Originally published by AxiTrader
Market Summary
Tech stocks came under heavy selling pressure once again overnight as the previous days bounce turned into a rout at one point. The big three indexes in the US were all in the red while Europe came under heavy selling pressure and the SPI 200 has unwound all of yesterday’s positivity on the ASX.
Naturally, the CBOE Volatility Index is higher. But it’s the wild swings we are starting to see that worry me the most. It’s becoming destabilising. Volatility begets volatility and the chances of a very big dip is growing – no doubt while I’m away in Bali.
We’ll see. But at the close the Nasdaq composite was down 1.44% at 6,144. The Dow lost 0.78% to 21,287 and the S&P 500 lost 0.86% to 2,419 with only the energy and financial sectors finishing in the black.
It was a similar story of weakness for the US dollar which has lost around half a percent in US Dollar Index terms. Euro is at 1.1440, the pound is above 1.30, and the Aussie dollar is actually marking time with the majors up half a percent at 0.7680 this morning.
That US dollar weakness comes despite the steepening of the yield curve – 2/10 back at 89 – or the increase in US 10 year rates to 2.27. Likely the lack of support for the US dollar comes from the greater percentage increase in European and UK rates over recent days as traders recalibrate interest rate reaction functions at the globes big central banks.
Oil was well above $45 in WTI terms at one point but finished the day at $44.87, gold has dipped a little as rates have risen, and copper, base metals, and iron ore continue to catch a bid.
On the economic front, the big news was the better than expected print of US Q1 GDP which came in at 1.4% against expectations of 1.2%. Let’s see how the next two weeks of data flows. It will be important for currency, bond, and stock markets.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Q1 GDP was again revised higher with the third reading overnight showing growth in the US of 1.4% in the three months to the end of March. That beat expectations of a 1.2% increase and the makeup of growth looked healthier. Consumption was revised higher and inventories taken lower. Taken together they support the notion that the second quarter increase in growth is more likely.
- German state inflation data was on the high side of expectations overnight. This is the second month in a row that we’ve seen inflation at a state level beat expectations. It will be troubling the Bundesbank a little I’d suggest. And it’s likely to increase tensions around the ECB table.
- Bank of England chief economist and MPC member Andrew Haldane again added his voice to the growing chorus suggesting the BoE may soon be lifting rates. On the recent increase in inflation, Haldane told the Guardian newspaper that “First and foremost we need to set our interest rate policy to prevent those higher inflation rates becoming entrenched”. As a result, in a separate interview with the BBC, he said “We need to look seriously at the possibility of raising interest rates to keep the lid on those cost of living increases…For now we are happy with where the rates are, we need to be vigilant for what happens next."
- I want to turn to the Nasdaq again this morning and that chart I’ve been watching. Volatility is rising and the daily bars are expanding. Last night prices again broke down below the Trumponomics rally trendline. They even traded below the levels I’ve been watching before finding a bid. Tonight is the night folks. If the Nasdaq doesn’t bounce back sharply I’ll be calling it – A top in place and a run toward 5385 (in Nasdaq 100 terms). Here’s the chart:
- HONESTLY, president Trump has done some silly things but his overnight tweets about the hosts of Morning Joe coming on top of this week’s comments to a female journalist while on the phone to the Irish Prime Minister are beyond the pale. As I write often, the only reason I raise these types of issues in a note on markets, economics, and trading is because I strongly believe his actions impact his efficacy as the guy who wants to implement health care reform, tax cuts, and build infrastructure. This week’s failure to launch of the Senate health care bill, his veiled threats to the Nevadan Senator Dean Heller, and the inability to get move his agenda forward are important for markets and valuations. But this personal stuff, his tweets and attacks, erode the president’s brand. And let’s face it, that’s his currency, it’s what propelled him into office. It’s what was supposed to help him persuade folks to turn his agenda into law. But my guess is that the president’s brand, his low approval rating, and the 2018 congressional elections will already be weighing on his support on Capitol Hill. Will we ever get Trumponomics? I’m starting to wonder.
- Look out for Qatar’s response to its neighbours demands in the next couple of days. Qatari Foreign Minister Sheikh Mohammed bin Abdulrahman al-Thani told reports in Washington overnight that “Regarding the ten days deadline, we are working together with the Americans and the Kuwaitis in order to prepare the proper (responses) ... to the list which has been submitted to us”
Australia
- The ASX had a very bullish day and with a close at 5818 it was pretty much on its highs. That likely set up another solid day for the EOFY in trade today. But then overnight weakness in the US and Europe intervened to cruel the hopes of fund manager everywhere that they might be able to improve their yearly performance a little more with another rally today.
- SPI traders have wiped a whopping 71 points, 1.23% of prices compared to yesterday afternoon. That’s knocked the SPI back to 5712. When viewed in these terms the SPI – which trades most of the 24 hour period of the daily clock not just the 6 hours of the physical ASX – has actually had a down day.
- The question, of course, is whether SPI traders are correct or not. Yesterday I wrote I’d expect the S&P/ASX 200 to run back toward 5830 over the course of the next three days. We almost got there yesterday and in what might be a thin days trade there is every chance the forces of better EOFY valuations and window dressing launch an attempt to hold the market up. But as I write often. Volatility begets volatility and as the Nasdaq is starting to show we might be about to see a lift in global stock market vol.
- Anyway here is the SPI 200 chart. Downtrend reaffirmed!
- Just quickly on HIA new home sales and job vacancies released yesterday. Both data points suggest to me the economy is still doing relatively well at present and my fears about consumers remain that. Fears.
Forex
- It’s been another long day for the US dollar which remains under pressure down 0.44% at 95.589 in DXY terms. Currency markets have reacted to the clear message the conversation has changed around the globe about the need to exit emergency monetary policy settings. For a time it was just the US which looked like its economy has entered escape velocity almost 10 years after the global crisis began. But increasingly in recent weeks comments from the Bank of Canada, the RBA’s striking positivity, Mario Draghi’s upbeat speech this week, and the Bank of England’s concerns about inflation have all pointed to moves higher in global rates. Bond traders have certainly taken note as the increase in 10 years outright levels and spreads to the US have shown.
- So while traders recalibrate their expectations about central bank policy divergence they also have recalibrated their expectations, and positions, in US dollar pairs. Most notably the euro, pound, and Canadian dollar. The Aussie has tagged along for the ride and the kiwi was already stronger than many thought. The net result is a weaker US dollar. How the data flows over the next week is going to be of utmost import as to whether 1.1450, 1.3050, 1.2960, and perhaps even 0.7720/40 hold in EUR/USD, GBP/USD, USD/CAD, and AUD/USD and provide the basis for a US dollar recovery.
- Euro is higher again this morning up 0.5% to 1.1433. The high of 1.1444 was right in the 1.1430/50 zone where the top of the long-term sideways/down trend comes in at the moment. It’s still too early to call a top in the euro on the technical, but this region is important. A break would signal a solid run higher. But a reversal is the natural base case for me given my McKenna Mantra – respect trendlines unless or until they break.
- The pound is higher again this morning too, also up half a percent to 1.2996. It too is off the highs of 1.3011 and traders may be a little wary the closer GBP/USD gets to 1.3050/60 as there is a strong cluster and convergence of Fibonacci resistance over multiple time frames in this region.
- Looking at the Commodity bloc the Aussie dollar out front for the first time in ages. At 0.7683 my sense is that the Aussie is confounding probably everyone except the bulls and the chartists. It’s right at the top of the overnight highs and the charts suggest it’s not done yet although equity weakness won’t help it. But the closing of the bond spread and more strength in base metals and iron ore does.
- The kiwi is stalling and is at 0.7295, while the Canadian dollar has again benefited from the strength in oil and is now sitting at 1.2997. The yen has lagged given the BoJ seems to be the only central bank who has credibly shown it has the policy, tools, and will to keep its rates low. USD/JPY is at 112.01 down 0.25% and still inside the overall downtrend.
Commodities
- Crude oil has just put in its first ordinary day in 6 after prices ran to a $45.42/45 high overnight. That’s just 30 cents or so below the 38.2% retracement of the May-June down draft. Overnight news that Libya is pumping close to 1 million barrels a day and Shell (LON:RDSa) has removed Force Majeure from a Nigerian pipeline was largely taken in traders stride. Comments from UAE oil minister however that OPEC has not discussed further production cuts was interesting. Suhail bin Mohammed al-Mazroui said “Of course additional production coming from several producers is prolonging the recovery but I think that is rather short-term. We hope to see more recovery in the third and fourth quarters…There has been a correction, yes, the correction is a little bit slower than expected. We are at the bottom of the second quarter and it is always a low-demand quarter. Third and fourth quarters, we will have a pick-up in demand and hopefully reach a more balanced market.” We’ll see.
- Of interest Goldman downgraded their oil target overnight. That’s a pragmatic step as much as anything else given the recent price fall. Germane to my comments above the bank said “the fast ramp-up in shale drilling and the unexpectedly large rebound in Libya/Nigeria production are on track to slow the 2017 stock draws…This creates risks that the normalisation in inventories will not be achieved by the time the OPEC cut ends next March. We expect this will leave prices trading near $45 (a barrel) until there is evidence of a decline in the U.S. horizontal oil rig count, sustained stock draws or additional OPEC production cuts”.
- Here’s the daily chart:
- Gold is lower this morning at $1245. I have to think this is in no small part is because the level of long bonds across the globe has started to rise – US 10’s are at 2.27% this morning!. Gold’s subtle weakness comes despite the increase in recent days of volatility measures on stock markets. And that might be something to watch. As is $1235…that level has to hold.
- Copper, and base metals, are up again this morning in what has been another good day for the complex. A weaker US dollar never hurts. But there is also continued talk of low inventories in both Shanghai and at the LME which have buoyed prices. Anyone looking at the charts will also have seen the bullish breakout recently. Copper is at $2.68 this morning – up 0.78%
Have a great day's trading.