Euro Surged As Mario Draghi Acknowledged EU And Global Growth

 | Aug 28, 2017 09:10

Originally published by AxiTrader h2 Market Summary/h2

Jackson Hole has come and gone. Janet Yellen defended financial regulation and Mario Draghi tried to highlight there are still risks to the EU inflation outlook while acknowledging EU and global growth was on the up.

That was all the bulls need and the euro surged on Friday night to the highest level since January 2015. Traders grabbed the fact that Mario Draghi didn’t try to jawbone the single currency. That generalised US dollar weakness suggests to many that the period of consolidation of its fall that we saw in August may be over.

That fall lifted EUR/USD to 1.0946 as traders take the path of least resistance higher. The yen, pound, Aussie, Canadian dollar, kiwi – among others – have all gone along for the ride in varying degrees. Save for the pound however most are lagging the euro and the AUD/USD is at 0.7923 this morning.

Stocks were a little lower in Europe and mixed to a little higher in the US. The S&P 500 closed 0.16% higher at 2,443. The Dow Jones Industrial Average gained 0.14% and the Nasdaq 100 was off just 0.09%. The wash-up is that the ASX is expected to open 6 points higher if SPI traders are right.

On global bond markets, the rally remains intact with US 10's down at 2.17% while German 10's yield 0.38% - forex traders and bond traders aren’t talking to each other, clearly.

On commodity markets, a weaker US dollar helped gold higher while the dollar and Hurricane Harvey conspired to lift WTI prices close to 1% higher. Copper is still strong around $3.03 a pound.

It’s a slow start on the data front to what is a reasonably big week of data with US non-farms the highlight Friday.

h2 Here's What I Picked Up (with a little more detail and a few charts)/h2 h2 International/h2
  • Janet Yellen’s speech on financial stability at Jackson Hole had no implications nor mentions of monetary policy. But it was a passionate defence of the increased supervision and stress test put in place after the financial crisis. There was also push back against the Trump administration’s claim – one echoed by putative Fed challenger White House economic adviser Gary Cohn – that the new rules had decreased the availability of credit for business. “The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” Yellen said. Pointedly she added “Already, for some, memories of this experience may be fading - memories of just how costly the financial crisis was”.
  • Traders had cloth ears to the cautiousness in Mario Draghi’s address at Jackson Hole as they chose to focus on his recognition that growth has picked up and his lack of warning on either the risks the euro poses to the ECB’s inflation target or the growth outlook. I confess to completely missing that traders though Draghi might say something about the euro as a risk on Friday night.
  • Draghi said “the global recovery is firming up” but noted that in Europe and Japan “the consolidation of the recovery is at an earlier stage versus that of the US.” On the outlook for Europe he said "we have not seen yet the self-sustained convergence of inflation to the medium-term objective," adding "therefore a significant degree of monetary accommodation is still warranted,". So, paraphrasing, monetary policy is likely to remain accommodative and there is set to be an interesting discussion with Jens Weidmann and his hawks at the next meeting.
  • He tried to again make this point in response to a question with Reuters reporting “On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term. On the other hand, we have to be very patient because the labor market factors and the low productivity are not factors that are going to disappear anytime soon." It’s worth remembering the ECB is a single mandate – inflation – central bank.
  • Here’s a counterpoint to the euro bullishness if your looking for one – and something that can boost stocks if its any chance of getting up. Gary Cohn, director of the National Economic Council, told the FT that the Whiter House is going to begin its push for tax reform this week. “Starting next week the president's agenda and calendar is going to revolve around tax reform. He will start being on the road making major addresses justifying the reasoning for tax reform”.
  • I can’t understate the importance of this for stocks or the US dollar if the White House can gain get traction with the Congress. Naturally there is a lot of focus on the debt ceiling right now and that likely takes precedence in terms of timing. But this is a space to watch closely.
  • US Durable goods orders fell sharply in July, down 6.8%. But when the volatility in aircraft was stripped out there was a 1.0% gain (vs +0.2% exp.). Which is solid.
  • China’s industrial profits were released over the weekend and showed the slowest rate of growth for 3 months. At 16.5% in July however that’s still nothing to sneeze at.
h2 Australia/h2
  • A small fall of just 2 points Friday saw the S&P/ASX 200 close at 5,744 as our big banks fought back into the week’s end. SPI traders have marked prices up 6 points over the weekend. That implies the market is likely to open in the middle of the past 2 week’s range, but toward the upper end of this broader 200 point band we’ve seen the 200 index trading in over the past couple of months.
  • Whether the local market can again challenge the 5800 level is dependant on what we see offshore and the performance of important sectors like financials and basic materials. We’ve had further confirmation that the global economy is doing well and traders will be asking themselves about questions of value when it comes to the financial sector given current strength in the Australian economy and prospects of an eventual RBA rate rise. But frankly these are the same questions, with the same outlook, that we’ve had for a while now – yet the ASX has stayed in a range.
  • That’s clear in the SPI chart. But over the past week or so the bottom on sell offs has come up which suggests there might be a little more positivity coming into the market. That’s particularly the case when you look at the performance of the overall market against some of the big cap financials. But a range is a range and I respect them – unless, or until they break.
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