Neither invocations of monetary policy tide change nor North Korea-spurred global crisis nor questions over stretched economic expectations have revived concerns in the speculative rank. Global equities have staved off critical breaks and drifted comfortably back into their ranges, volatility measures – while off the lows of the past two months – remain anchored to exceptionally low level, and favoured ‘risk’ assets seem to have shifted to cruise control.
Rather than attach this restraint to a specific fundamental, it is more likely that we are seeing the product of underlying conditions of complacency that translate into reticence for producing large speculative moves. If that is the case, the rest of the week may tease but never realize full trends as the final week of August carries the assumption of Northern Hemisphere holiday trade.
Wall Street: US indices followed the trend of moderate gains pioneered through European and Asian session market performances before it. Performance in New York seemed to favour speculative amplitude. The tech-heavy Nasdaq Composite led the way with a 1.05% advance that cleared out the serious of lower highs seen since the July 27th peak.
With a 0.5% gain of its own, the S&P 500 has offered little additional conviction to the bulls and the impression of a head-and-shoulders pattern still overbearing. The weakest of the performance was registered by the blue-chip comprised Dow Jones index which registered only 0.1% gain and didn’t bother to clear the past two-weeks’ highs. It seems the late-in-the-session remarks made by President Trump on tax reform did little to inspire the same enthusiasm afforded in previous months.
What is Motivating the Dollar Rebound: With the exception of the British Pound, the Dollar was this past session’s best performing major currency. Yet, where is this reprieve originating? There was a range of fundamental developments that could have played a role in the currency’s recovery. On the data front, the ADP private payrolls figure handily beat the consensus forecast (237K versus 185K projected) which serves as a possible footing for NFPs on Friday and further a revival for Fed rate forecasts.
Yet, the rebound gained most of its ground well before the data dropped. That would further preclude an explanation that the remarks made by the President on proposed tax reforms - such as lowering the corporate tax to a competitive 15% - before the close was similarly lacking. Playing the roll of a ‘carry currency’ that can advance alongside the likes of equities seems more believable, but that position likely carries far less weight than it had before 2017’s rout. Most likely, the motivation is simply practical: pressure easing before the DXY commits to a full technical breakdown which would likely flounder moving into holiday trade. Complacency and liquidity can work both ways.
A Forecast for Scattered Data: The economic docket looks like a Doppler radar with plenty of noteworthy event risk. Yet, that doesn’t necessarily make for a foundation of definitive volatility. This past session offered up Japanese retail sales, Aussie construction activity for the 2Q (which significantly bested expectaitons), Eurozone economic sentiment (a decade high) and the US private payrolls figure from ADP.
Ahead, we have another round with Japanese industrial production, Australia new home sales, Chinese PMIs from the government, Euro-area inflation and the Fed’s own favoured inflation measure (the PCE deflator). There are a variety of themes this will hit upon including growth, keeping bubbles (housing) inflated, rate forecasting and more. Yet, that doesn’t ensure strong market response. Investors have grown numb to a lot of fundamental pressure. It takes much more to strike a nerve, and traders should approach event-trading with a healthy dose of skepticism for impact.
Australia Dollar: The Aussie Dollar offered little motivation for FX traders one way or the other this past session. Without a determined drive to risk trends, the carry standing for the currency would provoke neither bulls nor bears. While the previous quarter’s construction report was remarkable, there seemed little appetite to throw confidence behind growth that has hearty support from a likely bubble.
We’ll see whether the local currency remains aloof as we build speed into the second half of the week. Second quarter capital expeditures and July home sales will struggle to move the needle alone. Instead, we should keep an eye on any ‘risk appetite’ moves seeping into the FX market for guidance.
ASX: Wednesday’s ASX session was generally positive through its close, but the deep 5.7 percent drop in the telecommunications sector tumble lead by Telstra after NBN rejected a revenue proposal that would have been worth $5 to 5.5 billion. A similar single-share shock doesn’t seem to be on the offing at least before Thursday’s open. And so, futures point to a very modest reprieve; but it is hard not to notice how close we are to the floor of the past three month’s range.
Commodities: Oil prices continue to flounder as refining in the US is hobbled by Hurricane Harvey. With nearly a quarter of the United States’ capacity to convert the raw crude into its more productive components, the structural supply glut is getting an unwanted seasonal add on. Meanwhile, gasoline futures in the US are the highest in over two years – which sends the ratio of gasoline to crude prices to its highest reading on records going back over three decades.
Elsewhere, gold seems to have lost the drive to keep pushing after its high profile 1,300 break. Its timing and movements look like a mirror of the Dollar’s, which further highlights the commodity driver that is likely most important in these markets: the volatility of the primary pricing tool.
S&P/ASX 200 up 0.709 points or +0.01% to 5669.721
AUD -0.65% to 0.7900 US cents
On Wall St, Dow +0.10%, S&P 500 +0.44%, Nasdaq +1.03%
In New York, BHP -0.48%, Rio -0.37%
In Europe, Stoxx 50 +0.46%, FTSE +0.38%, CAC +0.49%, DAX +0.47%
Spot gold -0.09% at US$1308.00 an ounce
Brent crude -2.31 % to US$50.80 a barrel
Iron ore -0.36% to US$88.979 a tonne
Dalian iron ore at 588.5 yuan
LME aluminium (cash) +0.87% to $US2084.75 a tonne
LME copper (cash) +1.85% to US$6772.00 a tonne
10-year bond yield: US 2.14%, Germany 0.36%, Australia 2.68%
By John Kicklighter, Chief Strategist, IG Chicago