Originally published by AxiTrader
Market Summary – 7.20am
The US dollar is under pressure again, continuing the troubles that started to emerge in Asian trade yesterday. Exactly why is difficult to know. The Treasury auction went off reasonably both in terms of bid to cover and rate. Japan has a re-newed political scandal, and two senior ECB officials warned inflation is too low and thus implied rates will be on hold.
That was against a backdrop of surging US jobs, a Fed which can help but raise rates next week and probably signal three more this year. But the dollar is lower anyway, USD/JPY is down 0.4% at 106.37, euro has gained 0.3% to 1.2340, and the pound is 0.45% higher at 1.3911. The Australian dollar is also higher despite weakness in Chinese bulk commodities yesterday, a fall in oil overnight, and copper being lower. AUD/USD is sitting at 0.7875 this morning – up 0.34%. The kiwi is up 0.2% at 0.7296 while the Canadian dollar is a little lower with USD/CAD trading at 0.13% - at least one exchange rate move makes sense.
Turning to stocks now and just like the ASX 200 yesterday here in Australia US stocks couldn’t hold onto their highs and have drifted a little as the day went on. As I write the S&P 500 is down 0.13% while the Dow is off 0.62% hit by a fall in Boeing (NYSE:BA) – in particular – and is trading 25,178. The Nasdaq continues to march on with the 100 index up 0.42% to 7,131.
US 10-year bonds are a little better bid then where they were yesterday afternoon our time at 2.87% - down 3 points from when I left my desk. The 2's are at 2.26% and the curve is back at 60 points.
Looking at commodities now and as noted iron ore, coke, and coking coal came under pressure yesterday – but prices ended off their lows. Overnight about a third of the bounce in oil Friday was reversed with WTI down 1.1% to $61.37 while Brent dipped 0.8% to $64.98. Concerns over US production are being blamed – but prices are tooing and froing without heavy conviction in a few dollar range right now. Copper dipped about half a percent to $3.1245.
In political news, it’s worth noting Britain has called out the Russian government for the nerve attack on the former spy last week while US President Trump continues to bully Europe over tariffs and has dispatched Wilbur Ross to make a deal.
Oh, and a hand grenade for the Australian share market, or at least those who generate cash from excess imputation credits, is going to be thrown by ALP leader Bill Shorten today the AFR says. The SPI is up 3 points though at the moment.
I’m excited for the release of today’s latest update of the NAB business survey. It will be a good indication if the ebullience in Australian business has continued and if hiring intentions remain robust. With a struggling consumer sector that is a necessary requirement to get anywhere near the RBA’s growth targets. The day the NAB business service is weak is a day I’m going very long Aussie interest rates and short the Aussie. Probably not today though.
Housing finance is also out in Australia while elsewhere the release of US CPI data for February is a huge event for markets tonight. Core and headline are expected to have increased 0.2% to 1.8% and 2.2% respectively.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The ECB is sending, has sent, a strong signal that inflation remains its number one priority and it is not winning that war. We heard that from Mario Draghi last week and overnight we also heard it from governing council members Coeure and Smets. Benoit Coueure said that, “Inflation is not quite where we would like it to be”. And that means, “It is very clear to us that short-term interest rates, the ones that are controlled by the central bank, will remain at very low levels, far beyond the horizon of our asset purchases”. So yes, QE will end soon but don’t expect rates to change in a hurry. POLICY DIVERGENCE FOLKS – just saying.
- His colleague Jan Smets, noted there may be more slack in the European economy than thought and as a result, “it may take more than we thought and inflation pressures could take more time to build…(But) it is absolutely crucial that we meet our price stability objective and not accept a level below that; the objective is what it is and we are not there yet”. Again folks, the ECB is a single mandate central bank. So can I say POLICY DIVERGENCE again? And don’t tell the euro bulls that the 2yr forward 2 years is slipping and implies a lower EUR/USD now.
- And while I’m on POLICY DIVERGENCE, the latest NY Fed inflation expectation survey published overnight of consumer expectations showed the median one-year outlook of 2.83% in February from 2.71% previously. The three year read also increased with a print of 2.88% from 2.79%.
- And speaking of Europe, president trump has never really been enamored with them has he? Almost from the time he took office he’s taken aim at them over one thing or another – NATO, defence budgets, tariffs and so on. And he was at it again overnight following up his weekend tweet on tariffs with another one popping them for their trade barriers and saying he’s sending the big gun – Wilbur Ross – to negotiate with them.
- Angela Merkel has refused to speculate on the next ECB president – Jens Weidmann may not be the lock many thought.
- What can we say about Vladimir Putin? Not a lot good is probably the easy answer if you care about Western democracy or political stability. Anyway, his latest foray at doing as he pleases appears to be the sanctioning of a murder on British soil according to the UK government. The FT reports that “Theresa May has pronounced it “highly likely” that Russia was responsible for the attempted murder of Sergei Skripal and his daughter Yulia”. Mrs May told parliament she wants to bring those responsible to justice but a Russian foreign ministry spokesman said: “this is a circus show in the British parliament”. Watch this space.
- And while I’m on the UK, Oliver Wyman released an apocalyptic report last night on Brexit. The report says British and EU firms would be £58 billion id Brexit talks collapse without a trade deal.
Australia
- Bill Shorten and his shadow Treasurer colleague Chris Bowen likely thing they are on a political winner with the tax grab from the wealthy. But we’ll see what the market thinks when things kick off this morning. Given that Labor is a areal chance to form government after the next election traders and investors may take the plan to heart when it is formally announced this morning.
- The AFR reports that, “more than one million shareholders, including self-funded retirees, who pay little or no tax would lose cash refunds for excess dividend imputation credits, under a proposed crackdown by Labor that would reap an estimated $59 billion in revenue over the next decade”. Labor will apparently stress that the policy will only impact 8% of tax payers, won’t lead to more tax – just less rebates, and will wipe out a Howard Costello benefit.
- There is no guarantee this will have an impact. But it could certainly startle a few horse on the local market. That’s particularly the case when you through in mooted changes to negative gearing that Labor is also likely to wish to implement should they take office. There is little doubt the Opposition wants to shake up the paradigm which is not necessarily a bad thing – but we’ll see how investors take the prospect of what is likely to be a much more interventionist government.
- Looking at the price action now and the pullback from the high yesterday on the physical ASX was a sign that valuation metrics might retrain prices here in Australia near/above 6,050 unless US stocks surge to the next level. In SPI terms what we are left with is a big ugly down day on the charts. It’s not terminal by any stretch. Price is at 5,993 and last night’s low at 5,980 is the key. If that breaks I’d expect a decent pullback.
- The Australian dollar is levitating at the moment up at 0.7877 near the highs of the past 24 hours as traders pay more attention to the weaker US dollar and less to the disconnect between the Aussie dollar and commodity prices like iron ore and copper. The 2’s spread with the US at -25, and the 10’s spread of -6 are hardly enticing for investors either. But with the S&P up a little now and with the Nasdaq higher – along with European and Asian stocks – it seems like it is risk appetite, and its increase, which is doing all the heavy lifting in the AUD/USD. Can it last? It can as long as 0.7840/50 doesn’t break. While that region holds the Aussie is still in an uptrend.
Forex
- The US dollar just can’t take a trick. How many times have I written that since December 2017. Not as many as we all read “Goldilocks” yesterday about the non-farms payroll Friday. But that is where I want to go with this discussion about foreign exchange rates. As you can see in the comments from the ECB they are generally still focussed on the lack of inflation in the Euro Area and as such even when QE finally ends this year or early 2019 rates will be on hold for some time. At the other side of the spectrum of global central banks is the fed which is a lock to hike next week by 25 points and which does not want to make the mistakes of the early part of this century by leaving rates too low for too long. So I expect to see a hike and a dot plot that signals 3 more moves in 2018.
- But between now and then there is still a week of trading and it is clear the US dollar is still struggling to get traction. The best I can say about the USD – in US Dollar Index terms – is that it has stopped falling for the moment. But at 89.90 this morning it’s not strong either. US CPI tonight is a huge event for the market to navigate and one that will set the tone for the US dollar in the run-up to the FOMC meeting next week.
- What you see in the DXY chart, however, is that for the moment it’s going nowhere.
- USD/CAD is one I am watching closely. Last week I highlighted I though price would go back and test the trendline. IT has overnight – but I was wrong because it went up first. Either way though the bounce off 1.2800 looks like an important one. 1,2720 is the easy 38.2% target.
Oil
- Shale oil is back in the headlines it seems this morning with the EIA forecasting another big lift in in output with a lift of 131,000 barrels. That’s a sign the Iranians might be right about the impact of higher prices in contrast to what the Saudis think – or should I say Saudi budget needs.
- As a result of the above oil markets gave up a chunk of their Friday gains overnight with some decent falls for WTI and Brent. Prices still seem indecisive to me for both Brent and WTI. You can see that in the daily chart of Brent. Rather than the wedge I think the range to watch is $63.15/20 to $66.15/20.
Have a great day's trading.