Originally published by AxiTrader
Key Takeaway - for the time constrained
It’s an interesting behavioural quirk in markets that traders and investors so want to believe in Donald Trump that the failure to pass the repeal of Obamacare – a bill a year in the making – appears to have met with shrugged shoulders and a feeling that at least now we can move onto tax reform. That’s my takeaway anyway after US stocks bounced a little after the bill was pulled Friday.
I think that’s also a judgement on the president’s personality as well. It’s as if markets are channelling a thought process that says “health care reform didn’t work, moving on”. But things may prove as, if not more, difficult for Treasury secretary Mnuchin and his boss on Tax reform. Frankly I’m surprised markets were so sanguine.
Yet Friday’s response across stock, bond, and forex markets was so muted as to suggest a cabal of traders is glad it over and we can now get to the meaty stuff of Tax.
So in the end the S&P 500 was down 2 points, the Dow Jones Industrial Average dipped 60 and the Nasdaq 100 rose 11. US 10's finished the week at 2.4% while further in on the curve the 2's finished at 1.25%. Watch futures today though - they could be lower.
On forex markets the Aussie looks terrible technically, dipped again Friday, but is sitting at 7630 this morning looking a little vulnerable. USD/JPY is having an early morning plunge in Asia and is down around half a per cent at 110.75, euro is going along for the ride at 1.0840 as we await the result of the little state election in Germany as a sign of Angela Merkel’s grip on power at the general election later this year. GBP/USD is hanging relatively tough at 1.2480 just a couple of day’s before Theresa May triggers Article 50 to begin the Brexit process.
On commodities gold bulls are a little more wary but it’s still fairly strong at $1243, WTI crude closed at $47.97 but that may change given mutterings of an OPEC and crucially non-OPEC deal extension. While elsewhere copper closed at $2.62
The last week of the month isn’t normally huge – but we have plenty of Fed speakers this week including the chair herself. We also get US PCE data Friday to round out the week and before that the latest read on US and UK GDP as well as some preliminary PMI’s out of China and elsewhere.
What You Need To Know
International
- Frankly I’m not in the camp that says “nothing to see here move along” when it comes to the implications of the failure to get the Obamacare repeal through the US House of representatives. I say that as a behavioural economics and finance guy. Yes I get the idea that the president will just move on and could say it’s a failed deal, live with, we are doing tax now. But if healthcare was complex then so to will Tax be with the many moving parts and competing interests.
- Some say the Republicans will be able to find Democrats to support their plans. But what’s in it for them. The 2018 elections will be racing toward members of the House very soon so the incentive to co-operate with the GOP when they could conceivably get the House back if the president is seen to be ineffective must already be palpable to the Democrats.
- That’s especially the case because the Dems could actually use this failure on health care to “wind up” the president and fracture the GOP. It’s the strategy I’d be using. Already the president showed this potential vulnerability in a Tweet overnight.
- All you have to do is goad the president about “HIS” failure” But, as you know this is not a political blog – but politics are markets these days. And while I hope for tax cuts and a reinvigorated US economy feeding jobs, wages growth, and a global economic uptick, the reality is even in these very early days I can see this all getting bogged down and too hard.
- Stocks don’t seem to be too worried yet. And the reality is I’ll be guided by the price action in my trading. But for now we have a little downtrend in the S&P 500. Here’s the chart.
- Medium term the 2400/2433 region still seems to me like it is going to be a significant top based on my read of the weekly charts. But this is very long term and on a shorter time frame if the market rallies and breaks higher there will be no point fighting it.
- Speaking of politics it’s a big week for Britain with PM Theresa May set to formally begin withdrawing the UK from the EU when she triggers Article 50 of the Maastricht Treaty. The economy has more momentum coming into this event than many thought with data consistently beating expectations since the vote last June. That can mitigate against the worst market fears. Likewise Deutsche Bank's (DE:DBKGn) announcement last week it was still investing in London could be a salve. But traders will also be on high alert and there is a chance of GBP reaction this week.
- Also in politics French presidential candidate Marine Le Pen stretched credulity over the weekend when she said that a Euro exit “wouldn’t be chaos”. Yeah sure. The polls suggest Macro will easily beat her in the second round should they square off in a one-on-one. Also out over the weekend was that Macron is garnering more support from across the spectrum of French politics with two centre-right senators (Fillon territory) swung behind his campaign.
- After the US last week sanctioned firms for dealing with Iran the nation has retaliated by sanctioning 15 US firms. It seems more symbolic than real but it is also a reminder that geopolitics isn’t absent from energy markets right now.
Australia
- The Australian markets move higher on Friday reminded me of a TISM song about River Phoenix. It came out of nowhere really, was a surprise to most, and was led by a rally in the banking and industrial sectors of the market.
- Maybe it was a reaction to the week’s fall and so was just the result of some bargain hunting? It’s hard to tell. But futures traders on Friday didn’t want to build on the performance and have only added another 1 point to the SPI’s price as we left trade Friday afternoon. It closed the week at 5748.
- Perhaps equally it’s just the relative performance of the ASX with regard the US market over recent week’s. Again hard to tell. I’m not exactly sure. But the price of the S&P/ASX 200 index couldn’t break back above the trendline it broke down and through last week with Friday’s rally.
Forex
- The US dollar has opened up in Asia under pressure as the euro and yen rally hard. The former is up 0.4% to 1.0840 – that’s a break out - while the latter has gained around half a percent to 110.76. At this early juncture I’m not exactly sure what is driving the move. I could hypothesise that it’s about trump and healthcare. But the fact that gold has hardly moved at $1243, the Swiss franc is lagging a little and the Aussie is under pressure just suggests a mild risk off tone in early Asia FX.
- Equally in very early trade it could simply be that someone had an axe to grind which was too large for early Monday liquidity and we’ll see things turn around when more treaders get their feet under the desk this morning.
- I’ll update a little later on this morning when some other markets open and we can get a beter handle on things.
- Looking at the AUD/USD on the charts it’s looking awful – that’s a technical term – and looks biased back toward 75 cents. If the moves in euro and yen are just US dollar specific then the Aussie should be okay near term. If they are reversed as more traders enter the fray then likewise the Aussie should continue to hold above 76 cents. But if these early morning moves speak to trouble in Asia markets today and a risk off tone the Aussie is likely to come under selling pressure.
- Elsewhere it’s worth noting the Mexican peso continues to strengthen!
Commodities
- Oil markets aren’t open yet but they have plenty to consider after a meeting of OPEC and non-OPEC countries in Kuwait decided to drop a recommendation for an extension to the 6 month production deal when the group next meets in May in favour of referring the matter to a “technical” committee. So while the ministerial committee – which included Russian energy minister Novak – said it was happy with compliance levels the fact that reuters has reported – and thus the market know – that the recommendation was dropped could put further downside weight on crude when it opens.
- Techically though it’s all about that double bottom over the past couple of weeks just around $47 in WTI terms. A break would signal the next leg of oil’s decline. But it has to break first – elsewise WTI is in a $47-49.65 range, here’s the chart.
- Gold is at $1243. If the move in USDJPY is an indication of some sort of concern in markets after the president swung back to health in his tweets then gold should rally today. We’ll see though.
- Copper is hanging tough given Escondida is coming back online. It’s at $2.62.
Have a great day's trading.