Market Summary
New records for US stocks, US 10-year bonds back at 2.3% but the curve still relatively falt at 76 points for the 2-10. That’s possibly due to the rumours that John Taylor – he of the Taylor Rule for monetary policy setting – impressed President Trump and is now the front-runner to get the job as Fed chair.
That rumour also helped the US dollar which picked up across the board. USD/JPY is back above 112, the euro is under 1.18 and theAussie dollar is back at 0.7850.
Gold is also lower on the move in long bonds, the US dollar, and some conflicting information about what might, or might not be, going on in conversations between the US and North Korea. Oil was higher as Iraq took back some territory near the oil rich city of Kirkuk and copper has rocketed higher and may now be targeting a move toward $3.41.
At the close the S&P 500 was up 0.17% to 2557 while SPI traders added another 11 points to yesterday’s stellar result on the ASX.
Today we get the RBA minutes, Luci Ellis takes part in a panel discussion, Fed dove Neel Kashkari speaks and we get a raft of inflation data in the UK and Europe. In the US tonight we get export and import prices as well as industrial production.
International
- John Taylor as Fed chair? That’s a real chance Bloomberg reported overnight saying that Taylor, “made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said”. Apparently the President “gushed” about Taylor after their chat.
- Taylor would bring to the Fed a mechanistic approach to monetary policy which would put him at the right hand side of the dove/hawk continuum. For example the Atlanta Fed’s current baseline guestimate of what the Taylor Rule suggests the Fed funds rate should be presently is a little under 3% at 2.94%. That sounds hawkish. But it’s worth noting that currently the majority of fed speakers, and the dot plot, suggest that fed funds is heading toward 2.5%/2.75% which is in the vicinity of that rate. It’s just that they are doing it gradually. So Taylor might indeed fit with current thinking at the fed and perhaps prove not so hawkish in real terms if he got the job. That doesn’t mean markets won’t react as if he is were he to get the job.
Chart - China’s inflation data was out yesterday and it would have done little to assuage the worries of markets that globally CPI inflation remains quiet. While the PPI was up a solid 6.9%, a six-month high, CPI inflation was up just 1.6% in September down from 1.8% in August. Usually, or should I say historically, in China and around the world elevated levels of producer prices would feed into retail, or consumer, prices. But perhaps the Amazonification off the globe is breaking this nexus. That and quiet wage growth globally. In China the CPI was pulled lower by a 7.5% fall in poultry and a 12.4% fall in pork. Add back the 0.4% they dragged off the headline number and we get a different picture. One that the Fed, and other central bankers can’t have missed.
Chart - And speaking of China, and perhaps upward pressure on inflation domestically and across the globe, Zhou Xiaochuan – PBOC governor – said yesterday that China’s economy is set to grow 7% in the second half of the year. He said the lift from H1’s 6.9% would come from household spending the FT reported. This week’s data should be very solid if he’s right. That will have reverberations for growth assets.
Australia
- The S&P/ASX 200 had another terrific day’s trade yesterdayrising 32 points, 0.56% to close at 5,846. That’s the highest close since May the 11th this year when the ASX200 was collapsing from its run up to 5950, or thereabouts. All of the 11 sectors of the index were higher with basic materials, where the miners sit, the standout with a 1.94% gain as metals again surged in China and on US exchanges.
- So it’s happened. We’ve bounced from the bottom of the range up and through the top of the range in the space of just 7 trading days. That may seem like a ridiculous amount of topside volatility. But the reality is that there has been a convergence of both solid Australian data and a continuation of the growing evidence that the global economy is growing in a synchronised fashion for the first time in ages. I know regular readers have been hearing me bang on about that for at least a couple of months. But it’s really only recently that this combination has gained traction to support the local exchange.
- Looking at the price action it’s clear the ASX has moved hard and fast. Indeed prices have been moving outside the Bollinger bands for a few days now. That’s usually a warning. But it’s also usual if we break out of a range. Which means prices might be a little stretched and a pullback to support at 5810 and 5776 wouldn’t surprise. But I’m not going to jump of this horse structural just yet. As noted yesterday the chances of a test toward 5950, probably 6000, by Christmas have increased materially.
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Forex
- Yesterday I suggested the US dollar bears might have a tougher time of it based on the charts, the EUR/USD one in particular. I highlighted that a break of either 1.1880 or 1.1800 would give a clearer picture as to the near term outlook. At 1.1792 this morning it looks very much like that outlook is for a weaker euro and stronger US dollar in coming days. 1.1735/40 seems a credible target at present with a break opening up a test of last week’s lows around the all-important 1.1660/70 region.
Chart - Naturally a stronger US dollar against the euro has translated into a stronger dollar across the board overnight.USD/JPY made a high of 112.28 overnight and a break of 112.35 would signal this leg might be over. But I’m not convinced yet.GBP/USD fell under the US dollar’s weight but also more talk of a messy Brexit. It’s at 1.3247 this morning.
- Just quickly on the Aussie dollar. It’s clear the global backdrop remains supportive in a growth sense. Coppers surge and more positivity about the Chinese economy and its growth prospects are really positive for the AUD/USD. But last night’s fall in iron orehurt the Aussie along with the strength of the US dollar and it’s back at 0.7853 this morning. I retain a view technically that because the Aussie has now satisfied both support at the 50% move from below 74 cents to above 81 cents and now closed roughly at the 38.2% of that fall the outlook is mixed but still points lower. I say that because unless 0.7920/30 this looks like simply the second leg of a deeper move lower.
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Commodities
- My enemy’s enemy is my friend. That is until my enemy is defeated and then maybe my enemy’s enemy might become my enemy. Such is the case in northern Iraq at the moment with Iraqi forces turning on the Kurds in the wake of the recent independence vote. News yesterday that conflict has broken out near the oil rich region around Kirkuk sent prices higher again and this has to increase the chances that Turkey – which has its own concerns about Kurdish independence – will turn off the tap on the Kurdish pipeline.
So we have Brent up more than 1% at $57.92 and WTI on track for that round trip to the $52.83 high.
Copper has made the round trip I’ve been talking about and busted the top of the range with a move of more than 3% overnight. At $3.22 it’s possibly on its way to a Fibonacci extension target of $3.41 after a neat Fibonacci retracement and then break. This set up, thee high, pullback, and then break, has always been one of my favourites.
Have a great day’s trading.
By Greg McKenna – Oct 17, 2017
Originally published by AxiTrader