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Markets Morning - A very quiet night for stocks but the USD fought back from early loses.

Market Analysis /
Greg McKenna / 29 Aug 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

Market Summary (8.15 am Wednesday August 29)

That the Bloomberg website is leading with an article I read in Asian trade yesterday afternoon about What a Chinese Superpower looks like tells you almost everything you need to know about overnight trade.

It wasn’t spectacular.

Sure the US dollar was under pressure early. But an 18 year high in consumer confidence, 10 year rates rising a little, the curve steepening a couple more points, a transcript of Robert Kaplan's interview with the Wall Street Journal, and Goldman telling clients that they’ve read Powell wrong if they think he was dovish all combined to lift the Greenback off the mat

So the DXY is at 94.73 down just 0.05%. Euro is at 1.1692 for a gain of 0.15% after a high last night at 1.1733 – the old resistance level. Sterling is down 0.18% at 1.2867 while it’s lost a little more against the Eur with EURGBP at 0.9086 as talk – and posturing – on hard Brexit continues. USDJPY sits at 111.17, up 0.1%.

On the commodity bloc the Aussie has underperformed with a loss of 0.2% to 0.7335 while the Kiwi and CAD have gained about 0.2% to sit at 0.6708 and 1.2934 (in USDCAD terms) respectively. That break of 1.2950 for the CAD suggest further strength against the USD – and crosses – as hopes grow Canada will reach a deal on  the revamped NAFTA this week.

To stocks then and the S&P 500 made a new record high at 2903.77 before closing down a few points at 2,897.53 for a gain of just 0.03%. It was only a 10 point range though last night – again there is a message there in these dog days of August. The Dow rose 0.06% and the Nasdaq was 0.15% higher at 26,064 and 7,570 respectively.

In Europe the FTSE caught up with a 0.52% rise but the DAX dipped 0.1% and the CAC was just 0.11% higher. Here at home the ASX still had a good day yesterday with a 36 point gain even though China reversed into the red in our afternoon. Overnight though despite positive moves in global mining stocks SPI traders have knocked 5 points of prices suggesting a cautious start to the day’s trade.    

On commodity market the return to strength of the USD – or at least the fact its stopped falling – seems to have hurt gold which fell $10 to $1201. Perhaps the lift in US 10’s to 2.88% and the 2’s to 2.665% (curve 21, less hand-wringing) also played a role in gold’s dip. Copper is up 1.4% in HGc1 terms to $2.74, the CRB is down around 0.6% however. Oil is down as well with WTI off 0.38% at $68.61 while Brent has dipped about 0.33% to $7596 – That overhead resistance in Brent looks strong.  API data just released showed a 38,000 increase in inventories.      

In the Crypto space Bitcoin’s rally continues – did you see my crypto video yesterday – and it sits at $7,093 this morning, up 5.8%.

On the day we get HIA new home sales in Australia, consumer confidence in Japan, Singapore PPI, export and import prices, and then this afternoon we get the Gfk consumer confidence data from Germany. House prices are out in the UK, GDP in France as well as mortgage applications in the US. That’s all before the big one in the US tonight which is the 2nd estimate of Q2 GDP. We also see PCE prices, pending home sales, and the EIA crude and other inventory data.

Macro Stuff that affects everyone and everything – either today or eventually

International

  • US consumer confidence shot the lights out in August  with a print of 133.4 against expectations of 126.7 and the previous month’s print of 127.9. Lynn Franco, director of economic indicators at The Conference Board, said in a statement “expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018”. President Trump was so excited about this he tweeted a story from CNBC last night.
  • And speaking of Trump, the President has taken aim at big tech tweeting “Google search results for “Trump News” shows only the viewing/reporting of Fake News Media. In other words, they have it RIGGED, for me & others, so that almost all stories & news is BAD”. He continued to bang on and reports from Bloomberg’s Jennifer Jacobs are that in the Oval Office he said, “I think Google is taking advantage of a lot of people. I think that is a very serious thing. It's a very serious charge. ... Look at what's going on with Twitter, if you look at what's going on with Facebook, they better be careful because you can't do that to people”. Just something to watch. It’s the FANGS who have been leading the stocks rally.
  • As reader know I suggested over the weekend and then earlier this week I didn’t think Powell was dovish. That’s something Goldman seems to also believe according to a report from Bloomberg which says Goldman economist Dan Struyven wrote in a note that “Unlike the bond market, we did not view Powell’s speech as dovish, partly because of its references to the Fed staff study…We expect not only a limited core inflation overshoot but also a sizable unemployment undershoot — and an FOMC that continues to care about that undershoot”. As a result Goldman reaffirmed their call for two more hikes this year and four – not a typo – next year.   
  • But, as Barron’s suggests, the market just doesn’t believe the Fed. Or at least much past the two hikes this year are not yet priced. Vito Racanelli wrote that one way to see the divergence between what the Fed is saying and market pricing “this is that investors are afraid of an inverted yield curve, the classic predictor of a recession”. I think he’s dead right. And I think the recessionista hand-wringers are way ahead of themselves.
  • Speaking of the Fed and rates, the WSJ released  a transcript of an Interview With Dallas Fed President Robert Kaplan. He highlights he’s leaning to 2 more this year and another 2 next year. Importantly on trade he signalled something I’ve noticed from Fed officials in the recent past – that is a real delineation on the trade war between NAFTA partners, allies, and then China. On the latter he said, “the trading relationship with China, on the other hand, is a final-goods deficit. And in addition, as important as the final-goods deficit -- and I lived in Asia for five years running our business there for my firm -- is the intellectual-property and technology transfer issues, which I think are just as significant, maybe more significant, than the trade [deficit]. And I think those issues should be addressed. I don't think they're easy to address. I think it could take an extended period of time to address them. You could debate the tactics of what we're doing, but I think that's actually a very appropriate fight. You can debate the tactics, but I think the objective of trying to address not only the deficit, but technology transfer and intellectual-property rights is very critical to U.S. competitiveness and long-term competition globally. And so that one -- it doesn't bother me as much if that takes a more extended period of time” (my bolding). Couldn’t agree more. Hopes for an easy or early resolution to the Chinese trade battle as I often write seem misplaced.
  • If you are wondering why China cares so much about controlling the Yuan this story may help. CNBC reports China has just implemented a settlement system for bonds which will pave the way for the countries bonds to be included in global indexes. That for me is why they don’t want a destabilised Yuan and capital flight just there. That and their desire to ultimately open up markets and usurp the USD in global trade at some point. It’s a long way off, but China is playing a long game.   
  • And on China, Premier Li said the nation is going to continue to tighten intellectual property rules. That’s a big sticking point for the US.
  • Keep an eye on Italy. PM Luigi Di Maio was in the papers last night again saying the nation might breach its 3% public deficit limit under EU rules to fund the promised spending measures it made before the election. And while I’m on Europe, lending growth last night was encouraging for the overall growth outlook.
  • And Peter Praet, the ECB chief economist again said overnight the time to end easy money is here because of the risks associated with easy money.  
  • Russia is holding its biggest post-cold-war military exercises with the Chinese and Mongolian armies involvement.  

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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