The Turn In Markets Continues As US Private Employment Surges

Originally published by AxiTrader

Key Takeaway

The turn in markets I have been talking about this week in my posts, and especially in my morning video, continued overnight with oil and gold collapsing while the US dollar and US bond rates rose.

Last night's catalyst for the bond, currency, and gold move was the massive surge in private employment during February. ADP reported that 298,000 jobs were added. That’s well above the Reuters poll of 190,000 and has the market now expecting a very solid non-farm payrolls when it is released tomorrow night.

It’s also strengthened expectations that the Fed will begin its multiple-move tightening cycle at this month’s meeting.

That hasn’t really hurt stocks too much. But it has strengthened the US dollar which is back above 102 in USD Index terms as it cut a swathe across forex markets last night. euro is below 1.0550, the yen is in the mid 114’s, The pound is down again and after another aborted foray above 76 cents the Aussie dollar has collapsed below 0.7550.

On commodity markets copper is down again, gold’s swoon continues, and those cracks I’ve been talking about in bulls resolve toward oil turned into crevices in the past 24 hours with WTI and Brent off 5.25% and 4.8% respectively.

Now for Chinese inflation data today and the ECB interest rate decision and press conference tonight.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 -5 (0.23%) 2362 (8.31 am Sydney)
• Dow Jones Industrial Average -69 (0.33%) 20855
• Nasdaq 100 +3 (0.06%) 5,837
• SPI 200 -12 (0.2%) 5,735
• AUD/USD 0.7528 -0.74%
• Gold $1207 -0.68%
• WTI Oil $50.29 -5.36%

International

• The surge in ADP payrolls aahs knocked US bond rates higher which has taken European yields with them. US 10’s are at 2.55% while the 2 year note is at 1.33%. German 10’s rose 5 points while Italian and Spanish bonds rose 8 points each.

• The maket wants to hear more about tax cuts and infrastructure. SO it’s important to note that president Trump is catching up with Elon Musk to discuss infrastructure. That suggests however the plans are still in the, well, planning phase and breaking ground – or fixing bridges – is still some time away.

• Britains Chancellor Hammond delivered a steady as it goes budget last night upgrading the growth forecast for 2017 but then forecasting slower growth for the next three years. Hammond is clearly still worried about the impact of Brexit. “The only responsible course of action ... is to continue with our plan, undeterred by any short-term fluctuations” Hammond said. Sterling bears noted his caution.

• Emmanuel Macron is getting closer to poll position in the French presidential election after gaining the backing of an influential socialist party heavyweight overnight.

• After terrible factory order data the day before Germany’s industrial production data posted a 2.8% rise in January data released overnight showed. That’s a small salve to concerns that the previous days data raised. Equally an Ifo survey released last night showed that investment plans of German business have risen to 5% in 2017 from last years 3% pace.

• Chinese President Xi’s promise to restore the nations Blue skies and cut back on coal and steel production continues have reverberations across base metals markets. There has been a clear reversal this week since the speech was delivered.

• On China the big news yesterday was that it posted its first monthly trade deficit in 3years as imports surged and exports rose at a far more tepid pace (in yuan terms). Commodities were a big driver of the increase in imports and notwithstanding the above certainly paint a picture of an economy that is continuing to grow at a healthy pace. What’s important about the deficit historical is that over the past decade or so when they have occurred it has been around, or in, the month containing the lunar new year. So this is unlikely to be a trend. That helps explain why markets took what could have been a shock in their stride.

Australia

• An interesting day on the local market yesterday as the market lost 2 points to finish at 5760. The miners were the big drag as group and the fall in base metal and iron ore prices, along with the performance of the energy and mining stock on both the FTSE 100 in London and the S&P 500 in New York suggest the SPI’s current 2 point rise may be a little optimistic when things kick off in around 10am this morning.

• Certainly with gold lower as well in both USD and Aussie terms there is another sector that could drag on the overall index level and point the SPI lower by the close.

• When I look at the SPI chart from my AxiTrader MT4 there is a clear level to watch on this little – tentative – uptrend. 5734.

• Nothing on the data docket in Australia of note today but Chinese inflation is always interesting.

Forex

• Like the little engine that can the US dollar’s rally is slowly continuing with the USD Index back above 102, just. What’s remarkable about this rally though is just how lacklustre it has been. Certainly we know that the “long dollar” trade has remained a crowded one – even if it still feels like the right one. But the lack of kick is interesting. Perhaps a strong non-farms is needed to drive the US dollar higher, perhaps tonights ECB meeting in which the bank is likely to remain dovish on European rates could do it. Either way though this recovery, and the little uptrend continues.

• What’s interesting about the moves on forex markets is that it is the commodity bloc that is getting the rough end of the pineapple. The Aussie, CAD, and Kiwi are all around 0.6% weaker against the US dollar over the past 24 hours. Each has its own issue – Oil for the CAD, dairy prices for the Kiwi and base metals and iron ore for the Aussie. But this move is also about the US dollar as well which is why the dollar/commodity bloc is losing the most ground – it’s a double whammy.

• So it’s no surprise then that the South African Rand, Brazilian real, and Russian Rouble are all of around 1% as well. The Mexican peso too lost ground against the US dollar. Probably the USD Index – the DXY – is just too narrow a measure to see the real US dollar strength.

• Getting back to the majors and the slide in the pound continued. It’s not in terrible shape at 1.2162, off 0.3%, and 20 odd points above its 1.2140 low after Chancellor Hammond steered the steady ship of the UK budget through the mine field that is Brexit – or at least he’s trying to. Euro is off 0.2% at 1.0545 as we await the ECB tonight. The pressure could be on if 1.0525/30 gives way.

• USDJPY is higher by around 0.4% ar 114.46 this morning. It’s trapped below recent highs but a break of 115, if it comes, could open a decent run higher.

Commodities

• US Oil inventories are still climbing with the EIA reporting a build of 8.2 million barrels against expectations of an increase of 1.66 milllion. It’s another sign that the OPEC production cut is taking longer to bite than I sense the Saudi’s would have wanted. That’s especially important because while OPEC’s compliance is 140% in February according to Kuwaiti oil minister Essam Al-Marzouq who said non-OPEC was languishing at 50-60%.

• But the really important point he made – one that Saudi oil minister Al-Falih pointed out the other day – is that it’s because of the Saudis deep cuts, much more than they agreed to, that there is any compliance at all. Al-Falih warned against other countries free-riding on the OPEC – its – deal. So as I warned when the January numbers were released, this is really all a Saudi-engineered and driven deal so if they lose patience oil – and the bulls – could crack wide open.

• For the moment though WTI, and Brent, are still in a range - JUST. WTI was above $51.00 earlier this morning as I was prepping for this note but has collapsed right into the support zone and currently sits at $50.33 down 5.25%. Unless this $50.00/50 level I've been talking about for sometime breaks the range holds. But if it does break…

• Gold’s slide continues as the US dollar strengthened a bit and, I think, technical factors and the recent break of support weigh. It’s at $1209 this morning and as I said yesterday in my markets video I’m 50% short but not sure where it will run to. I can see a move toward $1180 as an outside chance.

• Copper is off again as traders focus on the massive build in LME inventories in the past week. In US dollar terms copper is down 0.8% to $2.58 this morning as base metals across the board continue their recent pullback. Reuters reported this morning that copper stockpiles at the LME have doubled – NOT A TYPO – since last Thursday while Chinese trade data yesterday showed a fall of 10.5% in copper imports during February to 340,000 tonnes. That’s also down 19% from the same month in 2016. Levels to watch are $2.58 and $2.54.

Today's key data and events (all times AEDT)

• Australia - Nil
• New Zealand - Nil
• China - Producer Price Index (YoY) (Feb), Consumer Price Index (MoM) (Feb), Consumer Price Index (YoY) (Feb) (12.30pm)
• Japan - Money Supply M2+CD (YoY) (Feb), Foreign investment in Japan stocks (Mar 3), Foreign bond investment (Mar 3) (10.50am); Labor Cash Earnings (YoY) (Jan) (11am)
• Germany - Nil
• EU - ECB deposit rate decision, ECB Interest Rate Decision (11.45pm); ECB Monetary policy statement and press conference (12.30am)
• UK - RICS Housing Price Balance (Feb) (11.01am)
• Canada - Capacity Utilization (Q4), New Housing Price Index (YoY) (Jan), New Housing Price Index (MoM) (Jan) (12.30am)
• US - Challenger Job Cuts (YoY) (Feb) (11.30pm); Continuing Jobless Claims (Feb 24), Initial Jobless Claims (Mar 3), Import Price Index (YoY) (Feb), Export Price Index (MoM) (Feb), Export Price Index (YoY) (Feb), Import Price Index (MoM) (Feb) (12.30am); EIA Natural Gas Storage change (Mar 3) (2.30am)

Have a great day's trading.
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