Complacency Remains Despite North Korea's Miniaturised Nuclear Weapon

Originally published by AxiTrader

Market Summary

Fire and fury. That’s what US president Donald Trump has promised North Korea early this morning after news broke last night that the Hermit Kingdom has miniaturised a nuclear weapon to the point it can be placed on one of its missiles.

It’s been enough to break the Dow Jones Industrial Average's 10 day run of gains. But there is still an amazing level of market complacency. Maybe this is the thing, the grey swan from left field, the known unknown, that roils markets over the next week.

Anyway to the price action.

The S&P 500 dipped 0.24% with falls across the board and only 169 stocks higher. It closed at 2,474. The Nasdaq was also lower, down 0.21% to 6,370 while the Dow dipped 0.15% to 22,085. Europe’s rally will fade at the open this afternoon when they play catch up to the reversal in US markets.

And maybe the 7 points SPI traders have added to the S&P/ASX 200 overnight might prove ephemeral as well. Yesterday’s price action was awful. Broad based selling and another failed break of the wedge. We’ll need to keep an eye on US futures in our day today.

On forex markets the US dollar’s recovery continued. It’s stronger pretty much across the board with only the yen – which benefits from geopolitical risk – and the Australian dollar (which has a strong NAB business survey to thank) providing any resistance. The AUD/USD is still above 79 cents at 0.7909.

On commodity markets gold hasn’t caught the bid I think it could, copper has roared higher again, and crude is a little lower.

On the docket today we get Westpac-MI consumer sentiment and Chinese inflation data in our time zone along with home loan data for Australia.

Here's What I Picked Up (with a little more detail and a few charts)

International

• US defence officials now believe that North Korea has the capability to miniaturise a nuclear weapon and place it on one of its missiles, The Washington Post reported overnight. That has to be the most troubling thing we've heard for a long time on the geopolitical and global security front. But such is the complacency of this market of low volatility, but the dip, she'll be right mate, that no one seems to care. Sure yen traders took a little notice, and perhaps even gold did at the margin, but on the whole traders have ousted moved along, nothing to see.

• I find this complacency troubling. That's both at a personal and market level. Game theory tells us that the game change we've seen with the diminishment of US and Russian influence since the fall of the Berlin Wall and the rise of many other players makes the globe inherently more risky insofar as a smaller player could do something stupid - like actually fire the miniaturised nuclear weapon it has in the end of its missile. Anyway, for the moment, markets don't care.

• And I guess the good news is that China has said it will enforce the new sanctions placed on North Korea by the UN over the weekend. But unlike his father and grandfather – who had close ties to Beijing and in China – Jim Jong-un doesn’t visit and hasn’t the relationships that his predecessors had. That makes China’s influence likely less strong than in the past – except on an economic scale.

• As we enter the period of the month with less data, and as earnings season fades, it could be that the market is finally and significantly vulnerable. This chart from Joe Ciolli’s story over at Business Insider is a cracker in showing that the market performance has been driven by a very narrow group of companies. Just look at the red line – the equally weighted S&P 500 – and we see a very different picture for US stocks. Not terminal, but at risk of rolling over further.

• Ciolli asks, “So what does it all mean? Put quite simply: the foundation of the US stock market isn’t as strong as it looks on paper. Less publicized industries are faltering under the surface as mega-cap juggernauts continue to impose their will on the overall direction of the market”. Spot on.

• It's happening. The data flow is starting to turn back in favour of the US as I been suggesting it might for a little while now. Last nights JOLTS survey showed job openings hit a record in the US last month as businesses struggle to find the workers they need. This is Janet Yellen’s favoured labour market indicator and it reinforces - or will to Yellen and her colleagues - that labour market tightened continues and the path they have set for policy normalisation through balance sheet tapering and interest rate hikes is the right one.

• The Citibank Economic Surprise Index for the US surged 8 points last night to -31.4 after the data. A level not seen since May.

• Across the Atlantic, and after weaker Chinese trade yesterday, German trade missed by a mile with both imports and imports falling heavily. Taken in top of the surprise fall in German industrial production it's a clear sign that - like the Fed - Mario Draghi's articulated course of action and his caution about changing policy settings at the ECB is the right one. The Citibank Economic Surprise index for the EU dipped to 10.6. Recall humans don’t feel levels, we feel changes. That’s why the movement in these indexes matters for the US dollar right now.

Australia

• What a fraidy cat market we have here in Australia. Or put another way, the technical traders have the tiger by the tail and are flinging it around mercilessly. Whether it is the SPI CFD chart or the physical price action it’s clear the local market doesn’t have the gumption to break the renage/wedge and run higher for anything other than a few short minutes.

• Yesterday was a case in point. After a solid lead from US and European markets, and after PI traders marked prices up 24 points the ASX200 traded up to 5,791 before collapsing to close at 5,743. It could have been much worse with prices for the 200 index down at 5723/25 at one point.

• 147 stocks were lower in what was a broad based selloff engulfing all 11 sectors of the index. It was a poor performance and one which questions whether the SPI traders are even close to right this morning with prices up 4 points as I write.

• On a brighter note the NAB business survey was a cracker showing broad based strength across multiple sectors of the economy and across the states of the nation. Conditions rose a point to +15 while confidence followed conditions higher leaping 4 points from 8 to 12 in July. Trading, profitability, and employment were the bright spots for me.

• As I always say, this is the single most important data point each month I look at. We know business is doing well. So we know overall demand in the economy must be going okay. And my inference we know that consumers – despite what they might say sometimes – are doing well also. No wonder the Aussie is outperforming at the moment and hanging above 79 cents. For the moment anyway.

• Westpac consumer sentiment is up today.

Forex

• The US dollar is turning. That is clear in the price action. And whether it is the fact that data is starting to run in the right direction for the dollar and support the Fed’s outlook. Or whether it was simply that we had the pessimistic crescendo of dollar selling and bearishness over the past week or so doesn’t matter. The reality is that the dollar has turned. Most likely placed a significant low in place and folks – traders, analysts, investors – are now starting to say maybe the euro – and other currencies – are not good value at these levels.

• So this morning the US dollar, in index terms, is sitting at 93.645. Euro is at 1.1747 down 0.4%, sterilng's decline continued and it is at 1.2988 off 0.33%. The yen has hung tough because of North Korea (I know its counter intuitive given the risk) and comments yesterday from former deputy governor of the BoJ that the bank should exit stimulus. Yeah right. Anyway USD/JPY is down 0.3% at 110.40.

• On the commodity bloc the New Zealand dollar is still running south as traders worry about a dovish RBNZ tomorrow morning and it continues with the recent technical break. NZD/USD is at 0.7319 this morning, off 0.56%. The Canadian dollar is fairly flat at 1.2666, down 0.1%.

• The Aussie dollar has done exceptionally well all things considered. The question of whether or not that can last I believe will be resolved in the negative after the disappointing Chinese trade data yesterday showed both imports and exports running at a much slower pace than anticipated. That questions both domestic and international growth (especially after German trade data last night). What held the Aussie up was the stonkingly good NAB business survey. It suggests the RBA will be right. And it reconfirms that – like Canada – Australian data has been printing solidly for months. But the technical outlook, stocks dipping a little, and heightened tensions (if the market shakes its complacency) suggest we’ll see 0.7875/78 tested and broken. Then a run to 78 cents is likely. But that’s still strong isn’t it. We’ll see how the Aussie performs when we get there.

Commodities

• Crude is off a little as traders focus on the efficacy of the OPEC deal and thee EIA downgraded its demand increase expectations for the US in 2018. WTI is off 0.4% at $49.20 while Brent is down 0.52% at $52.10.

• On the supply side OPEC said it is going to seek to get compliance up across the laggard countries overnight. Also worth noting are continued efforts from the Saudis to tighten the market. Reuters reported that they are cutting supplies – they have been raising prices for months – to the Kingdom’s Asian clients.

• Interestingly a nice big draw of more than 7 million barrels on the API inventory data hasn't really helped oil prices this morning. Interesting.

• Copper is higher again overnight. It’s a technical rally and getting close to the $2.97 target that popped up on my charts last week. We’ll see. But this morning prices are up 1.13% at $2.94.

• Gold, Gold, Gold. The shiny stuff has to have a day in the sun sometime soon again if stocks decide to have a little swoon and if we get anywhere close to president Trump’s fire and Fury. For the moment though gold is at $1,261.

Have a great day's trading.