Originally published by AxiTrader
Market Summary
Oil is the big story overnight after the Saudis lead a number of countries in the Middle East to cut off diplomatic ties with Qatar over its support of Iran and the Saudis say terrorism. After initially rallying in Asia oil turned lower as US markets entered the fray with traders questioning whether this will threaten the OPEC production cut deal. Brent lost 1% while WTI is down 0.6%.
Other than that it has been a fairly quiet night where Markit PMI’s suggest again that Europe’s economy is still doing well on the back of German strength, while the US economy hits a bit of a flat spot.
But that hasn’t hurt stocks in the US overly much with only marginal falls as the Dow Jones Industrial Average, S&P 500, and Nasdaq 100 all hover near record highs. Germany was out but the rest of Europe had a bit of a down day while Asi was mostly in the red yesterday. That was especially the case here in Australia where the index reversed course sharply losing 0.57%, 33 points, to 5754. The S&P/ASX 200 closed off its lows but SPI traders have marked prices down another 10 points overnight.
On forex markets the old adage of what doesn’t go down will go up seems to be playing out for the Australian dollar which is easily the strongest of the Major currencies. At 0.7485 the Aussie is up 0.59% over the past 24 hours. The Euro is down around 0.2% as traders wonder about this week’s ECB meeting – it’s at 1.1254. US Dollar (JPY) is largely unchanged but GBP is a tiny bit stronger at 1.2906.
Gold is unchanged, but copper dipped a little as Shanghai inventories grow. Iron ore lost about 1.4% overnight.
Today we have the RBA board meeting then the decision at 2.30pm this afternoon. There is little chance that rates will be moved but what the governor says about the economic outlook in his statement is potentially a market mover if his message changes. Australia’s Q1 current account and Government finances statistics are out as well which will help economists settle on their forecasts for Q1 GDP to be released tomorrow morning at 11.30am.
Globally it’s very quiet but I’ll be watching the JOLTS and IDB/TIPP Optimism survey in the US tonight as well as the API inventory data at this time tomorrow morning.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 2436 -3 (0.12%) (7.34 Sydney - change since previous day)
- Dow 21184 -22 (0.1%)
- Nasdaq 6,295 +-10(0.16%)
- SPI 200 5,760 -4 (0.7%)
- AUDUSD 0.7484 (+0.80%)
- Gold $1279 (0%)
- WTI Oil $47.39 (-0.59%)
International
- Saudi Arabia, Egypt, the UAE, and Bahrain cut diplomatic ties with Qatar yesterday citing ties with terrorist organisations and Iran. This is a bit of an old stoush in many ways. Certainly, the Saudis and Iranians are facing off in places across the region and the Saudis have had their battles with Qatar in the past as well.
- But it has certainly increased geo-political tensions in the region and could be a signal of the escalating tensions between the US and Iran as well. We’ll need to keep an eye on things – especially oil traders – but you can see what the Iranians think in this comment from Hamid Aboutalebi, deputy chief of staff to Iranian President Hassan Rouhani who tweeted a veiled reference to the US being behind it. “What is happening is the preliminary result of the sword dance,” he wrote. You’ll recall the recent trip by president Trump and his dance.
- And it seems the reason behind the move from the Saudi's and others is that Qatar paid $1 billion ransom to two terrorist organisations to get a hunting party which included a royal back after they were captured in Iraq. Here's the FT article- The $1bn hostage deal that enraged Qatar’s Gulf rivals.
- US data last night showed that the services sector is still in pretty good health although off its peak. Both the ISM non-manufacturing PMI (56.9) and Market services PMI (53.6) slightly undershot expectations but they are not weak results and services employment looked good. Non-farm productivity was also out coming in flat for Q1 while unit labour costs rose 2.2% which is a decent step down in Q1 from the 3% pace previously and 2.5% expected.
- Interestingly president Trump announced his first concrete infrastructure plan overnight with details of how he wants to reinvigorate and privatise the US air traffic control system. "We're proposing reduced wait times, increased route efficiency and far fewer delays. Our plan will get you where you need to go quickly, more reliably, more affordable, and yes, for the first time in a long time, on time," the president said.
- And speaking of president Trump – he’s not going to block James Comey’s testimony this week. I didn’t realise he could. But it’s good that he didn’t so the process can continue.
- European PMI’s last night were mixed. EU-wide was solid as was Germany’s but Italy and France undershot expectations a little. Overall though they were all above 55 which is an outstanding result. It’s also a result which might prompt the ECB to change its rhetoric at this week’s meeting. Traders are wondering if the the bank won’t give a more balanced view of the outlook – saying the risks are more symmetrical – and thus subtly shifting the message about monetary policy and QE.
- Madame Lagarde of the IMF is still trying to get a Greek bailout sorted and offered concessions overnight.
- Yesterday’s China Caixin services PMI was solid at 52.8 in May from 51.5 the previous month.
Australia
- Well that was ugly. The S&P/ASX 200 had an awful day yesterday as the banking and financial sector came under selling pressure once more and the index was unable to get up, let alone through, the 5795/5805 region I highlighted as the key to the outlook yesterday. Probably the best thing I can say about the price action is that at least it recovered from the low when it was off 51 points at one stage.
- In the end the index was 33 points, 0.57%, lower and closed at 5,754. The big 5 banks were big losers while BHP and Rio also came under pressure. It’s an intriguing continuum of weakness for the Australian stock market. And it came even though the data yesterday suggested that maybe Q1 GDP growth won’t be anywhere near as weak as pundit were hypothesising yesterday morning.
- Either way in pure price action terms the 5,795 – 5,805 region remains the short term level to watch. It needs to break for the local market to kick onto another level.
- Turning to toe data yesterday and the lift in inventories and company profits was a good pointer toward a more positive print for Q1 growth. Company profits were up 6% qoq for a 39.7% lift in the year to the end of March as miners got back in the black solidly. Inventories were also stronger than expected with a 1.2% growth in the quarter and a 0.4% contribution to Q1 GDP.
- But, and yes this is becoming a theme in my musings on the Australian economy, wages only grew 0.3% for a 0.9% year on year growth rate. So is it any surprise that Morgan Stanley (NYSE:MS) released a note yesterday saying that Australia is facing a consumption crunch. It’s what I have been writing for ages now as I worry that APRA, the RBA, the end to the house price boom, and low wages growth nudges Australian households toward a focus on debt and thus a reduction in spending. Morgan Stanley said – via Business Insider - that Australia is now “decoupling further from the global recovery, with the consumer facing a cash flow and credit crunch”. The result? Morgan Stanley ahs lowered its 2017 growth rate from 2.1% to 1.2%.
- AND AND AND Morgan Stanley notes something else I’ve been banging on about but is for me one of, if not the, most underappreciated aspects of the new APRA macro-prudential guidelines. Specifically, when it comes to APG 223 and overall responsible lending guidelines there is every chance that APRA actually oversees a credit crunch for the first time in more than 2 decades. That will nobble the economy – this year, next, and the one after that.
- I can’t wait to see what governor Lowe has to say in his statement today after the RBA board meets. My guess is that he will continue to retain a robust and bullish outlook for the future. After all it was only a month ago that the RBA said in its quarterly Statement on Monetary Policy that it expects Australian growth to accelerate toward potential – 2.75%+ - this year and next.
Forex
- The Australian dollar is the big mover over the past 24 hours as the US dollar found a little strength and the buyers returned to the Aussie dollar. It’s an interesting move in the context of the weakness on the ASX 200 again yesterday. But the data flow yesterday seems to have reduced the changes that we’ll get an awfully bad Q1 GDP when it is released tomorrow and the job ads weren’t terrible so on balance that – and the technical – were supportive of the Aussie. 0.7515/20 is the target now that 0.7450/60 has given way. AUD traders will be watching the release of the remaining partials today and then parsing RBA governor Lowe’s words for any indication that he has changed his robustly positive view on the outlook for the Australian economy recently.
- The pound bounced back from yesterday’s initial dip in the wake of the London terror attack over the weekend. It’s back above 1.29 this morning as traders await this week’s election. What’s really interesting about the price action in British Pound (USD) is how the old trendline has constrained, slowed I guess, the rally in GBP so far. Interesting. Here’s the chart:
- Elsewhere the euro is a tiny bit weaker this morning at 1.1253. Could traders be wondering if the ECB can deliver? Or is this simply a recognition much is now priced into the euro. Possibly the latter. It’s not for me to criticise forecasters – it’s a tough job – but one of the big investment banks who had been calling for euro to collapse under 1 against the US dollar is now suggesting 1.18 and 1.19 levels later this year and in the first half of 2018. Much is becoming baked in for the short term. US Dollar (JPY) is vulnerable if 110.15/20 breaks. It has to break though.
Commodities
- The Saudi lead coalition’s decision to cut off diplomatic ties and essentially isolate Qatar initially lifted oil higher as traders appeared to worry about potential conflict in the Gulf – or at least increased geopolitical tension. But that fear gave way to, perhaps, a more relevant one in the context of recent negative price action in Crude. That is, does this boycott of Qatar, and the proxy face off with Iran, mean that OPEC solidarity surrounding its production cuts may now fracture. My sense is that is a real chance. But equally the fiscal imperative of this deal is how Iran and the Saudis have already found a way to work together.
- So WTI has traded through a roughly $1.50 range to open the week and the charts – price action – suggests further weakness could be on the cards. But only if Friday’s low at $46.72 gives way. Currently it is sitting at $47.39 down 0.59% while Brent is at $49.48 down 0.94%.
- There is room for this to kick off however. Qatar is the world's biggest LNG exporter. It has pipelines in the gulf and could retaliate but cutting off supplies to its neighbours. Something to watch. For Oil as I noted $46.72 is the key.
- Gold hasn’t moved much in the past 24 hours as it it holds near recent highs – its at $1259 an ounce. The $1295/$1300 level remains the key overhead resistance.
- Copper is a little lower this morning at $2.55 a pound. Traders are focussed on the rebuild of Shanghai stockpiles which were up 4.9% last week. Equally the divergence between the strength in services sector PMI yesterday – expanding at the fastest pace in 4 months – compared to the release of the manufacturing PMI, which fell into the contraction zone, highlights that the economic transition the government is trying to achieve may be occurring. It’s a very long road but that means China is transitioning to a more mature economy.
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