Originally published by AxiTrader
Market Summary
US stocks were a little mixed overnight but the big story is the one of the US dollar, which came in for a hammering after ECB President Mario Draghi conceded the next leg of QE tapering will be announced in October and aired little disquiet over the fate and strength of the euro.
Certainly, he noted euro strength has implications for inflation but there was no real jawboning. So the euro is up 0.9% at 1.2022. The yen is back and pushing USD/JPY to the bottom of its range. Sterling is at 1.31 and the Aussie dollar is back near recent highs at 0.8046. The US dollar is on the cusp of a material break down and commencement of its next leg lower.
Back to stocks now and the three big indexes were within 0.1% either side of the previous night's close. Stocks in Europe weren’t worried by the ECB with the release and upgrade of GDP data a positive.
The wash up is that SPI traders have marked prices up again this morning by 17 points. It was an awful day technically for the S&P/ASX 200 yesterday. Will today be any different?
On commodity markets copper held firm after a dip. Gold is up around 1% on US dollar weakness and oil is largely unchanged.
US 10's are at 2.04% and the curve is back near the flattest it has been in years at 77.2
On the day here in Australia we get the release of housing finance but the big release is going to be Chinese trade data. On an otherwise quiet day it could be a big catalyst for trade if the data deviates from expectations.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The latest read of EU Q2 GDP was released last night and showed that the economy expanded 0.6% in the three months to June. That’s a small increase on Q1’s 0.5%. But the data came with upward revisions to the year on year growth rate to 2.3%.
- It’s not exactly surging growth but you can see Mario Draghi, and the ECB’s dilemma. Growth at these levels does not warrant the continuation of the ECB’s bond buying program – QE. So it must end. The ECB knows it and the market knows it. That’s what is driving the euro higher and it’s what is complicating the decision for the ECB on the when and how. But the key here, and in the news overnight, is that it’s only a matter of time before QE ends, regardless of where inflation ends.
- While the ECB left rates on hold and delayed the decision on the end of QE Draghi said in his news conference that “We will be ready for much of what we have to decide (to scale back stimulus) by October…Right now, judging the way the world is going, we should be ready”. And boom, the euro roared.
- Of course Draghi worried about the impact of the euro on inflation and the outlook for same. But he’s not done anything to really derail its rally. How could he? Like the market he knows the time for QE has passed. And like the market he knows that the EU, the ECB, faces the same lack of inflation that the rest of the globe faces. SO the ECB will soon announce the next leg of its wind down of QE and that’s helping the Euro while EU data remains robust.
- The US Senate passed the disaster aid, government funding, and debt ceiling increase this morning.
- The reverberations of President Trump’s deal with the Democrats continue to wash through US politics and the Republican party. The President has answered Senator John McCain’s recent op-ed by doing the very thing he pointed to by reaching across the aisle for a compromise. In doing so he has recognised that to get things done he needs both parties to work together. And news this morning is that he is now working with Democrats on the dreamers programme. This is how Trump serves his base, and himself. He does a deal and he moves on. The question for markets though is does this reduce or increase policy uncertainty? I’m not sure.
- China has agreed UN action over North Korea with Foreign Minister Wang Yi saying “Any new actions taken by the international community against the DPRK should serve the purpose of curbing the DPRK's nuclear and missile programmes, while at the same time be conducive to restarting dialogue and consultation”.
- In a related matter, the US is still ready to sanction any company or nation that works with the North Koreans. Treasury Secreetary Steve Mnuchin said overnight “I have an executive order prepared. It's ready to go to the President. It will authorize me to stop doing trade, and put sanctions on anybody that does trade with North Korea. The President will consider that at the appropriate time once he gives the U.N. time to act,".
- Remember all the hand wringing about China, its reserve position, the looming currency crisis, and the economic collapse? It never happened as we all know and it’s a salutary lesson that markets are voting machines in the short run and weighing machines in the long run – as Ben Graham apparently said. That’s my way of saying that sometimes markets aren’t as smart as they think they are or market watchers give them credit for. Anyway, China’s foreign reserve position was released overnight and it was up again. The print of $3.092 billion was up $11 billion on the previous month. Clearly China has got its capital account in order both through policy action but also because sentiment has shifted toward China and its economic outlook.
- US initial jobless claims leapt to 298,000 last week in the wake of Hurricane Harvey.
Australia
- There was nothing good to say about the ASX 200 or the local market yesterday. It failed at overhead resistance and then finished back under 5,700. Overnight SPI traders have added 19 points but we’ll see how things play out.
- Technically it is clear that traders are watching this little down trend line. So unless or until the level is taken out – call it 5,720, the market remains under pressure.
- On the data front yesterday’s flat result for retail sales and lower than expected trade surplus of $460 million (it was a surplus though) were signs that data flows and ebbs. The big question for me, one I keep coming back to, is how long can consumption hold up in the face of slow wages and a big debt pile. This tweet from yesterday sums things up I think.
- We need to watch the NAB business survey very closely in the months ahead to see if any signs of a crack in the edifice of Australian growth begins to show. Or not as is likely the case. But we’ll see.
Forex
- The US dollar came under heavy selling pressure once again overnight. Initially traders were a little nonplussed with the ECB statement and decision. But once Mario Draghi started talking the Euro soared and the dollar came under pressure across the forex universe. Once again Draghi has managed to ignite a strong euro rally by signalling the strength of the EU economy, the coming wind back of stimulus, and by offering only the mildest objection to the strength of EUR/USD.
- So the US Dollar Index fell to a low of 91.40 and the EURUSD surged to around 1.2059. That’s a round 10 points below the August high which was itself the highest level since late 2014. And that means in both DXY and EUR/USD terms the levels are out the outer edge of the envelope which if broken could usher the next big leg lower for the US dollar.
- It’s clear we are in a US dollar bear market, we can see that in the way the market embraces everything bullish for euro and other pairs and ignores the positives for the US at the moment. And in a bear market one must be bearish. The question for me, and traders, is whether we are now at a point of inflection where the US dollar weakness – euro strength – steps to a new level or a point of resistance. If euro trades through 1.21 and USD/JPY falls below 108 we’ll have our answer.
- Naturally the impact of the euro’s surge has been a stronger yen, Aussie, pound, kiwi, and of course the Canadian dollar. Here’s where they sit day on day.
- The Canadian dollar is the leader of the pack as it breaks new ground and continues to surge against the US dollar. All of the other pairs – euro, yen, Aussie, sterling, and kiwi – are within the recent highs or lows (depending on the currency) against the US dollar. That does give me some pause from getting too bearish US dollars right now. As I say if USD/JPY breaks lower it might be the sign.
Commodities
- Gold is higher again. It held above the level I was watching and then ran 1% higher overnight to $1348 as the US dollar lost ground.
- Crude is largely unchanged at $49.13 for WTI even though the build in stocks was bigger than expected last week. That’s largely because the period of adjust after Hurricane Harvey continues and inventories won’t be market moving events for a little while yet. Brent was half a per cent higher at $54.51
- Copper is hanging tough. A break of $3.10 a pound given the current technical set up would be a sign of a decent dip. But the overnight low was $3.11 and copper is back at $3.1480 this morning.
Have a great day's trading.