Markets Celebrate Things Not Being Worse

Originally published by AxiTrader

Market Summary

There has been a celebration on global markets to kick off the week as relief takes hold that the North Koreans choose not to escalate tensions over the weekend and Hurricane Irma was not as brutal on Florida as many feared.

That’s seen the 4 big US indexes all rise more than 1% with that strength mirrored in the major European bourses save for the FTSE 100 which still managed a 0.5% rally. So at the close the S&P 500 was up 1.09% to 2,488.11 – a new record close. The Dow Jones Industrial Average was up 1.19% to 22,057 while the Nasdaq and Russell 2000 (AX:IRU) rose 1.13% and 1.1% respectively. The CBOE Volatility Index dropped to 10.73 – down 1.39 points or 11.5%.

Here at home after a solid 40 point rally yesterday where the banks were back in favour while the miners lagged SPI traders have added another 26 points overnight. Given the break of trendline resistance yesterday it should be a good day on the ASX.

The corollary of that return of risk appetite has been a coincident lift in bond rates across the globe. After trading down to just above 2% on Friday US 10 year treasuries are up at 2.13% this morning and the curve has steepened 4 points to 81. Still near he lows, but off them.

And when the US dollar is rising along with bond rates that’s never a good thing for gold. It’s down $19 and right on support. Copper recovered a little as ebullience reigned in markets rising 0.84% to $3.047 while oil was up more than 1% in WTI terms and basically flat in Brent terms.

Today we have the release of the NAB’s business survey – my favourite indicator of the month – here in Australia. Offshore UK retail sales and inflation data will be important given the BoE meeting this week.

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

International

• US stocks leapt higher overnight. I know I have not mentioned these markets more than in passing recently but that is because they have largely been doing nothing. Last night’s move however, and a push toward a new record close for the S&P 500, feel like more than just relief about Irma and the DPRK. Time will tell if I’m right. Certainly my experience is that when a market won’t go down on what might be worrying news, then buyers re-enter with gusto. Is that where we are right now? All I know for sure is that my favorite market timer got back in the market before this move. Additionally I’m wondering if the new paradigm in Washington that might be emerging between President Trump, the Democrats, and moderate Republicans hasn’t rekindled hopes that the Trump agenda for the economy isn’t dead – Trumponomics might be back!

• But don’t take my word for it, BI has a piece from Goldman Sachs (NYSE:GS) which highlights two reasons the stock market is safe from a correction. It’s worth a read. But the short version is that there is a distinct lack of investor euphoria and the reality that the US economy just keeps expanding. Yup…what they said.

• A bit of interest in ECB comments overnight. Forex markets have reacted to comments by ECB governing council member Benoit Coeure that “policy will remain more accommodative for longer” and the comment in his speech that “exogenous shocks to the exchange rate, if persistent, can lead to an unwarranted tightening of financial conditions, with undesirable consequences for the inflation outlook”. BUT there is a more pertinent comment which, when taken with comments from noted ECB hawk Sabine Lautenschlaeger that “the euro area is doing better and conditions are in place for inflation to pick up and move steadily towards our goal” which caught my eye. Coeure said “With the current recovery in the euro area being largely driven by domestic demand, euro strength may also have less of an impact on growth than, for example, after the Great Financial Crisis”. The euro has made an interim top so the focus was on the accommodative comments. But it’s clear the ECB is still moving toward an end to emergency monetary measures. As they should, the time has now passed – EU growth proves that.

• Lots of excitement yesterday in Asian currency markets yesterday with the Chinese signalling they have full comfort they have their capital account under control by lifting restrictions on capital needed to be held against forward yuan positions for both onshore and offshore banks. It’s a sign China is also worried about further appreciation in the CNY and fall in USD/CNY which is at 6.5274 – up 0.74% since Friday’s close. Noiicely done PBOC.

Australia

• A good day yesterday for the market with a 40.53 point gain on the S&P/ASX 200 which left the market up 0.71% at 5,713. Crucially the close was above the little short term resistance level that the physical 200 index was constrained by last week. That’s a good sign that the 26 points SPI traders have added overnight may in fact translate into gains for the physical market.

• Of course the lurch higher in US and European stock markets is itself a positive affirmation of the move SPI traders have pushed overnight. But as the recent history of underperformance in Australian stocks suggest nothing is certain just because global markets have rallied. But yesterday’s break of resistance suggests at least for today we should see a rally on local markets. A break of 5,735 for the physical ASX200 and the SPI would be a good sign that a move back toward 5,800 has begun.

• There was much discussion about housing here in Australia yesterday. The focus on “liar loans” which flowed from UBS research on whether, and how much, Australians fudge the truth on their home loan applications is interesting. But only in the abstract. I say that because the news does suggest that the gap between payments and net income is smaller than the lender believes making the owners more susceptible to mortgage stress and possibly default. But equally,default – which is afterall what really matters to banks – is a conditional probability, with the loss to banks then conditional on a number of things as well. So desperation to get into the property market has increased financial stability risks – something clearly the RBA and APRA noticed given their macro-prudential actions over recent years. But this same desperation to fudge the numbers on a home loan application behaviourally suggests to me a certain desperation to hang onto the house if times get tough. So it’s unemployment, a recession, that is the key to the outlook. We’ll see another one one day. But you can see that we have conditional probability on top of conditional probability for the fudging to become an issue. We can ignore the headlines for now.

• But as I often write, once Australian households become focussed on the repayment of their debt – which may just require price rises to slow, but equally might mean debtors get older – the domestic economy will suffer as dollars are redirected from consumption to loan repayment.

• Just quickly in other housing news (and not unrelated to to the above given the impact of fudging on prices) RBA researchers released a paper yesterday highlighting that FHB’s aren’t choosing to rent as a life style choice. Rather they are get locked out by rising prices. But the research also showed that once FHB’s get into the market they pay down their loan harder and faster than other borrowers. The RBA suggests it’s the discipline of saving for the big deposit they need which makes them frugal. David Scutt over at BI has more on the RBA’s paper.

• And now for the NAB business survey – my favourite economic release of the month. Last month conditions printed 15 and confidence 12…I wonder what we’ll see today.

Forex

• The US dollar’s recovery continued overnight with the US Dollar Index up 0.68% this morning at 91.972 and looking like a bottom might just be forming. Certainly the moves in the yen and the Swiss franc suggest that. Certainly these moves – along with gold and US Treasuries – suggest traders are much more relieved that both sides of the North Korean debate appear to have stepped back a little. But as I noted above my hypothesis that some traders might be thinking we might actually see the re-emergence of Trumponomics – different but still stimulative – now that the President has formed a relationship with Democrats is growing. We’ll see. But as I write this morning USD/JPY is up 1.52% at 109.46 and back strongly within the 2017 range and on track for a move toward 111. USD/CHF is up 1.28% to 0.9564.

• That US dollar recovery has knocked the euro back to interim support here around 1.1950. That’s despite Couere’s more even handed comments than the headlines suggest. That in itself tells be that traders themselves thing the euro needs a pullback. Long positions are still huge. So a break of 1.1945 will open the way for a run into the 1.1820/30 region where there is Fibonacci and channel support.

• Elsewhere the pound is off a little at 1.3167 and looking weak technically.

• Of the commodity bloc the Canadian dollar has done best and has actually made gains against the US dollar. USD/CAD is down 0.25% at 1.2118 as traders grapple with what the BoC might do on interest rates given Canadian economic strength. The kiwi is down 0.24% sitting at 0.7246 and the Aussie is off 0.4% at 0.8025.

• I noted the ugly pin bar on the Aussie and positioning as a risk to the outlook yesterday. So against that backdrop the 33 point fall from Friday’s close isn’t too bad. Metals and iron ore did well yesterday, which helped the Aussie as well. That will remain the case if these markets stay supported today. But this move could be about the US dollar and that means if last night’s low of 0.8018 gives way then a move to 0.80 cents seems on the cards, likely 0.7960/80. A break of this latter region would take out the trendline from the start of this rally and could lead to heavily selling and long liquidation.

Commodities

• Gold is under pressure as risk appetite rises and the US dollar and bond rates move higher. After such a strong run, ugly candle Friday and now Monday’s selling gold is very vulnerable to another big fall. Certainly it has already dropped $20 to open the week but a break of $1326 suggests a move toward $1300/05

• Copper, along with iron ore and other metals found support yesterday. My guess is that there was a little bargain hunting but equally that the better tone in markets helped metals. The global economy is doing well after all. But for copper my concern of a deeper pullback will return if support in the $2.98/3.00 region gives way.

• Oil markets continue to react to US hurricane season. You can see that in the rally in WTI of 1.18% to $48.04 while Brent was largely flat at $53.78. News last night was that Irma wasn’t as bad as expected and that the biggest refinery in the US had been restarted. There was also news that the Saudi and UAE oil ministers had discussed an extension of the production cut deal past March 2018. That has to be a rising chance given that OPEC was gaining traction with its goals before the disruptions of the Hurricanes.

Have a great day's trading.