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Markets Morning - Trump attacks Fed weakening the dollar and pushes bond rates lower

Market Analysis /
Greg McKenna / 21 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 (7.34am Tuesday August 21)

I was all set for a pretty short sharp summary this morning but President Trump has put paid to that.

Overnight rumours swirled that he’d criticised the Fed for raising rates at a fund raiser. That saw the US dollar come under a little pressure and US bond rates rally with the 2’sat 2.59% and the 10’s down 5 points to 2.82% and at the start of what could be a monster short squeeze.

That puts the curve at 23 points for those playing recession watch at home.

That President Trump’s comments have now been confirmed in a conversation with Reuters hasn’t done any further damage to the Greenback nor caused bonds to rally (rates down) further. But we can’t be too far away from a few tweets on the topic.

Anyway, the result is that the US dollar, in index terms, is down about 0.35% at 95.75 while the Euro is up a similar amount at 1.1486. That the Fed’s Raphael Bostic said one more hike and he’s watching the curve added a little bit to the USD move but the President was the key. GBPUSD is up about 0.3% as well as it closes in on 1.28 again – it’s at 1.2795 this morning.

On the commodity bloc the recovery in copper, rally in oil, and improvement in the CRB didn’t really help. The Aussie dollar is just marching in step with the Euro still with a 0.35% gain to 0.7341. The Kiwi missed the memo and is largely unchanged at 0.6644 while the CAD only gained 0.1% with USDCAD at 1.3035.

EM currencies are mixed. The Turkish lira lost about 1% with USDTRY at 6.07, but it’s bouncing around a little. The Brazilian real has lost 1.14%, but the South African rand is 0.6% better bid. USDCNH is flat at 6.8359. Let’s see where things go today now that President Trump has apparently also said he doesn’t expect much from the trade talks with China this week.

To stocks then and the S&P pulled back from the highs to finish at 2,857 for a 0.24% gain. It’s another one of those troubling candles like we saw a few weeks back at the recent high around 2,863. Obviously wee need to see the recent highs taken out for things to kick on. The Dow finished up 0.35% at 25,788 while the Nasdaq was 0.1% lower at 7,371. That the President also said Facebook and Twitter regulating themselves is vry dangerous might be something to watch in tech.

European stocks did better though as they played a little catch up to the Friday rally in the US. The DAX was 1% higher, the CAC rose 0.65%, the FTSE100 in London was 0.43% higher. SPI traders were more circumspect though subtracting 3 points overnight after a lacklustre day on the ASX yesterday which didn’t live up to the 28 point rally SPI traders were betting on Saturday morning.

Oil is higher despite the announcement the US DoJ is going to release 11 million barrels of oil in time for the Iran sanctions to really bite. So this morning WTI is up 0.8% at $66.43 while Brent is 0.5% higher at $72.17. As noted above copper is higher again with HGc1 up 1.45% to $2.66 a pound. Gold is up half a percent at $1190 while the CRB is up the same amount.

Bitcoin is largely unchanged at $6425.

On the day we get the RBA minutes here in Australia but before that we get another speech from RBA governor Lowe this morning. South Korean PPI is also out this morning along with visitor arrivals in New Zealand and Japanese industry activity. Tonight its very quiet with wholesale sales in Canada and the Redbook in the US.

Have a great day.

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

International

  • President Trump has teed off on the Fed and their rate rises. Reports were floating around of these comments at a fund raiser and that knocked the USD a little lower and saw rates rally  and the curve flatten. But these thoughts have now been confirmed as he’s repeated them to Reuters saying:
    • On the Fed, he said he disagrees with the Fed raising rates and is “not thrilled” with Chair Powell for doing so.
    • When asked about Fed independence he said he believes in the Fed doing “what’s good for the country”.
    • He said the Fed should be more accommodating and “I should be given some help by the Fed” and said he’ll criticise the Fed if it continues to raise rates.
    • On Currencies,  he said China and the EU are manipulating their currencies and also said when he puts tariffs on China they artificially lower the Yuan
    • On Facebook and Twitter, he said it’s  "very dangerous" they self regulate
  • I was so focussed on the massive move in long US dollar positions over the weekend I completely missed the huge build US Treasury shorts.  The CFTC data Friday showed big specs have a net short posi in the US 10’s of 698,194 contracts. That’s up 112,000 in a week, 230,000 in 4 weeks and 340,000 in 12 weeks. NO wonder Jeff Gundlach tweeted yesterday, “Massive  increase this week in short positions against 10 &30 yr UST mkts. Highest for both in history, by far. Could cause quite a squeeze”. Indeed it could, here’s a chart from Bloomberg.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And indeed the 10’s are down 5 points this morning at 2.82% which could be the straw the breaks the camel’s back – or at least the neckline on the head and shoulders pattern in the US 10’s. Here’s a pic via Twitter via @twomilelateral.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Turkey has caused the type of contagion many thought it might. That’s because the lira stopped falling and the Chinese played a good hand with the Yuan and the trade negotiations last Thursday. But that doesn’t mean EM is out of the woods. This chart Tracy Alloway shared on Twitter, and her little poem, highlights why folks are worried about EM debt. I’d add it’s a stronger USD that’s the real risk here.
Source: Twitter Screenshot
Source: Twitter Screenshot

 

  • And while I’m on Turkey, the Germans see no reason to rush to the nations aid. I’m surprised anyone thought they would given Erdogan’s antagonism toward the govern in German. But folks are gunna ask I guess. Anyway Reuters reported Merkel told a party meeting there’s no aid at the moment. Indeed Erdogan is still wind up his country along religious and patriotic lines against the US and markets.  You’d swear there was an election on he’s going so hard. But there’s not.
  • And on Germany. The Bundesbank sai last night German growth is likely to slow in the second half of this year. I’m guessing most folks figured that out. But that won’t stop the German trade surplus being the biggest in the world again according to Ifo. 
  • Oh and keep an eye on Italy. I’m not tying to find something to worry about, but the government last night said it may blow its deficit cap as it has to rebuild a bridge and fix infrastructure. IT also said it hopes the ECB’s QE is extended.
  • And, and, and there might be some BTD flows going into EM to stabilise them a little. This from Twitter.

 

Source: Twitter Screenshot
Source: Twitter Screenshot

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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