Originally published by AxiTrader
Key Takeaway
Stocks drifted a little in the US on Friday night with small falls in the Dow Jones Industrial Average and the S&P 500. Europe had a better night of it, but local SPI traders have marked down prices pointing to a fall of around 13 points when the S&P/ASX 200 opens this morning.
On forex markets the Australian dollar just couldn’t close above 77 cents but at 0.7695 it looks strong. Maybe the worm has turned? In no small part that depends on the US dollar’s direction in the week/week’s ahead and on that front strength in euro, the pound, yen and the Mexican peso suggests that a long US dollar market has still got some unwinding to do.
It’s a fairly quiet week economically and politically so traders will have space to let their fears occupy their minds. That may not be good for the dollar or stocks.
Nor the price of oil which recovered a little after last week’s lows. But oil prices are still adjusting to a sea-change in sentiment. That’s sentiment toward the efficacy of the OPEC/non-OPEC deal, the return of shale oil, and what is an interesting dip in demand recently. Only a move in WTI back above $50 might soothe growing fears.
Gold benefitted against this backdrop and remains relatively elevated while copper and base metal’s rally continued.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -3 (0.14%) 2378 (6.42 am Sydney)
- Dow Jones Industrial Average -20 (0.1%) 20914
- Nasdaq 100 +0.23 (0.00%) 5,901
- SPI 200 -13 (0.2%) 5,770
- AUD/USD 0.7691 +0.15%
- Gold $1228 +0.20%
- WTI Oil $48.78 0.0%
International
On the G20
- Plenty of disappointment over the weekend with the G20 communique. German economists and commentators are saying it was a big loss for Germany after references to protectionism were taken out of the communique over the weekend. More than 40% of German GDP comes from exports and when you throw this in with with president Trump’s apparent refusal to shake hands with chancellor Merkel at the White House the other day, plus the president’s Tweets on NATO and how much money Germany owes the US, and you get a sense of why the Germans might be a little unsettled.
- One thing that stayed in was a reference to competitive devaluations.
- US Treasury secretary Mnuchin said “this is my first G20, so what was in the past communiqué is not necessarily relevant from my standpoint”. Yep – forget the world order that existed and stopped the beggar-thy-neighbour policies in a post GFC world which really could have lead to a depression-era re-run. Anyway moving on lest I get political.
- Mnuchin made it clear the US is open for business – BUT ON ITS TERMS. “We believe in free trade, we are in one of the largest markets in the world, we are one of the largest trading partners in the world, trade has been good for us, it has been good for other people. Having said that, we want to re-examine certain agreements."
On Stocks
- The rally continues to stall. That doesn’t mean that stock prices in the US must fall because often it is a price pause that refreshes as much as a price reversal. But the positive catalysts to further moves higher appear to be lacking at the moment so at best it seems a period of stable and quiet price action may ensue – at least at an index level.
- This is BIG folks if you are waiting on meat on the bone of Trump’s tax and infrastructure plans. Something I picked up listening to the Friday edition of Bloomberg Surveillance over the weekend and Reuters is now reporting this morning is that after the skinny budget gave no details of the type of information the market is looking for – and no small part of the stock rally Is based on – on tax and infrastructure we’ll have to wait until May to get more. White House budget director Mick Mulvaney told NBC Sunday that “I think it’s mid-May we’re shooting for right now, we’ll have that larger budget…” He added that this is when we’ll see “more flesh on the bones”.
- This delay is a risk for stocks if US data starts to disappoint. For the moment of course the Citibank Economic surprise index continues to show the data in the US is still stronger than markets have been expecting. So it’s a risk but not an actuality.
- On US growth and data flow the gap between the Atlanta Fed’s Q1 GDP guesstimate and the New York Fed’s far more rosy guess has closed a little after Friday’s update. The NYFed’s GDP Nowcast for Q1, which has more emphasis on soft data than the Atlanta fed’s GDPNow, dipped 0.4% to 2.8% on Friday with an associated guesstimate of 2.5% for Q2. Atlanta is still at an awful 0.9% guesstimate.
- Why did I raise tax and GDP? Because US stocks have stalled and are a little vulnerable if the4re is disappointment at these levels – especially the S&P’s technical outlook. So it is something to keep an eye on because if stocks dip it will impact many other markets. For the moment though the the run of days without a 1% fall continues to march above 100.
On Bonds
- US rates ended the week in much better shape than one might have expected as the week opened. The 2’s closed down at 1.317% and the 10’s closed at 2.50%.
- But comments on Friday morning our time from ECB governing council member Ewald Nowotny - supporting the rumour that spread through markets after the recent ECB meeting – that rates could rise even before the end of QE unsettled the short end of the European bond curve a little.
- It’s another sign how global reflation has changed things. The BoE is just a good month’s worth of data after Article 50 is triggered away from a tightening I think, the ECB is clearly thinking about exiting accommodation – others will follow. That is with the exception of the BoJ and RBA at the moment.
- That’s important for forex as well. That’s because policy divergence was supposed to favour the US and the US dollar. But if other central banks are moving much earlier and faster than markets expected then the bull run in the US dollar is likely to be less strong and linear than many believed.
On China
- Rex Tillerson looks like he had a good meeting with President Xi with the latter praising Tillerson’s approach to China and the working relationship he is seeking. Both parties appear to be keen to work together on North Korea with the US having put a military strike on the table. That’s something the Chinese will be keen to avoid.
- China’s central bank governor Zhou Xiaochuan was upbeat on the economy over the weekend. He said “China's economic growth rate is stable overall, with growth prospects improving. China will continue to implement active fiscal policy, and prudent and neutral monetary policy."
On Australia
- The ASX200 almost closed back above 5800 on Friday in what was an unexpectedly positive days trade. The high of 5815 was still below the years high around 5833 but the 0.24% rise to 5799.60 was relatively healthy none-the-less.
- Of course the rally in base metals continued across the week and it was the basic materials sector – which includes the big miners – which performed well and helped propel the market higher across the week. With the PBOC governor again signalling the Chinese economy is doing well over the weekend and with base metals still pushing higher we may not have seen the end to this rally.
- But to the extent that it was financials which weighed on US stocks a little it’s easy to see why the SPI traders marked prices down when the market closed on Saturday morning with a fall of 13 points to 5770.
- This takes prices back below the recent highs, and even though it reflects the extension of the most liquid SPI contract that traders are trading to June – so there is a time element at play – in CFD or charting terms traders just look at the price action. So this rejection of higher prices is in itself important for traders and price action. Yes it’s circular – but that is how it works.
On Forex
- The US dollar looks a bit wobbly – but it hasn’t broken yet. Not in USD index terms nor in Euro terms. And it is still above the top of the recent USD/JPY range. Although in all of these markets it is getting close to important levels traders are watching.
- Here’s the Euro chart for example – It speaks for itself. The level to watch is 1.0795, but I’m going to give the rabbit room to run and as a result am looking for a trade above 1.0810 before I’ll be satisfied the range has broken and Euro will run higher. Has to break though first – remember the McKenna Mantra.
- So while euro sits at 1.0735 this morning USDJPY is at 112.59 and looking like it wants to head back into the 111.50/112.00 range bottom for a test of US dollar support. It’s been a cracking range for traders who like to trade such things, but a break would be decisive. It has to come first though – McKenna Mantra again.
- And in DXY terms the US dollar is at 100.31. 99.20/50 is the key level to watch. If it breaks we don’t just get a head and shoulders we might actually get a ghost pattern which would see the US dollar substantially lower.
- For the Aussie I have published a piece already this morning on the outlook. It depends on the US dollar in no small part. AUD/USD can run to 0.7740ish but a break might need a little oomph from the US dollar. There is a chance the worm has turned though.
- And of course the Mexican peso is gradually breaking down, or should I say USD/MXN is breaking down. This is an interesting sign for the US dollar overall and EM currencies everywhere. Worth noting while US economic surprises are still solid SO TOO ARE BRICS AND EM economic data prints.
On Commodities
- Oil has had an interesting week and Fibo support bottom, followed by an almost perfect technical reversal – to the 38.2% retracement level of the $6 fall to $47low – and then has failed to get back inside the old trendline it broke through on the way to the low $47.
- This is a nice set up and fits neatly with the new bearish narrative. Rallies appear to be being sold and only a price move above the previous $50.20/50 range low would likely change the outlook.
- Not to mention stockpiles, OPEC cut efficacy, shale oil, and positioning. It’s roll day on the 21st so some shenanigans on futures markets could impact CFD prices. Which makes the next couple of days more interesting than normal as we open the week. Anyway here is the chart – the levels are obvious.
- Gold and copper are both doing well. Escondida looks like it is in proper negotiations which may weigh on copper but gold is benfiting from the US dollars fall.
Have a great day's trading.