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Forex And Bonds Unfazed But Gold Strangely Bid

Published 18/04/2018, 09:42 am
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Originally published by AxiTrader

Market Summary (7.42am Wednesday April 18)

Resistance eliminated! Earnings look good.

That’s the short story of stocks overnight with solid gains on US and European markets defying the continued unease on Chinese bourses yesterday.

At the close the S&P 500 is up another 28 points, 1.06% to 2,706 besting the top of the very recent range and rising back to the 61.8% retracement level of the fall from just above 2,800 to the recent low around 2,550. The Dow is up more than 200 points, 0.87%, to close at 24,786 while the Nasdaq surged 2.12% helped by Netflix's (NASDAQ:NFLX) almost 10% gain.

In Europe it was a game of catch up after the previous days trade missed the strength of the US rally. The DAX was up 1.57%, the CAC up 0.76%, and the FTSE in London rose 0.39% while Milan’s FTSE MIB was 1.37% higher. Yesterday in China we saw more weakness with the Shanghai Composite down 1.3% despite the reasonably solid 6.8% GDP print and relatively robust retail sales, investment, and production data.

Overnight the PBOC cut the reserve requirements on a number of banks by 1% - maybe that will help.

Here at home after a lacklustre day yesterday for the local exchange SPI traders are betting that the S&P/ASX 200 has a better day of it, adding 24 points overnight. That seems reasonable. Watch for a break of yesterday’s higher at 5,871 on the ASX200 or 5,855 on the SPI to really get things moving. It those levels don’t break it’s a signal too.

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On forex markets you’d be forgiven for thinking the return of risk appetite would have helped the Aussie dollar. But alas that is not the case and AUD/USD is down marginally at 0.7769 – it’s showing an uncommon lack of volatility at the moment.

Elsewhere the pound reversed sharply off new post-Brexit highs up around1.4375, or thereabouts, despite decent prints for jobs (+55k v 33k exp, UE4.2% v 4.3% exp) and wages. It’s at 1.4290, actually down 0.3% on the day and back inside the previous and persistent range. Euro is largely unchanged at 1.2372 despite a fall in the ZEW economic conditions (87.9 from 90 last) and sentiment (-8.2 from 5.1 last) indexes and the bounce in US industrial production (+0.5% v 0.4% exp). USD/JPY is also largely unchanged at 107.02, as is the USD/CAD at 1.2546 while the kiwi is down 0.3% at 0.7340.

On commodity markets oil is back up a little with WTI gaining 0.4% to $66.47 and Brent up 0.2% to $71.54. Tiny moves, but still holding the break. Gold is at $1347 despite the rally in stocks – something to watch – while Dr copper dipped about 0.4% to $3.075 which might be one of the restraints on the Aussie.

And for the unintended consequences file, the US sanctions on Russian companies continued to power aluminium prices higher with a gain of 4.99% on the LME.

Oh, and bonds. US 2's are still rising at 2.39% while US 10's are at 2.82%. The 2/10 curve is at 42.90. Worth noting the Fed has signalled worries on inversion – that’s all.

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And finally, President Trump announced more details of the upcoming summit with North Korea after meeting Japanese PM Abe in Washington. The IMF also released their upgraded – slightly – forecast for global growth this year at 3.9% with a similar outcome expected for 2019. Yes, trade tensions are a headwind but that’s pretty solid. And of course reflecting that solidity, and especially of US growth, the multitude of Fed speakers last night highlighted rates are going up because inflation is heading up.

To the day ahead then and it’s quiet here in Australia with just the Westpac leading index out. But Japan has trade data while China releases house price data. Tonight’s PPI, RPI, and headline inflation data in the UK will be important for the Pound and expectations about the upcoming MPC meeting. And speaking of central banks the BoC has a meeting this evening – no change is expected.

On the earnings front in the US we get Morgan Stanley (NYSE:MS), US Bancorp (NYSE:USB), and Amex (NYSE:AXP) as the headline acts.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • I was thinking yesterday about President Trump’s China/Russia currency comments and thought maybe I’d represented things wrongly in my piece yesterday morning. My sense was that perhaps he was not commenting but signalling. He knows the Russians are making hay while the rouble collapses and oil is high. And he knows that with the USD/CNY rate back near where the Chinese devalued back in 2015 it might be tempting to make a little adjustment. So he was warning them.
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  • That thought, which frankly popped into my head as I was driving to Sydney (there is something meditative about that freeway), was seemingly confirmed by US Treasury Secretary Mnuchin overnight when he said, “it was a warning shot at China and Russia about devaluation. China has devalued their currency in the past. He’s watching it”.
  • I raise that today because I get a sense that President Trump has knocked the Chinese off kilter. Of course he knocked nearly everyone off kilter in some way over the past year and a bit since he was inaugurated. But you can see in the way the Chinese are furiously trying to win support from other nations to stand against the US moves on trade and tariffs – with little consideration of existing EU tariffs, EU disquiet over IP, and that the EU is a big beneficiary in NATO – that Beijing may not be as calm as they seem. Of course they are playing it as if they are not rattled but I’m not convinced. Yesterday the Chinese both simultaneously signalled they will open up their market for vehicle production to foreigners and abandon the JV requirement while also placing more punitive tariffs on US ag exports. Anyway, that’s just my way of saying we all need to keep an eye on this US- China trade and pre-eminence battle.
  • To the Fed now and it is clear that rates are going higher. More importantly though it is not only clear that rates are going higher but that the fed is genuinely certain inflation is going to rise and that growth is going to accelerate. That’s the clear message we are getting from Fed speakers at the moment. I don’t have the time to highlight everything that was said. But my key takeaway comes from John Williams, soon to be the number 3 at the Fed, who said he thinks inflation – including PCE – will rise to/above 2% this year and then stay there for years. On that basis alone the Fed must normalise. It probably won’t go to the 3.4% the Taylor Rule suggests rates should be at. But it will keep raising rates. One other thing Williams said was that he does not expect the 2/10 curve to invert.
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  • We’ve had a rough couple of months on markets. We’ve had a volatility shock, we’ve had trade tensions, we’ve had geopolitical issues – real and dangerous ones – in Syria and the Middle East and we’ve seen some sharp moves. And through all this the underlying strength of the global economy has come under question. Whereas we entered 2018 looking at a solid 2 years of growth for the global economy many are now wondering if that was too optimistic an outlook. Not so the IMF who have upgraded their outlook for growth – especially in the US, Europe and Japan – this year and next compared to where they were just 6 months ago.

Table

  • The question is, of course, is whether this is late news. I ask that because save for China and the US most countries Surprise Indexes are now running in negative territory. Of course that doesn’t mean negative growth, rather we may have past peak optimism. That has implications for markets more than growth itself which, if the IMF is right, should continue to print strongly. Something to remember if stocks fall off a cliff anytime soon.
  • Crowded trades. The latest BAML survey is interesting if for no other reason than it shows a massive level of cognitive dissonance among fund managers. Or more correctly it shows how off kilter they have become due to the rising uncertainty in markets recently. For example, while only 18% of investors think stocks have peaked the net overweight fell from 41% to 29% in April – an 18 month low. Okay so maybe that’s not dissonance just caution. But when 40% expect a peak later this year and 39% think it will be in 2019 why is the balance falling? Anyway to the crowded trades and it’s the FANGS+BAT which are still the winner closely followed by the US dollar. So there is still a chance for the bid in these stocks and the offer in the US dollar to be less aggressive than previously.
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Table
Source: Twitter Screenshot

  • Interestingly BAML also reports the money managers disagree with the IMF and are the least optimistic about the global outlook since Brexit.

Chart
Source: Bloomberg

Australia

  • The Aussie dollar is doing nothing and going nowhere at the moment. It popped down to a low around 0.7759 a couple of times yesterday but the high was just 30 or so points above that around 0.7790/91. So it’s a case of nothing to see here, move along please.
  • But it is an interesting question to ask why the upsurge in risk appetite that might have been associated with this bounce in stocks hasn’t helped. For me the answer is in the BAML survey. There isn’t actually an uptick in risk appetite. The specifics in US earnings are helping lift US stocks but that is not filtering into other markets. Just look at the price of gold at $1347 or US 10’s at 2.83%. If this was a genuine risk on move we’d be seeing gold lower and rates higher. And that, for me., is why the Aussie dollar is stuck. Markets are reacting to specific stimuli and for the Aussie we won’t see that until 11.30am Thursday when the jobs report is released. In the interim my 4 hour charts suggest a run down to 0.7760 again and if that breaks it’s 0.7740/45 and 0.7720. Topside it’s 0.7790/0.7810 as the key levels.
  • 5,855 remains the key level to watch on the SPI. The daily charts suggest it should be able to best that level – or at least test it. We didn’t quite have a bullish engulfing day yesterday but it was close. The high overnight was 5,853 reinforcing the above level as key to the next break. If it gives way I’d be targeting 5,896. And if that breaks….
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Chart

  • Did you read the RBA minutes yesterday? I did and they felt like the RBA was trying to lipstick the pig. Okay, Okay. I might be overegging it because the IMF just said overnight it agreed with Treasury and the RBA’s optimistic growth forecasts. So the RBA is on solidish ground. But when I read the minutes I got a real sense the RBA is genuinely worried about households. That’s important because while the GDP calculation of C+I+G+(X-M) can still be solidly positive if one sector is struggling while others do well there is a real sense that the C bit, consumers, consumption, households, is struggling. For me that is why the RBA spends so much time talking about unemployment and wages. It knows population growth is a big factor driving GDP but that at an individual household level things are less rosy than the overall GDP would otherwise suggest. So rates will be on hold for some time. At least another year is my guess. Here’s the key bit from the minutes, “In current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down. As progress in lowering unemployment and having inflation return to the midpoint of the target was expected to be only gradual, members also agreed that there was not a strong case for a near-term adjustment in monetary policy”.

Forex

  • Macro forces are supportive of the US dollar. Growth, central bank policy, and interest rate differentials. But the US dollar can not take a trick. That is an important signal in itself as I have written often. What the catalyst to break these ranges will be I am not sure. It will come in time. But not yet it seems.
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  • So, there is not a lot to add about forex rates per se on the day. We are still mired in ranges and extensions are continuing to be rebutted in the majors. We saw that yesterday for GBP/USD which extended past the previous 1.4343/44 high to an overnight peak of 1.4376. It’s clearly back inside the range now and testing the trendline from the last 8 or 9 days move. Should it break lower it will simply reinforce the range trading nature of this market. The 4-hours show the levels are clear.

Chart

Commodities

  • Oil is holding its range break which is an important signal in a price sense. We’ve had another inventory draw on the API data this morning which again supports prices and while the USA/Russia tensions have eased oil traders are clearly eyeing the Iranian/Israeli face off that is happening. Over the weekend the Israelis appear to have hit Iranian targets. The Iranians haven’t hit back yet but have promised retribution. So the geopolitical bid remains, global growth still looks okay which is good for demand, and inventories are still falling. No surprise then that prices are bid.

Chart

Have a great day's trading.

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