Markets Morning - Aussie dollar and EM currencies under pressure, stocks drift

Market Analysis /
Greg McKenna / 24 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 (7.43 am Friday August 24)

Even before Jerome Powell gives his speech at Jackson Hole tonight we are hearing from influential Fed figures that rates need to continue to increase. Robert Kaplan and Ester George both highlighted rates need to keep rising. That’s reinforced the message in the FOMC minutes the previous day and helped the USD catch a bid tone in what’s been a good day for the Greenback.

But even with the march of the USD the Australian dollar is the big G10 forex story this morning with the political turmoil of the Liberal Part implosion seeing it lose 1.3% over the past 24 hours as it crashed to 0.7250 this morning. That’s even worse than the Pounds Brexit worries fall of 0.75% which sees it at 1.2813 and much worse than the Euro’s 0.5% fall to 1.1542, or the Yen’s 0.6% los with USDJPY up at 111.29.

There’s likely to be – but not certain to be – a party spill around lunchtime today when, assuming it happens, the Australian Prime Minister will not stand. The challengers are former Home Affairs minister Peter Dutton, Foreign Minister Julie Bishop, and Treasurer Scott Morrison. Interesting day for the AUDUSD – more in the AUD section of the macro note.

The Kiwi got belted as well last night losing 0.9% with NZDUSD at 0.6635 while the CAD lost 0.62% with USDCAD at 1.3081. But it’s politics in Australia and the Aussie dollar which are the big losers.

Back to the US and stocks are mildly lower in all of the big 4 indexes. The S&P has had another troubling day when I look at the candle. It’s at 2,856, down 0.17% - 5 points – and at risk of another run to 2,820 perhaps a little lower. The Dow is off 0.3% at 25,656 while the Nasdaq 100 is off 0.14% at 7,413. The Russell 200 was also lower falling 0.32%.

Those are not big falls by any stretch and Europe had similar moves with the DAX off 0.16%, the CAC was basically stable, and the FTSE 100 in London dipped 0.15%. But SPI traders have seen some positivity somewhere and added 22 points overnight. Good luck with that folks.

On commodity markets copper lost 1 per cent as the next tranche of $16 billion of tariffs were imposed overnight on each side of this US-China trade battle. Gold is down $10 an ounce at $1185, and oil has consolidated the previous days gains to be basically flat day on day at $67.87 in WTI terms and  $74.81 in Brent terms.

There was a little kerfuffle in EM forex as well with USDMXN up 1.2%, USDBRL up 1.86%, and USDZAR up 1.6%. The Turkish lira lost about 1.15%. Watch this space folks.

On the day it’s Kiwi trade, Japanese inflation, and Singaporean industrial production in out time zone. And the LibSpill political mess of course here in Australia. Tonight it’s Fed chair Powell at Jackson Hole as well as German GDP and US Durable goods.

Just another quiet end to week. Have a good one.   

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

International

  • President Trump raged at Attorney General Jeff Sessions in his conversation with Fox News yesterday. It was the usual stuff about Sessions taking the job and then recusing himself. But I thought sessions response says a lot about the kind of legal jeopardy the President or those around him might actually be in given the Mueller inquiry. Session said, “I took control of the Department of Justice the day I was sworn in… While I am attorney general, the actions of the Department of Justice will not be improperly influenced by political considerations.” BOOM, take that Mr President watch this space.    
  • Here is my favourite story from overnight. Bloomberg says that a 1998 paper written by one of the pioneers of quantitative techniques used in modern monetary policy could give a clue to where the Fed is headed and maybe what Jerome Powell might say at Jackson Hole tonight. According to Bloomberg James Stock suggested in 1998 that, “if as a central banker you’re unsure about whether the economy has changed in fundamental ways, it pays to be more aggressive, not less”.
  • To that end then it’s worth noting the comments from Kansas City Fed president Esther George, that “two more rate hikes could be appropriate” this year and then several more next year as the Fed lifts rates toward neutral which George sees at 3%. On Trump’s arguments with the Fed and chair Powell George said, “expressions of angst about higher interest rates are not unique to this administration…We know higher interest rates cause adjustments in the economy.” Robert Kaplan and Raphael Bostic were both doing the rounds at Jackson Hole as well but neither deviated from what they said earlier in the week.
  • Across the Atlantic we heard from Bundesbank president Jens Weidmann, who said that the 1.7% inflation rate the “experts” at the ECB are forecasting for the next few years is close enough to the target that the ECB needs to withdraw accommodation as soon as possible. “For this reason, it’s also time to begin, exiting the very expansionary monetary policy and the non-standard measures, especially considering their possible side effects,” he said.
  • Oh and it seems Jens is out of the running for ECB president. News, via Handlesblatt, but all over the place overnight is that German Chancellor Angela Merkel wants the EC Presidency and has shifted her focus away from the ECB.
  • ETF’s, index linked funds, and passive investing have taken the market by storm in recent years. In some ways they are as responsible for the rally as all theshare buybacks. But there is a concern held by many and dismissed by many more that the move into passive and ETF’s will have a day of reckoning one day. I’m in the day of reckoning camp because my sense is in the next downturn the bid will evaporate and someone will shout fire with the exit doors either blocked or closed. Think the volocolypse in February but bigger, much bigger.
  • Anyway I raise it as something to watch because I’ve seen what happens to supposedly liquid investments in such circumstances in the past. And I was prompted to write this today because of a yarn I saw on CNBC this morning. You can read it here. The key is such an event is unforecastable in terms of timing and almost as hard to hedge against. But traders and investors might just need to keep that in mind.  
  • And on the potential for the US stock market to reverse, Morgan Stanley’s currency guru Hans Redeker told CNBC the outperformance of US stocks to the rest of the world cant last. “When you see a risk in emerging markets rolling over, and you have this concentration of liquidity in the U.S., you know that the next market that is going to give in is the equity market of the United States of America," Redeker said. He went further adding, "the likelihood that we're getting first a tightening in global liquidity conditions is very high, and this has implications on market places. I think at one point it is, as well, going to call out the U.S. — the S&P at the moment is I think trading at lofty levels, and its benefiting from this concentration of liquidity, but that cannot last”. The tightening of balance sheet conditions being undertaken by the Fed and pushed by Weidmann is in my view the big liquidity event coming. I’m in Redeker’s camp at some point.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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