Originally published by AxiTrader
Market Summary
US stocks were higher overnight on the back of solid data and a growing expectation that the the Trump tax cuts will be delivered.
That drove the Dow Jones Industrial Average 0.68% higher to 22,557, while the S&P 500 climbed to 2,529 for a gain of 0.39% and the Nasdaq 100 rose 0.32% to 6,516. In Europe stocks – except for Spain – were also higher. And that means SPI traders have built on yesterday’s solid gains on the S&P/ASX 200 adding another 19 points to yesterday’s 48 point lift.
On currency markets the US dollar was generally better bid as traders worried about what Catalonia means for Europe and the euro. Last night’s data reinforced that move and we saw something we haven’t seen since late April this year – the Citibank economic surprise index for the US actually climbed back into positive territory. So this morning the US Dollar Index is on the cusp of a break, euro is at 1.1735, the pound is at 1.3273, USD/JPY at 112.74 and the Australian dollar is largely unchanged at 0.7825 after again finding solid support under 78 cents.
Bonds were also higher initially but dipped a little – US 2's are at 1.49% while the 10's are 2.34%. Spanish bonds are widening to German bonds.
On commodity markets oil was hit hard as traders switch focus – after a trendline break – to supply, not demand and market tightness. WTI fell around 2.2% to start the week. Gold is under pressure in a perfect storm of reasons to sell it and copper is hanging tough.
Today we get the RBA and plenty of other local data .
Here's What I Picked Up (with a little more detail and a few charts)
International
- Global growth folks, global growth. That’s the economic story of the night as the raft of manufacturing PMI’s released in the past 24 hours tell the story of a continuation of this trend toward synchronisation and strength. In the US the ISM manufacturing PMI climbed to a 13 year high of 60.8 while in Europe the data showed the EU wide manufacturing PMI hit its highest level since 2011 of 58.1 during September. German manufacturing PMI rose to 60.6, in France the print was 56.1, and Italy printed 56.3 – all numbers and either as good or better than the previous month’s result. More broadly whether it was Brazil, Canada, Japan or many other markets the manufacturing PMI data released showed strength – and in most case a higher number than the previous month.
- Indeed the composite Markit/JP Morgan measure of global manufacturing PMI remained at August’s 75 month high of 53.2. Remember back in August when I wrote about the OECD report which said 2018 will be the first time in a decade every member country would be growing. This is another sign of that.
Global Manufacturing PMI (Source: Markit.com)
- That’s a good sign for growth assets, and for the Australian dollar’s support – even with the stronger US dollar. But it also reinforces the notion the time for emergency monetary accommodation has passed. So even though inflation remains low the bias of rates to rise, and central banks to withdraw stimulus will continue.
- One notable exception to the improved manufacturing PMI was the fall in the UK data. Certainly, at 55.9 the UK manufacturing print is still healthy. But the fall from last month’s 56.7, and the 56.4 print the market had expected caught traders by surprise knocking Sterling for six. It’s down 0.85% this morning at 1.3281.
- BUT THE BIG DEAL, the very big deal, for traders – especially forex ones – is that the Citibank Economic surprise index has climbed back into positive territory after last night’s data. That means that for the first time since the end of April this year it the data flow is again beating consensus . As you can see in the chart below that collapse in the data – the CESIUSD fell to a low of -78.6 in mid-June – was a big part of the US dollar’s weakness. The recovery in the data hasn’t been as strongly positive for the buck – yet. What’s important here is that regardless of what Neel Kashkari (see below) says the US economy is expanding and the Fed is likely to raise again this year and then 2-3 more times in 2018. All the while running down its balance sheet. That puts upward pressure on rates, bond spreads, and the US dollar – even before the stimulatory impact of the Trump tax cuts when they pass the Congress.
- And speaking of Neel Kaskari, the Minneapolis Fed president said overnight that the Fed’s rate rises are responsible for keeping inflation low. He’s a dove who has already dissented twice this year and doesn’t want to raise rates again until inflation hits the Fed’s target. “My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations,” he said. But it’s this last point where he highlights why others around the FOMC table are taking rates higher. They believe thee labour market will continue to tighten and that inflation will eventually rise. Kashkari’s prescription would be to react then and hike rates. Janet Yellen thinks that might be too late and the Fed would have to raise rates in a manner which would cause a recession. It’s clear in Kashkari’s comments that the argument is not about higher rates, just their timing.
- And ICYMI yesterday, I covered the upgraded Q3 GDP forecast from the Atlanta Fed to 2.3%, comments from Philadelphia Fed president Patrick Harker that he’d pencilled in another rate rise this year and 3 next year. SO it’s also worth noting that overnight Morgan Stanley (NYSE:MS) upgraded its Q3 GDP forecast from 2.6% to 2.8%.
- On the Catalonian referendum. Somewhere north of 800 were injured in clashes with police and the Catalonian leader has said it’s time for Spain’s central government in Madrid to deal with the region which voted overwhelming for independence in Sunday’s referendum. It’s an existential crisis for Spain. But for markets it reignites worries about the whole EU project as we await the Italian elections and see how Brexit plays out. Spain’s bond rates widened to German bunds overnight and the IBEX fell 1.2% while the rest of Europe’s bourses rallied.
Australia
- We finally did it. The S&P/ASX 200 has a solid day yesterday taking out the little downtrend that constrained it at the end of September and breaking and through 5700 comfortably. The close at 5729 was a gain of 48 points, 0.84%, and SPI traders have added another 18 points in trade overnight. Given the lead from US and European markets last night that seems a reasonable bet. The charts suggest a run toward the congestion zone between 5770 and 5805. But the questionof a move higher remains an open one unless or until the overall range is broken. The ducks have to be lining up for a break higher for the ASX in the months ahead though surely given the global growth, local growth, and interest rate outlooks.
ASX200 Daily (Source:Investing.com)
- The Reserve Bank Board meets today with no change expected to the official cash rate of 1.5%. But even what RBA governor Lowe says in the accompanying statement will be parsed aggressively by both sides of the interest rate argument for signs of whether the inclination is moving toward rate hikes or rather if the RBA is firmly stuck on hold. Based on recent comments hold seems the more likely outcome with continued caution around employment slack, lowflation, subdued wages growth, a relatively strong Aussie dollar, and high household debt. But as the global manufacturing data shows - the backdrop for the Australian economy has improved. So on current trajectory the move to higher rates in Australia is only a matter of time. When, not if.
- On the data docket today besides the RBA we have the release of the ANZ consumer confidence data for the week, Job ads for September, Building permits for August and HIA home sales.
Forex
- The US dollar was bid in Asia yesterday as traders reacted to the news of the Catalonian referendum. That tone continued overnight such that we have the US Dollar Index up 0.56% to 93.59. That’s on the cusp of what could be a very big break and run toward my current target of 95.85/96.00. A break of 93.70 would take out last week’s high and see the US Dollar Index off and running.
USD Index - DXY (Source:Investing.com)
- Looking specifically this morning the euro is down 0.67% at 1.1734. last night’s low was 1.1724 which is just above the previous week’s double low on consecutive days around 1.1715/20. That makes this zone a critical region which if broken will open up the downside to 1.1660/80. A break of this latter level would potentially be a sentiment changer. My current target remains 1.1525 however – just a garden variety 38.2% retracement level of the the big swing to recent highs.
- USD/JPY is higher, up 0.24% at 112.74, actually looks a little toppy. Yesterday’s Tankan survey – like the other data I discussed above – was actually pretty solid and levels above 113 are looking a little tough for the bulls to crack at the moment. Only a break of 112.15/20 however would suggest a big fall.
- Sterling was the worst performer among the G10 with a fall of 0.93% to 1.3273 after the worse than expected PMI print overnight.
- Of the commodity bloc the Canadian dollar lost 0.34% with USD/CAD up at 1.2508 as oil prices slid overnight. The kiwi is at 0.7194, down 0.15% while the Aussie dollar is down 0.09% at 0.7826.
- As noted above the global and local economic back drops are supportive of the Australian dollar which helps explain why it found support below 78 cents again over the past 24 hours. Ultimately the question for the bulls is whether that outlook can countermand what looks like a resurgent US dollar. Data on both sides of the pair will detemine that in the weeks ahead.
Commodities
- Oil fell heavily last night despite the closure of a Libyan oil field as traders again grow wary that prices at these levels will see an aggressive response from US shale oil producers. On Friday Baker Hughes reported that the rig count rose for the first week in the best part of two months with an additional 6 rigs added. That, and comments from the IEA that even though inventories are down substantially in 2017 that trend is unlikely to continue and may rise in 2018, seems to have weighed on sentiment.
- So this morning WTI is down 2.2% to $50.52 while Brent fell 1.29% to $56.06. It’s an interesting turn after last week’s solid surge. Both WTI and Brent broke those uptrend lines I highlighted last week and my system went short Friday. Last nights WTI low of $50.04 was above the 50% retracement level of the recent rally and this $49.90 region looks like important support.
- Gold continues to fall as the global economy grows, as rates rise, ass risk aversion wanes, and as the US dollar falls. As highlighted last week the break of $1281 opened a move to the low $1260 region where the next Fibonacci level rests at $1263. Gold is down 0.7% at $1270 this morning.
- Copper is still hanging in at $2.93 largely unchanged.
Have a great day's trading.