Originally published by AxiTrader
Market Summary (7.34am Monday April 23)
The S&P 500 was down again Friday as US 10-year rates rose again while the US dollar caught a bid.
That the S&P 500 lost 0.85%, 23 points, to close at 2,670 is no surprise given the 10-year Treasury rate closed the week at 2.95% - back at the 2018 highs. With a strong economy, tight labour market and the base effect dampening inflation washed out, all the bond market vigilantes need now is a little bit of old style oil price induced inflation to get them moving.
And moving they are. The 10-year increased 13 points last week and the close at 2.95% is the highest weekly close for the 1-year since 2014. The 2's are up too, at 2.45% which is the highest weekly close since 2008, and because of this the curve is still relatively flat at 49.50 points.
But don’t worry about the curve it’s normal for this part of the cycle. A recession will come eventually. But not yet. Not unless oil rises too high for the global economy to cope. And on that front OPEC has made an enemy of President Trump it seems – he tweeted directly against the cartel saying “OPEC is at it again… Oil prices are artificially very high! No good and will not be accepted!”
Oil was still a little higher by the end of the day, recovering from a dip after the tweet to finish at $74.06 in Brent terms and $68.40 in WTI terms. OPEC is still talking tough and without a hint of irony the Saudi oil minister told CNBC, in response to the President’s tweet, “markets should determine price”. :S
Back to stocks briefly and the Dow fell 0.82% while the Nasdaq dropped 1.58% as tech came under pressure before some very big results are due to be announced this week including Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB), and Microsoft (NASDAQ:MSFT).
Europe was mixed – the DAX fell 0.21% but the FTSE was half a percent higher, while the CAC rose 0.39%. While here at home after a 12 point dip Friday futures traders knocked another 15 points off the SPI at the close Saturday.
The downside looks to be opening up again for stocks as I’ve been saying in my daily videos recently.
To forex now and the US dollar was universally better bid at week’s end gaining ground across the entire major currency universe. The Australian dollar is back at 0.7673 this morning while the kiwi is down at 72 cents. USD/CAD broke higher too despite the slightly faster than expected inflation rate (2.3% yoy v 2.2% exp) and solid retail sales (0.4% in Feb v 0.1% exp) for Canada released Friday. USD/CAD is at 1.2758.
The dollar is stronger against the euro which is at 1.2265, the pound has collapsed from last week’s high around 1.4376 to sit at 1.4003 this morning. Against the yen the dollar also gained and is at 107.79.
Gold came under a bit of pressure from the US dollar and lost $10 an ounce even though stocks swooned. It’s back toward the middle of its range at $1335. Copper didn’t do terribly much and is at $3.13 a pound while the rest of the base metals complex saw a continued unwind of recent surges. Aluminium was down 2% on the LME.
It’s a quiet start to the week on the data front with the “flash” Markit PMI’s for Japan, European nations, the EU, and the US all out. Existing home sales in the US are also out.
More important is the price action. Do 10’s hit and take out 3%? Does the S&P fall as far as the Elliott Wave folks say it mightz? Will the US dollar break 91? In that sense it could be a huge week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US 10-year rates rose 13 points last week. From the close the previous week at 2.82% traders saw the surge in oil prices and know what that means for inflation down the track and hit the sell button. So, as I wrote above the 10’s closed the week at the highest level since 2014. The market is still heavily short based on the CFTC data released Friday. It showed that as at last Tuesday the big speculators had a net short of 371,689 contracts. That’s up from 313,304 short 4 weeks ago and a short of just 117,877 12 weeks ago.
- But whereas previously I’ve written the level of shorts might prove the biggest hurdle for a break of 3%, this time with oil surging higher and the base effect restraining inflation in the US washed out we might see this level breached. That’s especially the case given the relationship between oil and inflation. Here’s a short run chart since 2011 from Reuters.
- For the moment though the growth momentum in the US continues. The NY Fed said Friday its GDP Nowcast is now expecting Q2 growth of 3.03% from 2.87% previously. Its Q1 forecast is 2.91% while the Atlanta Fed is at 2%.
- Fed speakers were out again Friday, with the highlights being – Chicago’s Charles Evans said he’s less worried about the flat yield curve than he was a few months back. San Fran and soon to be NY Fed president Williams also said he’s not worried about the yield curve and that continued gradual rate hikes are the “right forecast” for US rates. That’s something Fed governor Lael Brainard echoed.
- But is 3% the magic number to derail stocks? It doesn’t feel like it should be because the strength of the US economy and the Fed's rate rises suggest it’s a level consistent both. Not restrictive at all in that sense – neither is Fed policy which isn’t even back at neutral. But here’s a chart from Fundstrat’s Tom Lee which suggests it’s 4% which is the big level to watch. Naturally, that’s a long way off at the moment. But what Lee’s correlation between stocks and the long term downtrend in bonds suggests is that his version of the trend line/s when touched are what triggers stock market weakness. Bloomberg reports Lee said, “since 1980, interest rates and bonds are negatively correlated. Higher rates = lower equities. When 10Y touches the trendline, it has marked past equity tops”. Here’s his chart. You be the judge.
- Across the Atlantic it seems the hawks are fighting a rear-guard action as we run up to the ECB meeting this week and press conference from Mario Draghi. Jens Weidmann was quite upbeat about growth in his speech Friday and Reuters reports that sources told it that the recent sluggish data flow isn’t signalling a break dwon in growth and as such won’t impact the move toward the withdrawal of QE.
- And what about crude? With President Trump taking aim at OPEC he has sent a none-too-subtle signal that the push toward $100 the Saudis seemed to be gravitating to might be a bridge too far. That Saudi oil minister al-Falih rebuked the president by saying “markets should determine price” and the clear lack of self awareness of that comment won’t have been lost on President Trump. I don’t necessarily expect more tweets. But I’d bet MBS will hear about perhaps balancing out his desire for higher prices, and thus greater revenue for the Kingdom with driving prices too high such that they destabilise President Trump’s economic growth outlook.
- North Korea said it is open to denuclearisation of the peninsula over the weekend. Also we heard that US treasury Secretary Mnuchin may travel to China to smooth out some of the trade tensions. Interestingly ZTE said over the weekend that the US sanctions it is facing are an existential threat to its existence.
Australia
- The Australian dollar is lower again along with the kiwi, Canadian dollar and other pairs. The Aussie has reversed aggressively off the top of the current down trend channel it is in – and which it touched – last week. 0.7650 remains the key short term support. A break of that would suggest a test of the trendline from the 2016 low which comes in around 0.7628. If that breaks then we could be in for a run to 0.7595 and ultimately 0.7475.
- What happens when you get a bearish engulfing day? Usually you end up with a down day the next day. And that’s what we’ve seen on the SPI Friday. If 5,808 breaks today then a big dip is on the cards. I’m looking for another 80-100 points off the S&P 500 and that would translate to about a 3-4% dip here at home as well.
Forex
- Are we finally about to see the US dollar break out? That’s the tantalising question traders and investors are faced with as US 10’s increase toward 3%, as European data continues to slip, and as the base building, we have seen for the dollar morphs into strength. As it stands at the moment we are still just in ranges. The US Dollar Index is yet to break 91. Euro is yet to fall below 1.2150, USD/JPY is still below 108.50, the kiwi above 0.7140. The list goes on. But the signs are there that the US dollar may be able to break out.
- The reality is though that as yet the breaks have not come. You can see that clearly in the euro, or many of the other pairs I’ve mentioned above. But taking the euro as the bellwether it’s worth noting that it is still stuck in its range and the 2 year forward 2 year rate has risen lately – along with US and German 10 year bond rates – which is supportive of the euro. So I’m watching 1.2250 as an indication euro is slipping. Ultimately though 1.2150 has to break for the euro, and hence the US dollar, to really get a move on.
Commodities – Oil
- I mentioned what might end up being the over reach of Saudi oil minister above. I could be totally wrong. But this President has shown himself to get pretty feisty when it comes to issues he identifies as hurting his constituency and it’s clear he’s rounded on OPEC and oil prices as one such issue. That doesn’t mean we can’t get to $80 a barrel in Brent terms and $75 in WTI terms. But through there – if OPEC push too hard, might be a stretch.
- Already reports are the Russians are getting titchy about an extension as OPEC searches around for a new reason to extend the cuts even though it has achieved its stated goal of inventory reduction. In this context while the Saudi oil- minister said after the meeting in Jeddah Friday that it is “premature” to talk about easing the production cuts his Russian counterpart Alexander Novak said “we have an opportunity at the ministerial meeting in June to reopen action that can be both ways. In fact we have been saying this from the very start…”. We’ll see. For the moment OPEC is getting its wish and the technicals support further gains while last week’s lows hold. But I’m going to go out on a limb and suggest that 728,131 net long WTI contracts reported by the CFTC Friday, and with the prospect of a stronger US dollar coming we might see those lows tested and broken this week. Geopolitical risk is still there and May’s decision on the Iran sanctions remains top of mind for traders. But the market looks a little stretched right now.
- Here’s the Brent chart – it looks biased back toward $72.60/70 and if that breaks it’s $70.75/90 and below that $69.90.
Have a great day's trading.