Originally published by AxiTrader
Market Summary
The Dow Jones Industrial Average might be higher again overnight but the broader, and more correctly calculated indexes of the Nasdaq 100 and S&P 500 are a little lower at the moment as traders seem to be accentuating the negative in what’s overall a pretty solid earnings season. That could be an important tell as we head through August’s long days of the northern summer.
Anyway at the close, the S&P dipped two points to close at 2,470 – respecting overhead trend line resistance – the Nasdaq dropped 27 points, 0.42%, while the Dow was 0.28% higher at 21,891. In Europe it was a mixed bag with Frankfurt and Paris lower but London a little higher.
The wash up is after a mildly positive day yesterday to end the month SPI traders have barely moved the needle marking prices up just 2 points from yesterday.
It was a very different story for currency markets however as euro, pound and yen traders hit the US dollar once again. Euro is above 1.18 for the first time since early 2015. The other majors are not at such lofty levels but the US dollar is certainly on the back foot. The Australian dollar and its commodity bloc cousins are lagging the euro gains – but at 0.7998 against the US dollar, the Aussie is hardly weak.
On commodity markets, copper is higher again buoyed by the internals of the Chinese PMI data yesterday and continued concerns about the crack down on scrap. Oil is higher again as traders focus on the growing sense OPEC is gaining traction, and gold remains bid on a weaker US dollar. Iron ore had a cracker in China yesterday.
Looking forward the RBA decision at 2.30pm this afternoon is the key one for local markets. But traders will also by watching the Caixin manufacturing PMI in China. And of course the raft of Markit PMI’s for the globe over the course of the next 18 hours or so.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US president Donald Trump has sacked his new Communications director Anthony Scaramucci at the urging of new White House chief of staff General John Kelly. That was the breaking news from the NYT a little after 4.30am Sydney time this morning. And it hurt the US dollar a little – or at least it gave the sellers another excuse to hit the bid. But it’s worth wondering if this might be a turning point in the presidency. A 4-Star Marine general as chief of staff is a very different personality to a political operative. So it’s a fair bet that discipline among White House staff increases materially with an associated reduction in leaks. That might give the administration some oxygen.
- And that oxygen is necessary because the President is dealing with some important geopolitical issues right now. Yesterday China rebuffed Trump’s tweets over the weekend that it is up to it to rein in North Korea. China's UN Ambassador Liu Jieyi told a news conference "[The United States and North Korea] hold the primary responsibility to keep things moving, to start moving in the right direction, not China”.
- Equally the decision by Russian President Vladimir Putin to throw almost 800 US diplomats out of Russia after the passing of new Russia sanctions is another challenge. And don’t forget Venezuela, where President Maduro seems to have just seized absolute power. The US is readying sanctions as a result. Then, of course, we have health care and the road block that is for tax cuts and other administration policies. So maybe General Kelly can get the Trump train back on track.
- On the data front US pending home sales rose 1.5% in June which was around twice what the market had forecast. But the Chicago PMI dipped to 58.9 in July from 65.7 the previous month and against expectations of a 60 print. Balancing that out somewhat, however, was the release of the Dallas Fed manufacturing index which printed 16.8 higher than both expectations and last month’s print.
- European data showed the unemployment rate fell to its lowest level since 2009. At 9.1% it’s still appallingly high, but hey it's falling. Also out was EU wide inflation which printed 1.3% in headline terms and 1.2% in core terms. The latter was a smidge better than expectations. So throw in the big beat on German retail sales which rose 1.1% and the euro found a bid.
- Chinese data yesterday showed a softening in growth with the manufacturing PMI printing slightly weaker than expected at 51.4, while non-manufacturing printed 54.5. Contained within this data, however, was indications the government stimulus is continuing, Steel PMI rose to a 15 month high of 54.9 which, when combined with a new environmental crackdown in Chinese iron ore mines, saw the price of ore rocket on futures trade yesterday.
- We’ll now see if French President Macron is really the breath of fresh air many hope. Both houses of the French parliament have now passed a bill to overhaul labour laws and allow individual company rather than industry wide deals to be made.
Australia
- A cracking day for local stocks yesterday with solid rises in the miners leading the charge after iron ore futures joined the copper party to buoy sentiment and drive the buying. The 18 point rally was still inside the wedge the market is stuck in right now and while it was a positive day the selloff from the 5745 high in the physical S&P/ASX 200 suggests there are still some strong headwinds for the local market right now at an index level.
- Naturally earnings season here in Australia is going to be important at an individual company level and as a result this will inform moves in the index. To that end Rio Tinto's (AX:RIO) results tomorrow is going to be huge.
- In the meantime though the focus will be on what offshore markets are doing and what the RBA has to say this afternoon. My sense is the RBA governor has to address the potential handbrake the Aussie dollar at 80 cents will place on growth in aggregate as well as in the economic transition.
- And you can see in this great DFAT chart of Australia’s top 25 exports – via Sam Jacobs at Business Insider – just how impactful the higher Aussie will be on the repatriate receipts for our mining related exports. But I’ve also highlighted three service exports – check how high education is – which will also be impacted by a higher Aussie. It’s a simple chart but really shows the sectors that are impact by the Aussie at 80. If Governor Lowe soft pedals today we’ll be trading 81.50/82 cents pretty quickly.
Forex
- The US dollar was under pressure again last night losing further ground against the euro after what appeared to be month end flows and after more European data suggested to traders the ECB is on track to change policy in the months ahead.
- Of note was the EU CPI print of 1.3%, yes I know ludicrously low, but on expectations, and the much stronger than expected German retail sales for June - +1.1% v 0.2% expected - which were the source of the dollar’s woes. That's driven the euro above 1.18 for the first time since January 2015. EUR/USD is currently trading at 1.1834 as I write – that’s off the high of 1.1844 soon after the news of Anthony Scaramucci’s ouster broke.
- Sterling is also higher at 1.3196. That’s a gain of around half a percent despite the mixed picture from UK data in the run up to this week’s BoE meeting. Overnight BoE data showed a continued fall in mortgage approvals and a slowdown in consumer credit growth. But as I wrote yesterday in my Forex today column the pound has room to outperform the euro. Perhaps not overnight – but we’ll see.
- The yen benefitted from yesterday's data in Japan as well as the US dollar weakness with USD/JPY trading down at 110.21 and potentially on track for a test of the bottom of this range below 1.09.
- Turning to the dollar/commodity bloc and we see these three currencies lagging a little right now. Aussie traders are clearly waiting for the RBA decision and governor's statement this after noon. At 0.7996 however, the AUD/USD is not weak - just lagging the euro with a 0.13% rally compared to the EUR/USD move of +0.72% over the past 24 hours.
- Likewise, the Canadian dollar and kiwi are also dragging their feet a little relative to moves in the euro. At 1.2460 USD/CAD is a little higher than this time yesterday while the kiwi is largely unchanged at 0.7508.
Commodities
- Sentiment is a fickle thing. That's something US dollar bulls have found recently and it is something that has been a big driver of the price action in oil markets over the past 12 months or so. That's important because you can see in the price action and the reaction to news that whereas previously it was bearish data that was embraced by traders the worm has now turned. It's anything bullish which get traders attention.
- And so it was last night that news of US sanctions on Venezuela - after the power grab by president Maduro - caught the attention of traders. WTI is back above $50 a barrel after a 0.93% gain to $50.17 while Brent rose 0.19% to $52.62. That oil could rally when OPEC production data showed an increase last month of 90,000, according to Reuters, is interesting. LIkewise, that oil rose while analysts materially downgraded their forecasts for the price of WTI and Brent for 2018 is also instructive.
- The latest Reuters poll showed Brent is seen averaging $54.51/bbl and WTI $51.88/bbl in 2018 (vs$57.37 and $55.20 previously). These are big drops. And perhaps open up the topside a little if we continue to see the big drawdowns in inventories we've seen recently.
- Chartwise WTI, and Brent, have charted beautifully in recent years so it's worth noting there is overhead resistance in WTI around $50.40/50 looming.
- Gold too has overhead resistance looming just north of current prices. last night's high around $1271 was a few dollars below the $1274 level I'm watching. If it can break, gold could run $20.
- copper continues to battle north as a combination of focus on the impact of the muted Chinese clampdown on scrap imports and decent Chinese - and global - economic data keeps price relatively elevated. At $2.89 a pound copper is up 0.7% overnight but off the high of $2.91.
Have a great day's trading.