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Markets Morning - USD still pressured but stocks and bond rates higher on Mexico trade deal

Market Analysis /
Greg McKenna / 28 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 (7.41am Tuesday, August 28)

One down, about 50 to go.

Okay, I’m being facetious. But the fact that the US has cobbled together the Mexican end of the NAFTA deal and the fact that there appears to be no formal sunset clause, and that the Mexican’s are now trying to get Canada back in – even as Trump belts them again - has buoyed stocks in the US with a new record for the S&P 500.

But success with Canada, let alone China or the EU remains far from certain. Indeed I’d argue that the EU deal with Junker, this with Mexico, is deck clearing for the major battle.

Anyway, stocks don’t care about that. They are positive that a deal is good and that Fed chair Jerome Powell’s Jackson Hole speech means he is not going to do anything to choke off this US economic expansion prematurely. So this morning the S&P 500 is up 0.76% at 2,897 with all sectors except utilities higher on the day. The Dow is up 1% at 26,049 – a record -  while the Nasdaq 100 is up 0.98% at 7,559. The Russell 200 lagged with a rise of just 0.16%.

In Europe the DAX ripped 1.16% higher as risk appetite improved and the Ifo business climate (103.8, 101.9 exp), conditions, and expectations were quite a bit stronger than expected. The CAC was 0.86% while the FTSE 100 was only 0.19% higher.

Here at home even though Chinese stocks ripped higher yesterday with the Shanghai composite up 1.9%, the CSI300 up 2.44%, and the Hang Seng up 2.17% the ASX200 could only manage a 22 point gain. Overnight though SPI traders have added another 21 points after prices yesterday bounced of the little trendline I’ve been watching.

On forex markets the USD is under pressure still as traders continue to bet the message Jerome Powell was sending is a dovish one. In fact what they are actually betting is the yield curve is right and the US economy is slowing because Powell effectively said he’s data dependant. The wash up is the USD Index is down 0.4% at 94.72, with the corollary being a 0.5% rise in the Euro to 1.1682 and seemingly on its way to 1.1750. GBPUSD is up 0.4% to 1.2896 while the Yen has missed out and is at 111.03 for a gain of just 0.13%.

Commodity bloc currencies have been led by the Canadian dollar which posted a 0.53% gain against the Aussie dollar’s 0.3% gain. They sits at USDCAD 1.2958 and AUDUSD 0.7344 respectively. The Kiwi is at 0.6699 up just 0.13%. EM currencies are mostly stronger as well with the Mexican peso, Brazilian real, and South African rand between 0.4% and 0.6% stronger. But the Turkish lira has lost another 1.8% while the Russian rouble is 0.6% weaker.

Oil is higher again. WTi took out resistance and is up 0.3% at $69.94 while Brent is 0.66% to the good at $76.32. Gold picked up another $5 and is at $1210, while copper is at $2.72 in HGc3 terms, up 0.3%. The CRB overall gained 1.04% while Basic Materials was the strongest sector on the S&P 500 with a 1.45% rally.

Bitcoin has gained 1.8% to $6,730 while US 2’s are at 2.645% and the 10’s are at 2.845%. Ohh that means the curve steepened 2 points the hand-wringers can relax for a day. :S

Data wise today, there is close to nothing of note. South Korean consumer confidence is out in our time zone then its Euro Area loan and M3 growth this afternoon before we get the goods trade balance for the US along with wholesale inventories, the Case Shiller house price data, Conference Board consumer confidence and the Richmond Fed manufacturing index.

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

International

  • The US and Mexico have reached an agreement on their bilateral side of NAFTA. Not that you can call it NAFTA when Cnaada hasn’t been part of the deal and when both President Trump and his economic adviser Larry Kudlow have warned the Canadians they’ll hit them with auto tariffs this morning is they don’t fold to them. Canadian foreign minister Kristy Freeland said her nation will now look at what’s been agreed. But Trump saying, “I think with Canada, frankly, the easiest we can do is to tariff their cars coming in. It’s a tremendous amount of money and it’s a very simple negotiation. It could end in one day and we take in a lot of money the following day”. Apparently that’s a negotiation tactic because Kudlow said the US would like to do a good deal with Canada.
  • The markets loved it. Or so the reports this morning say. I think Powell was more important, but I do highlight what Gregor Samsa wrote in a blog post this morning as making utter sense as to the rally. On the US-Mexico deal he said there is “nothing there and [it] will not move the needle in bringing back jobs to the U.S., in our analysis. That is why, we believe,  the markets like it — little impact on profit margins and the prospect for the removal of tariffs” (my bolding). Business Insider has more on the deal here.
  • Who’s got he upper hand in the trade battle between the US and China? That’s the question this morning with competing theories. One says the PBoC’s reintroduction of the “counter-cyclical factor” in setting the Yuan’s rate each day is an olive branch to Washington and thus the US has the upper hand. I say to that the Chinese have halted the Yaun’s slide when USDCNY and USDCNH pushed through 6.90 to 6.93/94 and were set to hit 7 because they want to retain control of their markets. This is just an obvious next step.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Others say that given the Chinese now know – after last week’s discussions -  perhaps up to 40% of the issues are intractable that Beijing is girding its loins for a fight because it has no choice and thus the US does not have the whip hand at all. The argument would run by locking down the Yuan it’s one less thing the Chinese have to worry about. The corollary of course, as Luke’s tweet suggests is that things could get worse still as consultations open for the $200 billion in the next round of US tariffs this week.  
  • Sam Jacobs over at Business Insider wrote up that paper I mentioned yesterday on the algorithmic economy and its impacts on both inflation and pricing power that was delivered at Jackson hole by Alberto Cavallo, an associate professor at Harvard Business School. Sam’s thrown in some recent comments from the RBA’s own Guy Debelle as well. It’s a good piece and worth the time to read as it explains how the rise of Amazon and other online retailers is changing the outlook for inflation. The bad news folks, low inflation means low pricing power which makes it harder to get decent wages growth. It also increase the incentives for business to replace humans with AI and robots to increase margin. That’s the real cost of your cheaper books and appliances – jobs and wages.   
  • And in uber interesting news, excuse the pun. Toyota has invested $500 million in Uber while Warren Buffett’s Berkshire Hathaway has invested in the parent company of Indian payment platform, Paytm. This is an amazing space folks, keep an eye on it.  
  • Brexit is getting messy again folks. It’s not impacting the GBP because the USD is weak. But overnight French President Macron said that he respects the decision and sovereignty of the Uk citizens decision and would like to do a good deal but not at the risk of EU integrity. The Irish foreign minister essentially echoed these thoughts though he did say he thought a deal could get done. But will it be one the UK parliament can ratify?

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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