Originally published by AxiTrader
Market Summary
A very dovish Lael Brainard couldn’t help lift US stocks, which were lower overnight, as traders came back from their Labor Day break and reacted to the weekend’s events on the Korean Peninsula.
Financials didn’t like the flattening of the curve that Brainard’s comments implied (2s-10s 77.2, down 5) and were the worst performing sector with a drop of 1.85% on the S&P 500. In the end 8 of the 11 sectors of the S&P 500 were lower, which left it with an 18 point fall to 2,457 to finish down 0.75% on the day.
The Dow Jones Industrial Average ended down 1.07% at 21,753 and the Nasdaq 100 was 0.93% lower at 6,375. Stocks in Europe were mixed with London down 0.52%, Paris off 0.34% but Frankfurt 0.18% higher.
Here at home after the S&P/ASX 200 climbed off the mat to finish at 5,706 yesterday SPI traders have marked prices down 25 points this morning. That implies a poor start maybe even a strong GDP at 11.30 AEST won’t cure.
On forex markets, Brainard's comments and a big drop in factory orders were all the excuse US dollar bears needed. The euro is higher but it is the yen that is the big mover of the larger pairs buyers come for it as a safe haven from stocks swoon and Korean tensions. The kiwi is higher after a good dairy auction and the Aussie dollar is doing as best it can just below 80 cents as solid growth supports.
On commodity markets, stocks and North Korea buoyed gold, which is higher again. Oil is up as the US recovers from Hurricane Harvey and news broke the Russians and Saudis are already talking about an extension to production cuts. Copper is as copper does – higher.
GDP is the big one here today in Australia and then tonight we have the Bank of Canada interest rate decision, US trade, US PMI’s and the Fed’s Beige Book.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Russian president Vladimir Putin is clearly worried about the escalation of tension on the Korean peninsula. Speaking at the BRICs conference yesterday he said “Russia condemns North Korea's exercises, we consider that they are a provocation ... (But) ramping up military hysteria will lead to nothing good. It could lead to a global catastrophe”. He said there is no path but “a peaceful one”. But he also added that it was “ridiculous to put us on the same (sanctions) list as North Korea and then ask for our help in imposing sanctions on North Korea…This is being done by people who mix up Australia with Austria.”
- And while most of the political focus in the US has been on President Trump ending DACA the Wall Street Journal Editorial Board said in an article overnight there are more options open to President Trump than to obliterate North Korea. The journal effectively says the popular views that the only options are war or acquiescence are wrong. It’s a gated article. But one worth reading. That said there was one sentence that jumped out at me which – I’d bet – will bug the heck out of President Trump. The Journal noted that “The tests underscore how much US intelligence has underestimated the North’s nuclear progress, which will soon make American cities vulnerable to attack”. Which is important context around UN Ambassador Nikki Haley’s comment the previous night that when a rogue nation has a nuclear tipped ICBM pointed at you you don’t drop your guard.
- The US dollar was under pressure last night after Fed governor, and permanent voting member, Lael Brainard said that the US central bank can afford to wait and should be more cautious on rates. “We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard said. Then echoing Chair Yellen from a couple of years back she effectively said the Fed should be prepared to run the economy hot for a while to get inflation higher. “I believe it is important to be clear that we would be comfortable with inflation moving modestly above our target for a time,” she said. And why not? That’s kind of what the BoJ has signaled with policy. No matter how good growth gets it’s keeping the 10 year between 0.0% and 0.1% as it seeks to stoke inflation.
- Minneapolis Fed president Neel Kashkari went a little further suggesting higher rates might actually be hurting the US economy. He's a dove but that's an out of consensus at the fed I'd bet.
- Also hurting the US dollar was the 3.3% fall in US factory orders. Never mind that the 3.3% fall was what the market forecast. It was an excuse to sell a few dollars. Key here is that the big dip in transports (planes) was what dragged the number down. Abstracting transportation equipment orders were actually up 0.5% in July after Junes 0.1% increase. So not a bad number at all really. ISM New York was weaker though dropping to 56.6 fin August rom 62.8 previous. That’s still a strong print, just not as strong as it was.
- In Europe services and composite PMI’s were slightly weaker than expected in Italy and France but stronger in Germany. The wash up was that the EU services PMI was a little weaker at 54.7 and the composite PMI printed 55.7.
- In the UK services PMI dipped to 53.2 in August from 53.8 the previous month. That was a bigger drop than expected and August’s print is the lowest since September 2016.
- In China yesterday data showed the services sector expanded faster than forecast with a print of 52.7 against the 51.8 expected. That lifted the Caixin composite PMI to 52.4 from 51.9 last month.
Australia
- It’s going to be a good day for growth it seems today with the release of Q2 GDP in Australia. At least that is the expectation after the release of the last of the partials yesterday. Even though the current account deficit blew out net exports – the bit that feeds into GDP – came in higher than expected and will add 0.3 ppt to Q2’s growth. That’s seen economists lift their forecasts into the 0.9%/1.0% region for the quarter. That’s solid.
- And you might be forgiven for thinking with that strength the RBA would be preparing the ground for a rate hike. But yesterday the board left rates at the record low 1.5% for another month while Governor Lowe delivered a fairly balanced statement to accompany that decision. One of those “strength here, challenges there” statement that he is already becoming famous for.
- Personally I read the governor’s statement more positively than some who believe the door is still open for another rate cut. But he gave both sides of the debate reasons to relax in a speech deliver in Brisbane last night. He explained that when rates rise eventually they will be on track to head a couple of percent higher back toward where the RBA sees the neutral rate. But he also highlighted now is not the time for that. “it will be some time before we are at what could be considered full employment in Australia and before underlying inflation is at the mid-point of the medium-term target range. This means that stimulatory monetary policy continues to be appropriate,” Lowe said.
- Yesterday’s statement gave an explicit call out to softening in housing conditions in Sydney and Governor Lowe’s speech last night AGAIN cited housing explicitly as a reason the RBA had not cut even though the economy probably could have benefitted – via unemployment falling and inflation rising. “Our judgement has been that it was not in the public interest to encourage an already highly indebted household sector to borrow even more. More borrowing might have helped today, but it could come at a future cost,” Lowe said.
- So all up – rates on hold for some time here in Australia – no matter how solid GDP is today.
- Looking at stocks now and the outlook remains sideways with a downward bias after the falls offshore. The physical market closed the S&P/ASX 200 at 5,706 last night and SPI traders have knocked another 25 points off that overnight as US stocks dipped. That may not get the ASX200 back to yesterday’s lows at 5,666. But there is every chance it goes close. If that level breaks then the recent low is 5,645. Metals continue to do well, that is a salve to the market. But financials came under pressure last night in the US which may not be a good sign for the biggest sector on the ASX today.
- In SPI terms the levels to watch are 5,643 and 5,607.
Forex
- As highlighted above a big fall in factory orders and Lael Brainard’s very dovish speech were all the excuse US dollar bears needed to hit that big red sell button again overnight.
- So this morning we have the US dollar index down 0.31% at 92.34. Euro is higher again at 1.1916 up 0.18%. Not spectacular by any stretch and still inside the range we saw Friday night. No doubt that’s because trraders are waiting to see just how dovish, or not, the ECB is at this week’s meeting.
- USD/JPY is back under 109 as traders worry both about North Korea and swooning stocks. At 108.81 USD/JPY is down 0.84% and now less than 60 points off last week’s lows and 70 points above the low of 2017. If 108 breaks the outlook shifts decidedly bearish for USD/JPY with a target in the 106.50 region and then 103/104.
- Sterling is higher and back above the trendline it broke below last month. At 1,3029 GBP/USD has both broken back above the trendline but also the 1.30 level I’ve been targeting lately as the key to the next leg higher.
- Of the commodity bloc the Kiwi is doing best after a good dairy auction (at least that's my take). At 0.7232 the NZD/USD is up 1.01% day on day.
- The Aussie too is strong and at 0.7994 it’s up 0.67% after yesterday’s solid data in Australia and positive surprise in Chinese PMI’s. Traders will be betting that the economist are right in their forecasts of a strong GDP report and were it not for the tension on the Korean peninsula right now we’d be talking about an Australian dollar at new highs for the year such is the level of support both fundamentally and from buyers.
- The Canadian dollar followed oil a little higher and is up 0.3% with USD/CAD down at 1.2373. Traders await the BoC decision and comments tonight.
Commodities
- The Tass news agency said in a piece late yesterday that the Russian and Saudi’s are already discussing a further extension to the production cut agreement. That helped global oil prices move higher last night with WTI surging 2.81% to $48.62 while Brent rallied 1.72% to $53.24. That underperformance of crude also speaks to a readjustment of relative prices now that refinery capacity is coming back on line and pipelines are re-opening in the aftermath of Hurricane Harvey.
- There have been large drawdowns in recent months and were it not for Harvey crude is likely to have been substantially higher as a result. Not $60 a barrel in WTI terms clearly. But at least testing the recent highs above $50 a barrel.
- So it’s worth noting that overnight WTI has broken back above the trendline it recently broke down and through and looks biased toward trendline resistance at $49.50/60 and then $50.00. For me though a break of the $50.20/40 will be the big test for crude.
- Gold is playing its safe haven role once again. But this morning it’s not just a safe haven from issues on the Korean peninsula but also from the falls in US stock markets. The target remains $1,360/65 on my charts. It’s worth noting that gold continues to look overbought on the daily charts. But it has broken the downtrend from 2011 in recent months so that’s not entirely unexpected. Especially with all the tensions at the moment.
- Copper, Copper, Copper – Oi, Oi, Oi. The metal with a Phd is continuing to find support as the narrative around global growth and questions of the supply-demand balance continue to be raised. There has been a general rally in metals on this basis recently which has meant that even though copper looks stretched support remains firm. It’s at $3.1245 a pound this morning.
Have a great day's trading.