Gold And The Yen Find A Bid In What Feels Like Rising Risk Aversion

Originally published by AxiTrader

I did something I never do today, I slept in until 4.45am.

It was glorious.

But it also truncated my research time so the report is a little shorter than usual today.

Stocks in the US dipped, the DAX pulled back from a two-month trend line, and the US dollar was mostly weaker, and bond rates fell a little as traders reacted to president Trump’s stump speech in Arizona during Asia trading yesterday.

At the close, the S&P 500 was 8 points lower, 0.32%, to 2,444. The Dow Jones Industrial Average dropped 88 points for a 0.4% loss and the Nasdaq 100 fell 0.3% to 6,278. IN London the FTSE 100 was largely unchanged but the DAX neatly reversed off a two-month down trend from the record high.

Locally after a 13 point fall yesterday on the S&P/ASX 200 index SPI traders have marked prices up 15 points this morning suggesting a better day. We’ll see.

On forex markets the US dollar lost about 0.45 in US Dollar Index terms and roughly the same against the euro as the combination of a hawkish Bundesbank president and weaker US home sales saw EUR/USD climb back to sit at 1.1814 this morning. That’s 80 points off the low of the past 24 hours. The Aussie too is off its lows at 0.7905 this morning after trading down to around 0.7880 in Asia yesterday. Most interesting for forex traders though is that the Yen is back below 109 this morning and back near the bottom of the 2017 range.

On commodity markets crude is higher after EIA inventory data showed crude draws a little more than forecast and gasoline inventories down almost double what the market expected. WTI is at $48.39 this morning. Like the yen, gold is higher this morning at $1,290 – traders seem to want to have another run at $1,300. Copper is a little lower at $2.97 in what was a mixed night. But iron ore recovered some of yesterday’s losses.

And bonds rallied. US 10’s fell to 2.17% from 2.22% yesterday.

Kiwi trade is out this morning and then tonight we get UK Q2 GDP.

• President Trump’s threats to shut the US government and burn the NAFTA agreement didn’t exactly roil markets overnight but they certainly garnered plenty of attention. Fitch has threatened the United States credit rating if it happens, Speaker of the House Paul Ryan has said it won’t happen, and while the comments initially put the Mexican peso – and to a lesser extent the Canadian dollar – under a bit of pressure that has mostly washed away.

• For me, when I think about the impacts on markets, the key to that speech as I watched it was it gave the President the chance to re-energise himself doing what he is best at – the Stump Speech. It was great theatre – unless you’re an advisor of course – as he went off script, was politically incorrect, threatened the government shutdown, building the wall, intimated a pardon for the Arizona sheriff Joe Arpaio, and again bashed his predecessor Barrack Obama.

• But it’s Congress that will decide on the debt ceiling limit and avoid the shutdown – not the President. And it’s likely the Congress that will need to work out what it wants to do on tax cuts. I’m still expecting some progress there in the months ahead.

• The battle at the ECB governing council table next meeting is going to be interesting after Bundesbank president Jens Weidmann said overnight that QE must end. “Based on our June forecast, there is no need in my view for taking further action for next year and in particular not for extending the buying programme” Weidmann said in an interview with the German press. It’s hard to disagree with him given the economic performance of the German and EU economies.

• But Weidmann’s comment appears to be in contrast to Mario Draghi’s speech overnight where he talked about the uncertainty that the ECB, and central bankers more broadly, face. “We must be aware of the gaps that still remain in our knowledge” Draghi said in a speech. It wasn’t exactly a cry to leave QE intact. But it was a recognition of the reality of central banking.

• Just look at the absence of inflation around the globe, the lack of price pressure in the US and UK labour markets even though they both appear very tight. Draghi is essentially saying that central bankers are not omnipotent and don’t have all the answers. It’s an argument for caution wherever each economy and central bank is in the cycle.

• On the data front - US home sales fell 9.4% on an annual basis to 571,000 units in July which was the lowest reading so far this year. The housing sector appears to have slowed and this data point garnered plenty of discussion overnight.

• So much so that the fact the Markit HIS composite PMI for the US hit a 27 month high in August seems to almost have been lost. The flash print for this month rose to 56 from 54.6. Services rose to 56.9 from 54.7 but manufacturing dipped to 52.5 from 53.3.

• In Europe the data backed up Jens Weidmann’s call. The flash composite PMI for Germany in August printed 55.8 up from 55.7 last month – holding near 6 year highs. EU services PMI dipped to 54.9 but manufacturing rose to 57.4.

• And speaking of central bankers, Dallas Fed's Robert Kaplan again reiterated his expectation that balance sheet taper will begin soon even as he suggests patience on rate hikes pending inflation updates.

• What a disappointing day for the bulls on the S&P/ASX 200 yesterday. Stocks fell 13 points, 0.23%, to close at 5,737. I’m out of step – given time constraints this morning – with why exactly SPI traders have marked prices higher this morning. Certainly, global miners look to have had another good night, and gold and crude are higher. So maybe that’s enough?

• We’ll see. The reality is that both the physical ASX200 and thee SPI are trapped in a range, and have been for month’s now. Here’s the latest update of the SPI chart – Not Drowning, Waving.

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