Oil Market Roiled By Texas Rain

Originally published by AxiTrader

Market Summary

Hurricane Harvey dominates the news cycle as Houston suffers under the massive deluge it has wrought. While the human and physical toll on the city and its infrastructure continues, the aftermath of the hurricane has been felt in various sectors of the US stock market.

But the wash up was that the big losers were largely offset by sectors investors bet would benefit from the rebuilding process so the S&P 500 ended the day largely unchanged with a 1 point gain and close at 2,444. The Dow Jones Industrial Average fell just 5 points and the Nasdaq 100 was 0.28% higher at 6,283.

European stocks were a little lower Monday and it’s worth noting the DAX 2 month downtrend from the record high remains intact. SPI traders are guessing on a 4 point rally to follow yesterday’s APRA influenced 34 point loss.

On forex markets the US dollar’s weakness continued overnight with the euro extending its gains as it marches toward 1.20. That euro strength has been replicated across most of the forex board with the US dollar under pressure. That’s seen the pound lift back above 1.29, the yen linger near recent highs pushing USD/JPY to recent range lows again while the commodity bloc is all stronger in varying degrees. The AUD/USD has gained 0.4% and is at 0.7965 this morning.

Bonds in the US are lower again with the 10’s off a little to 2.15%.

And on commodity markets gold has leapt higher to $1310 as a weaker US dollar and disquiet over the US combine to see traders putting a little cash in a safe haven. WTI fell as demand is expected to fall from shuttered refining capacity while copper was higher again.

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

International (I’ve covered most things in the sections below)

• President Trump is getting a lot of non-Harvey coverage again. His comments about NAFTA over the weekend, what a bad deal it is and how he might terminate it continue to show how volatile he is at the moment. But reports saying he demanded tariffs on China, and called his staff globalists in a meeting about the tariffs continue to colour him as increasingly independent of the “adults” who were supposed to be in the room with him (see further comments in Forex section).

• In overnight data from the US wholesale inventories rose 0.4% in July (vs +0.3% exp) while the Dallas Fed manufacturing activity rose from 16.8 to 17.0. Commerce department goods trade balance showed a fall in both exports and imports.

• The EU is urging Britain to get its act together on Brexit. Chief negotiator Michel Barnier said “to be honest, I am concerned. Time passes quickly…we must start negotiating seriously," adding "the sooner we remove the ambiguity, the sooner we will be in a position to discuss the future relationship."

• Japan is pretty upbeat on the outlook for growth its monthly report showed yesterday. Economy Minister Toshimitsu Motegi told reporters that “there’s a strong chance” the Japanese economy will match the 1960’s record run of a 57 month expansion. He highlighted that it is a “domestic demand-driven recovery” but the report did note the 4% annualised growth rate is unlikely to be sticky.

• Chinese stocks were on a tear yesterday with the Shanghai composite up another 0.94% to 3,362 and the China A 50 index climbing to 12,267.

Australia

• Nothing like an APRA inquiry into our biggest bank and a sense that the Royal Commission might be inevitable before the next election to knock the ASX off its perch yesterday and turn the day positive to negative. At the close the S&P/ASX 200 was down 34 points to 5,709.

• In the grand scheme of things nothing much is going on at an index level. But as the above pressure on financials shows, and as I have discussed in the past, there is still plenty of action at an individual sectoral or company level. We don’t trade individuals stocks or sectors at AxiTrader, but it’s worth keeping an eye on what is going on below the index if you are – as I am – trading the SPI.

• The net of it all has been a continuation of the range for both the ASX200 and the SPI. The range is roughly 200 points for each market. 5,628 to 5,833 for the physical and 5,590 and 5,790/5800 in the SPI. Here’s the latter chart.

• The ANZ Roy Morgan consumer confidence survey is out today. It’s not really market moving but it will be interesting to see if the enduring citizenship malaise for our parliamentarians down in Canberra continues to weigh on the outlook. If Australian consumers – let alone businesses - get a sense there might be an early election over this mess it would be a big negative for the outlook.

Forex

• Can you buy the currency of a nation with an increasingly erratic president? That’s the question global investors will be asking themselves when they sit around the investment committee table at the beginning of September. It’s not a question necessarily driven by the weakness in the US dollar and the euro at its highest level since late December 2014 – although that will be part of it. Rather with the negotiations over the debt ceiling looming and with US stocks at relatively elevated levels investors will be asking themselves if the United States is where they want to put that next dollar of capital they have to invest or rather where else might be more attractive.

• And that means that even at these levels the US dollar’s fall may have further to go. Certainly a strong run of US data and a firm signal the Fed is on track to taper and then tighten might help the dollar. But as the president seeks to blow up NAFTA, demands tariffs against China, accuses his own staff in the China meeting of being “globalists”, gets publicly rebutted by his most senior economic adviser over his Charlottesville response (would Trump now appoint Cohn as Fed Chair), pardons a Sheriff in contempt of court, and more Russia probe allegations surface – ahh, deep breath - it’s becoming clear that hopes John Kelly might be able to rein in the president aren’t working. Indeed from this far away it looks like Kelly has stopped most of the leaks but the president has become more, not less, erratic.

• I offer the above not as political comment but rather because these will be the types of discussions investors have at their investment committees. These are the types of conversations that will influence capital flows. These are the types of conversations which will influence currency rates and levels against the US dollar. They will be reflected in the price action on forex markets. That’s how we’ll know what investors decided at these meetings in the weeks ahead. (And don’t take my word for it – this story from CNBC highlights the same thought process).

• In many ways it’s already happening as this chart of US stock outflows from BAML via Business Insider shows. Will it accelerate? What about US bonds will they still be the default choice as the global safe haven under this President?

• And in the short term traders and investors are still selling the US dollar. Overnight the euro has rallied to 1.1976 a gain of 0.44% from Saturday morning’s close. The break of the little flag from the 1.1909 high Friday and then the break of that high was an important sign of momentum which has continued today.

• GBP/USD is higher as well up 0.34% to 1.2933 even as the EU says that Britain needs to get its act together on Brexit and major news sites – and researchers – are suggesting the chances of getting a deal done in time are slipping. USD/JPY is still above 109 at 109.16 down just 0.16% and still holding above both recent lows and the bottom of the 2017 trading range.

• The commodity bloc has gone along for the ride in varying degrees. The AUD/USD is at 0.7965, up 0.4% and above the recent highs over the past couple of weeks. The NZD/USD is up 0.23% at 0.7256, while the Canadian dollar is lagging a little as it heads back toward recent highs against the US dollar. USD/CAD is at 1.2493 down 0.11%.

Commodities

• It’s not just US dollar weakness that has driven gold $19 higher to $1,310. That gain of 1.42% to me reflects growing disquiet about the outlook for markets, for the negotiations of the US debt ceiling that will take place in September, and about the level of financial market volatility that could cause. The break is a big one – the target is $1,360.

• The oil market is all messed up by the impact of Hurricane Harvey. While gasoline prices in the US surged in Asia yesterday the price of WTI has fallen by 2.3% to $46.77 a barrel as traders bet that the shuttering of refining capacity in the Houston area will have a large impact on demand for crude for a while. That will see crude inventories build up in the US so prices have fallen. But the 2.3% fall in the front contract fades to 1.82% by December where the price of WTI is currently at $47.46 and 1.5% by June 2018 where the price is $48.35.

• The impact has also been to widen the spread between WTI and Brent to $4.01 this morning. Certainly that is a continuation of a recent trend in spread widening – but it’s a sharp one. Brent this morning is at $52.01 down just 0.76%.

• One thing worth noting – and which may impact Australian prices for diesel and jet fuel - is that reports are US buyers are sniffing around Asia for cargoes they can get quickly. Singapore prices are currently pretty tight with seasonal demand high. American interest to buy in a tight market could further exacerbate that.

• Copper continues to march higher. The front contract is at $3.065 a pound, up 1.12%, after a high of $3.075 as traders clear out some shorts for close out tonight.

Have a great day's trading.