1% data showed overnight. Most unhelpful and unfortunate timing.
- And Brexit. Theresa May gives a response tonight. But EU negotiator Barnier said overnight that it’s getting to the point where the best Britain can hope for now is a Canada or South Korea style free trade agreement.
- And in the saying file. I offer you this from one of my favourite analysts on the planet.
JUST SAYING FOLKS. JUST SAYING.
Australia
- The Australian dollar fell out of bed again with the announcement of the steel and aluminium tariffs by President Trump this morning. The reason for this is a linkage through risk appetite and the fall in US stocks but also through the growth channel as well. The argument on risk appetite is easy to understand as I highlight often. But on trade wars the argument would run that if the US action leads to retaliation and the erection of trade barriers across the globe then prices rise, companies and countries are cut off, and overall growth across the globe suffers. It may all be a storm in a tea cup – though not for some of our steel makers – but if this really impacts sentiment across global markets on the stocks and economic outlook the Aussie will suffer.
- And the SPI has collapsed another 40 points as well after the physical ASX 200 lost 42 points yesterday. As I wrote yesterday, and said in my videos the 5,884 region seems to be a tractor beam and easy level to expect the SPI to drop back to being the garden variety 38.2% retracement of the recent rally. And that was the low this morning – in the past hour – before prices started to rise once more as the US stopped falling.
- Capex yesterday, and the way it was reported and interpreted initially, was the reason the Aussie dollar fell to the 0.7712 low. Certainly the fall of 0.2% for Q4 was a big miss compared with the markets expectation of a 1% increase. But that’s on the forecasters for getting it wrong. The actual data was not terrible at all showing a reduced drag from mining and a lift in investment plans for the rest of the business sector. Equipment plant and machinery were up 2.2% which feeds into GDP growth for the quarter while a big part of the drag was from building. Personally I like the mix a lot more this way. Spending plans for the next financial year were higher than where they were at the same point for the current year 12 months ago – but they again undershoot forecasters guesses. I liked what Paul Dales from Capital Economics said of the release, “the key point is that investment is no longer the Achilles heel of the economy as firms are starting to flex their spending muscles”. Or as former RBA governor Glenn Stevens might have said, it seems animal spirits are making a comeback.
Forex
- The US dollar is only down marginally at the moment with the US Dollar Index just 0.16% lower day on day. But the key point for me is that the high was at 90.93 which is essentially a perfect test of the 38.2% retracement level of the big fall for the dollar. It needs to break this level to run toward 91.70. And if it can not the focus will shift lower once more. Support is at 90.20. EDIT – DXY has actually fallen to 90.28 in the past 30 minutes since I wrote this.
- The yen is on the march again and in a clear downtrend. It has not been able to get back above the 108 previous range bottom and all of BoJ governor Kuroda’s entreaties about the need for policy to stay where it is has fallen on deaf traders ears. It’s at 106.36 as I write and a break of the recent low is necessary to really get things moving to the downside. But a drop below 105.57 would open the way to my first target at 103.50ish as a Fibo extension of the latest move.
Commodities
- Use the force Luke. That’s what Obi-Wan entreated Luke to do more than once in Star Wars and it’s a message worth remembering when trading gold at the moment. As I wrote earlier this week the charts suggested that XAU/USD would fall back toward the $1305/06 region but that the stock market funk suggested – rhetorically – that caution is warranted on getting too bearish.
- Unsurprisingly the force – sorry the charts – won out with gold making a low of $1302 overnight. But the battle between good and evil, the charts and gold’s safe haven bid is not done yet. So with stocks falling in a heap gold is now trading back at $1318 – unchanged on the day.
Have a great day's trading.