Oil is off again, Aussie lower too as traders are cautious ahead of the Fed

Quick Recap

Ohhhhh traders are nervous at the moment.

Last night we saw stocks retreat by around 1% in Europe, and while the move in the US was a quantum less you can see in the price action that while the Fed tempering its language, assuming they do, will lift stocks it’s unlikely to be sustainable.

That’s because there is a clear recognition that the moves in China, promise from the ECB and potential for a change in tact from the Fed reflect a slowing growth picture around the globe. As I’ve been seeing that’s why oil has been sliding and it’s also why the Aussie dollar has missed the best part of the last week’s rally in stocks. Indeed it fell 0.7% last night and is back below 72 cents but holding support at 0.7180 for the moment.

Of course some of the weakness could be worries about a low CPI when it is released by the ABS at 11.30 AEDT today. But as Alan Greenspan once said (my paraphrasing) ‘If I want to know how expectations about global growth are looking I look at the Australian dollar.’

Indeed as I also highlighted yesterday in my Asian Trading Wrap I think the chances of a big Chinese reduction in its expected growth rate from the Plenum which is being held this week could rattle markets as well.

We’ll watch this space. A positive Fed story could lift stocks tonight but if they hold the line it could be a disaster.

As I highlighted at Business Insider this morning:

Data releases in the US last night do offer some cause for concern. Durable goods orders fell in September with the August data revised even lower. That’s not good news nor is the news that the massive services sector in the US has fallen back to a 9-month low, although the print of 54.4 is still the envy of the manufacturing sector. Consumer confidence also dipped in the US from 102.6 to 97.6, while the Richmond Fed manufacturing index dropped to -5 from -1.

It all adds up to an off-beat economic indicator signalling a recession in the US. Which means the Fed might have missed its chance to hike. If they signal that their intention has changed tomorrow morning, then stocks should get a lift. But the outlook has darkened in traders’, minds it seems.

So even though the news that the US is going to tap the SPR and sell oil to help ease the Debt ceiling impasse was a weight on Crude overall it’s fall is emblematic of concerns about growth. Likewise the fact the euro has held in relatively well even though Peter Praet, the ECB’s chief economist, says there are “no taboos” as Europe loads the QE bazooka again is a sign traders are thinking about growth, this time the US.

Good luck it’s an important 24 hours.

The overnight scoreboard (7.41am AEDT):

• Dow Jones Industrials -0.24% to 17,581
• Nasdaq Composite -0.09% to 5,030
• S&P 500 -0.26% to 2,065
• London (FTSE 100) -0.81% to 6,365
• Frankfurt (DAX) -1.01% to 10,692
• Tokyo (Nikkei) -0.9% to 18,777
• Shanghai (composite) +0.14% to 3,434
• Hong Kong (Hang Seng) +0.11% to 23,142
• ASX Futures overnight (SPI December) -21 to 5,325
• AUDUSD: 0.7200
• EURUSD: 1.1044
• USDJPY: 120.35
• GBPUSD: 1.5305
• USDCAD: 1.3264
• Nymex Crude (front contract): $43.20
• Copper (US front contract): $2.36
• Gold: $1,166
• Dalian Iron Ore (January): 365.5 (denominated in CNY)
• US 10 year bond rate: 2.04%
• Australian 10 year bond rate: 2.63%

On the day

On the data front today, Australian Q3 CPI is out at 11.30am AEDT. The market is looking for a headline rate of 0.7%.

Offshore retail trade in Japan is out this morning and then tonight, German import prices and Gfk consumer confidence are out along with French and Italian CPI. In the US, oil traders will be watching the EIA stock change, trade balance and of course, the Fed decision and statement.

CHART OF THE DAY: AUDUSD…0.7180 the key

The Aussie dollar’s weakness for me is symptomatic of the fact that traders are as worried about the weakness in growth that saw the CHinese rate cut, ECB promise and likely Fed delay. That’s not a growth back drop that is positive for the Aussie.

That is especially the case when you take into account the misguided belief by some investors that the RBA will cut rates next week (that could bite me).

It’s breaking down but hasn’t broken yet and the key level in the short term is 0.7180. A break and we get a cascade lower.