Originally published by AxiTrader
Welcome to my daily Markets Musings.
This is essentially my little black book, the diary of market moves I’ve been writing for myself since that day back in April 1988 when, in the morning meeting as a junior dealer, I was embarrassed about not knowing something that happened overnight.
It’s not supposed to catch everything – just the things that help me build the fundamental narrative I need around what’s happening in the markets I watch, and which then readies me to take the technical signals when they come.
Feedback always welcome
Greg
Market Summary
An interesting night across global markets as US stocks continued to rise with the Dow Jones Industrial Average and S&P 500 set to close at new records and US bond rates reversing all of last week’s gains.
Just a few minutes before the close the S&P 500 is up 0.14% at 2562, the Dow is above 23,000 with a 0.7% gain to sit at 23,155 as I writer. The Nasdaq 100 is down marginally at 6119.
European stocks had a positive night across the board. But SPI traders are more circumspect subtracting 2 points from yesterday’s close as both it and the physical S&P/ASX 200 show signs this rally might need a rest and pullback.
On forex markets the US dollar lost ground against the euro, surged against the yen, and slipped against the Canadian dollar as specific drivers overtook forex markets. The kiwi is lower this morning as traders await the decision on who will form government today and the Aussie dollar is waiting on today’s employment report. AUD/USD is at 0.7847 roughly equidistant of two key levels to watch.
Oil is higher again, but not as much as the bullish impetus could have suggested. WTI is at $51.99, while gold is lower as bonds and stocks rise. It’s at $1280. Copper's slide continued in what was a down day for metals, steel, and iron ore.
China data dump (retail sales, industrial production, urban investment, Q3 GDP) and Australian employment report are the key highlights for traders in our time zone today.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Treasury Secretary Steve Mnuchin pretty aggressively warned Congress that they need to pass the Trump tax cuts or the stock market will fall by a “significant amount”. Mnuchin told Politico “To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains”. Whether that’s a sign he’s losing traction on Capitol Hill or just an extension of the president’s usual belligerence is unclear. But it’s a warning that the Administration will not accept any blame if stocks fall if the tax package fails on the Hill.
- The Fed’s Beige Book was out last night in preparation for this month’s FOMC meeting. The key takeaway for me was even though the Hurricanes had impacted on parts of the US the Fed report growth in all 12 districts. And that even though labour markets were tight inflation is still quiet. What’s it mean? It means the fed still has to go on faith that with the level of growth and tightness in the labour market the chances are that inflation will eventually return. So the Fed will keep normalising rates by taking the Fed funds rates up once more in 2017 and then perhaps another 3 times in 2018.
- That’s something NY Fed president Bill Dudley reiterated overnight. Dudley said, “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually”.
- But we got weaker than expected building permits data overnight with a fall of 4.5% in September. Housing starts were also much weaker than expected down 4.7% during the month. It means housing is going to be a drag on GDP growth for Q3. But the Atlanta Fed’s GDPNow stayed at 2.7% (annualised) for the quarter with the bank saying, “The forecast of third-quarter real residential investment growth inched down from -4.1 percent to -4.3 percent after this morning's new residential construction release from the US Census Bureau”. The Citi Eco su
- BoJ board member Sakurai said yesterday that the bank needs to stick with the current framework for monetary policy even as the economy picks up. His signals were a strong reiteration of the BoJ’s current policy of keeping rates low in order to give the recovery time to entrench. “As long-term growth potential improves, people's perception of prices will change, which will raise the natural rate of interest," Sakurai said, referring to the point at which interest rates match potential economic growth. "This will lower real interest rates and make monetary easing more effective over time. This is why it is vitally important to continue easing with our current framework” Sakurai said. It’s also a policy clearly designed to keep the Yen as weak as the BoJ can get away with by moving interest rate differentials in the US dollar’s favour as the Fed increases rates and bonds move higher in yield.
- Chinese President Xi gave a long and wide-ranging speech to open the 19th National Congress yesterday. There have been many column inches written so I’ll leave you to read them but the key takeaways for me are that Xi signaled the CCP, and China itself, is paramount and above all else in the economy and frankly the world. That’s important for Chinese business and reform in the next few years. Xi clearly also understands the lesson of history and feeding the masses and knows the inequality that has grown in China this century needs to be addressed.
- Longer term he signaled a desire to export Chinese style socialism, he wants to make China’s military a “world class” force by 2050, and he was pretty belligerent with regard to Taiwan. He warned that China has "the resolve, the confidence, and the ability to defeat separatist attempts for Taiwan independence in any form” adding "We will never allow anyone, any organisation, or any political party, at any time or in any form, to separate any part of Chinese territory from China".
Australia
- The ASX 200 mapped out a neat pin bar yesterday trading up to a high of 5906 before pulling back to close at 5890 up less than one point on the day. The miners were under a little pressure, and the basic materials sector closed down 0.06%. The big banks were mixed leaving the financials index up 0.16%. Energy is down 0.24%, consumer cyclicals down 0.55%, and the telco sector dropped 1.24%.
- Yesterday I highlighted that I’m always wary of markets which go vertical in the way the ASX200 has over the past couple of weeks. And that the chances are that we are close with the setup in the ASX200 which would signal an interim top and pullback of 50, perhaps 100 points. The pin bar is a sign that that just be the case. The next day or so’s trade is important. Particularly because this morning with SPI futures off just 4 points the set up on that is similar. It doesn’t guarantee a top but is suggestive one is forming.
- There were a few second, perhaps even third, tier indications yesterday that the Australian economy is doing better than the retail sales for August suggested. The release of the NAB’s cashless retail sales index saw a recovery in September from August the year on year growth rate fell to 5.5%. But the NAB said “Based on movements in NAB's data and our data mapping techniques, ABS retail trade is expected to rise by 0.6% mom in September which would reverse the published 0.6% decline in August." Of note the NAB also says “the index is derived from personal transaction data from NAB platforms (around 2 million transactions per day) and offers a 2-3 week lead on ABS retail trade data”. If the NAB is right on this data and the expectation for the next retail sales data this is positive sign August was an aberration not the start of a new trend toward a retrenchment in household consumption as many feared.
- Another sign that Australian households are doing okay was a report from S&P that the percentage of households in arrears on their mortgages – based on the sub-set of RMBS on issue – fell to 1.1% in August from 1.17% the previous month. David Scutt reported at Business Insider that S&P said “relatively stable employment conditions and low interest rates continue to underpin the low levels of arrears for most Australian RMBS transactions”, adding that it believes “lending standards generally have tightened in many areas since attracting greater regulatory scrutiny beginning in 2015.”. Exactly the point I keep making. Also an interesting observation the day before the September jobs report, which is released today.
- Looking further out, the latest read of Westpac’s Leading Indicator, dipped a little to -0.21% in September from 0.16% in August. That suggests that the Australian economy will be growing mildly below trend over the next 3 to 9 months. That’s a big dip from earlier this year as the chart below shows.
- Westpac chief economist Bill Evans said “While the Index only gives us a glimpse of the likely momentum in the first few months of 2018 it is consistent with our view of the likely growth environment next year. Westpac is currently forecasting growth of 2.5% in 2018. Constraints on growth next year are likely to centre on a lack lustre consumer who struggles under the weight of weak wages growth; high energy prices and excessive leverage. Conditions in housing markets, particularly in the eastern states, are likely to soften while the residential construction boom will turn down”.
Forex
- The US dollar is a little lower this morning as traders seemed to focus on the weaker than expected building permits even though there was also more talk about the ECB extending its bond buying program for another 9 months. That’s seen the US Dollar Index down marginally at 93.397 this morning down 0.1%
- The euro however, is higher by 0.25% at 1.1796 after a run to a high of 1.1805 overnight. Why the US Dollar Index is lower is because of the surge in USD/JPY, which is up 0.64% at 112.91 as stocks and bonds keep rising and as the BoJ signals it will hold the line on rates and monetary policy.
- But while the euro is holding above the key supports we have been watching it is still not out of the woods with some chat that it is mapping out a head an shoulders pattern. I’ve annotated the chat below. But whether it’s a H&S pattern or not is immaterial. The key here is that EUR/USD has to hold 1.1660 to avoid a big fall. While it does it’s still consolidating the recent run higher.
- GBP/USD is higher this morning after average earnings were a little stonger than expected in August up 2.1% excluding bonuses and up 2.2% with bonuses. That, and the fact the unemployment rate held at the decades low of 4.3% suggests that whatever the dovishness BoE speakers expressed the night before the chances of a rate hike in the month’s ahead remain elevated.
- And it was data contributing to the commodity bloc moves as well. USD/CAD is lower after the Canadian dollar caught a bid on the back of the much stronger than expected 1.6% in Canadian manufacturing sales. The pundits had guesstimated a fall of 0.1%. That means USD/CAD has continued to reverse of the range highs and is back at 1.2458, down 0.5%.
- The kiwi is down 0.3% at 0.7150 as traders await the decision of New Zealand First today on who it will form a coalition with to form government. I’ll leave the rhetoric about who is better for the kiwi to others but for me, the key levels for forex traders to watch is a break of either 0.7115 or 0.7210 will get the market moving.
- And speaking of watching AUD/USD traders will be hanging on the release of the September jobs data at 11.30am AEDT this morning. In the lead up the AUD/USD is hardly changed day on day at 0.7846. The market is expected a rise of 15,000 jobs during the month to follow August’s stellar 54,200 gain. Unemployment is expected to remain stable at 5.6%. Levels to watch for the Aussie are 0.7810/15 and 0.7897/7905. A break either side will likely see an extension.
Commodities
- Oil is mildly stronger this morning despite the news that there has been a two-third reduction in exports through the Kurdish pipeline to Turkey in the wake of the Iraqi military operations in the region and despite a clear threat from the Iranian’s to “shred” the sanctions deal if the US walks away. Iran’s supreme leader Ayatollah Ali Khamenei said overnight “Trump's stupidity should not distract us from America's deceitfulness ... If the US tears up the deal, we will shred it ... Everyone should know that once again America will receive a slap in its mouth and will be defeated by Iranians”. Recall that last week President Trump decertified Iran’s compliance with the sanctions deal which gives Congress 60 days to reimpose economic sanctions. That’s a move which would likely impact Iranian exports and further tighten the market.
- But that, and a big 5.731 million draw in US crude oil inventories, and more “sources” confirming OPEC is aiming at a 6-9 month production deal extention didn’t combine into the bullish pulse for prices it could have. Rather WTI is up just 0.31% at $52.05 with Brent at $58.18 up 0.52%. Still positive and still close to range and recent highs and still with a good chance of at least a test, possibly break higher. Here’s Brent.
US 10-year rates are back at 2.34% with 2’s up at 1.57% so it’s no surprise gold is on the back foot again this morning. But its reasonably well off the $1276 low at $1280 this morning, down 0.33%. 
- Copper is lower again this morning down 0.6% at $3.16. After falling for 2 days for a loss of around 5 cents copper is still within the range from two days ago which tells what a huge outsized rally that move from $3.13 to $3.24 was. So a pullback is not unexpected.
- Worth noting though is that confidence that copper prices will stay elevated is growing with Reuters reporting overnight that “Chile state copper commission, Cochilco, forecasted on Wednesday an average global copper price of $2.95 per pound in 2018, a sharp upward revision from its mid-year estimate of $2.68, due to greater demand in China, a key market”.
Have a great day's trading.