Originally published by AxiTrader
Market Summary
US stocks ended mixed but the US dollar was higher across most of the forex board after Fed chair Yellen noted inflation’s continued undershoot but reiterated that it will rise back to the 2% target. As such, the Fed will keep raising rates because to avoid doing so would risk an aggressive response in the future and tip the US economy into recession.
So at the close the Dow Jones Industrial Average was down 0.05% at 22,284, the Nasdaq 100 was up 0.15%, and the S&P 500 was effectively unchanged at 2,496. Stocks in Europe were fairly quiet but SPI traders have anticipated 16 points of gains when the S&P/ASX 200 opens this morning.
On forex markets, Yellen’s speech helped the dollar rally but it gave back some of its gains after traders continue to question if low-flation will really not impact the Fed's plans to raise rates. The euro and kiwi were again the big movers falling 0.5% and 0.8% respectively under the weight of the US dollar and political concerns in both nations. The yen is a little weaker, the pound is hanging tough, the Canadian dollar actually made 0.2% of gains and the Aussie dollar found support at 0.7858 but is still down 0.6% at 0.7885.
Gold is lower as trader fear less about North Korea after president Trump warned the DPRK but said the military option was not the number one option. It’s down more than 1% at $1293.60. Oil is a little softer after yesterday’s surge, and copper has fallen again.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The US President has again warned North Korea. But, President Trump said military action is not the first option. He added though that the US is “totally prepared” for the second option, the military option, which would be devastating. Trump also said that North Korea should have been sorted out by previous administrations which “left me a mess”. It’s a mess he said he intends to sort out.
- And while I’m on North Korea you just have to read this piece at 38north, the US-Korea Institute at Johns Hopkins. It’s one of those reads that probably requires an adult beverage on hand because it worries the protagonists “have maneuvered themselves psychologically into the belief that war is inevitable unless the other side capitulates to its desired end state”. And it draws parallels with the Kaiser’s slide toward war in Europe in the lead up to 1914. Not a fun read by any stretch – but an important one.
- President Trump again promised his tax cuts overnight saying “we will cut taxes tremendously for the middle class - not just a little bit, but tremendously”. Interestingly on this front the Peterson Institute's Adam Posen said the delay – but fact tax cuts are still coming – changes his view the US was due for a recession. He essentially said the boom phase of Trump's agenda has stalled and as a result so too has the bust. Personally, with a cautious Fed I see no reason why the US economy can’t keep growing for a few years yet. We do have almost perfectly synchronised global growth in prospect in 2018 for the first time in a decade.
- Normalisation folks, that is what the fed has been doing as it raises rates and that is what chair Yellen intimated it will continue to do in an important speech overnight. Chair Yellen wondered about the persistence of low inflation and suggests there might still be a little slack in the labour market. But in a nod to the reality this is both the Fed getting ahead of its expectation inflation will eventually rise again – I’m better they think it will be non-linear and simply reach a tipping point where it accelerates at some point – and policy normalisation Yellen said rates need to keep rising modestly to avoid having to tighten hard and fast and risk a recession.
- “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession. Persistently easy monetary policy might also eventually lead to increased leverage and other developments, with adverse implications for financial stability” Yellen said. In lay terms – we just can’t wait till we see the whites of inflation's eyes, that would be too late.
- “Too weak, too slow, too inefficient” – that’s what French president Emmanuel Macron said about the EU overnight as he launched an ambitious vision for further European integration. Macron’s plan included an EU armed force, and resources so the IMF doesn’t need to operate within Europe in times of trouble. Both laudable but likely a bit of a harder ask in the wake of the German election over the weekend though.
- And speaking of Europe, EU negotiator Barnier said that Brexit talks are not yet ready for the next stage. “We will discuss our future relations with the UK once there is so-called sufficient progress. The sides are working and we work hard at it. But if you ask me... I would say there's no sufficient progress yet, but we will work on it” he said.
- On the data front US consumer sentiment fell to 119.8 in September from 120.4 in August while housing data was mixed showing new single-family home sales fell 3.4 percent in August (on Hurricane disruptions) while house prices increased 5.8 percent year-on-year in July. Richmond Fed manufacturing activity rose from 14 to 19 (vs 13 exp).
- The US Senate has formally abandoned the Obamacare repeal bill. Looming changes to Senate procedural operations means any changes to health care are now going to have to be bipartisan if they are to pass the chamber.
Australia
- SPI traders reckon it will be a better day today, they’ve added 16 points to wipe away yesterday’s 13 point fall and close at 5,670 on the physical ASX200. It was another day of disappointment as the rally faded again under its own weight. There isn’t much to say really about the index overall other than it’s looking weak and I wonder what will shake it – and the SPI – from this cycle of unsustainable gains and this slip to the lower half of the trading range.
- Certainly the technical look awful. Not so much because we are seeing a strong down trend – we are clearly still inside this roughly 200 point range the market has been in for a couple of months now – but we are seeing a consistent inability to hold gains. That has actually generated a very short term – and steep – downtrend. So if the physical ASX200 can break 5,695/5,700 it could run a little harder.
ASX200 Daily (Source: Investing.com)
- Yesterday the RBA gave another warning on household debt which suggests when rates rises do come in Australia they will be slow and shallow. RBA assistant governor (financial system) Michelle Bullock said at a panel discussion, “when interest rates do start to rise in Australia, they are likely to impact consumption in a different way than they did when we were in a low debt society, so this is something the Reserve Bank will need to take into account”. That is RBA rate hikes will bit harder on spending because Australian households are carrying so much debt.
- That the RBA is worried about household debt levels is no surprise given their work with APRA to rein in home loan lending especially investor and – the most speculative sort – interest only loans. That they are also concerned about the levels of debt is something governor Lowe has pretty much said from his first speech upon taking the top job at the RBA. But the bank has remained upbeat on the outlook for the economy so many of us – yes me included – think rates will rise in 2018.
- But that is not certain by any stretch with Westpac’s Bill Evans and Capital Economics Paul Dales – both economists I respect greatly – taking the other side of that argument. David Scutt over at Business Insider has a good wrap of why they have a bit of a jaundice view on the outlook which you can read here. Hint, they think the RBA is wrong.
Forex
- The US dollar took a lot of heart from Yellen’s hawkish tone initially overnight pushing hard against currencies across the forex universe. But Janet Yellen’s focus on the uncertainty of why inflation remains low did give plenty of room for traders to have a different view. So the US dollar is still stronger – but off it’s highs.
- As I write EUR/USD is down half a percent at 1.1780 and on the way to my target – see below. But because a lot of the euro’s weakness is about German politics the pound has been able to resist the US dollar and it is only down 0.1% at 1.3451. It does look very toppy though on my charts.
- Euro broke through the 6-month down trend yesterday and then took out 1.1820 overnight. But as momentous as that fact is it seems some traders are more interested in the potential bearish lead that the break of the neckline of an apparent head and shoulders pattern in EUR/USD suggests. That suggests a fall equal to the size of the H&S pattern which is about 200 points. That targets a move to the low 1.1600 region. That’s a little below my current target of 1.1660/80 that I’ve penciled in. But if that level breaks I’d see a deeper retracement – and thus satisfaction of the H&S pattern regardless.
- USD/JPY found its mojo as traders again seem to relax about North Korea. That makes sense because even though it’s fair to say we all worry about the impact of war on thee peninsula it is still – hopefully – a low probability event. Certainly that is what the market is betting based on moves in USD/JPY which is up half a percent to 112.26 and USD/CHF which has risen 0.3% to 0.9690. Gold tells the same story, as does the little lift in US rates.
- Looking at the commodity bloc and the Canadian dollar is out performing the Aussie and kiwi as traders await a speech from BoC governor Poloz tonight and as oil prices remain elevated. USD/CAD found resistance right where it should have last night and is off the highs at 1.2344 – actually down 0.2%.
- In contrast while the Aussie also found support at last night’s low of 0.7858ish it is still off 0.62% at 0.7886 this morning. The drift continues for the Australian dollar which could face substantial downside if the US dollar recovery that is presently underway really gains traction. I expect that to be the case and even if the rally ultimately proves ephemeral a rally of 2-3% from here for the US Dollar Index seems likely. That would suggest an AUD/USD which tests 0.7740/50, perhaps even 0.7650.
- Similarly the drift continues for the kiwi which slipped below the trendline support briefly but then bounced back a little to sit at 0.7200, looking vulnerable and off 0.84%.
Commodities
- Oil is off a little this morning after the previous night’s strong surge. The reports are it was “profit taking” which perhaps it was because we often see big surges followed by retracements. Rather though I sense it’s was a lack of buying because of the range breaks we saw in both Brent and WTI and uncertainty about the outlook for hedging from US shale producers. My sense is the market is tightening and prices will rise. This morning’s API data showed a draw of 761,000 barrels against expectations for a build of more than 3.4 million. Anyway WTI is currently down 0.6% at $51.89 while Brent is down 1.1% at $58.37.
- WORTH NOTING: The Iraqi Kurdish leader said the referendum was a yes vote and called for the Iraqi government to engage in “serious dialogue”. That is not going to please Baghdad or Turkish president Erdogan. And oil traders will be watching for any fallout after Erdogan said he’d turn off the Kurdish “tap” for their oil which flows from the land locked territory through a Turkish port for export. 500,00 barrels a day in a tightening market would make a difference.
- Gold is lower this morning as traders worry less about the North Korean tensions and as the US dollar strengthened. At $1294 it’s down 1.2% and looking wobbly. The recent low at $1288 is the key now. It must hold if gold is to build a base otherwise a run toward $1261 is on the cards. But if it holds gold can start to build a base to head higher once again.
- Copper is under pressure again and is back at $2.89. A couple of cents more and copper will take out the recent low and that, like gold, would beckon further price falls even though the fundamental market would seem to support prices. That’s why I use technical though. The fundamental stuff is important but it’s the technical that trigger trades.
Have a great day's trading.