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Markets Morning - Brexit madness dominates forex while global stocks rally strongly

Market Analysis /
Greg McKenna / 10 Jul 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.43am Tuesday, July 10)

How do you like your eggs? Fried, poached, sunny side up, over easy, or maybe just scrambled.

I apologise for the breakfast metaphor but it’s the first thing I thought of this morning with the UK government in a bit of a funk over Brexit with Foreign Secretary Boris Johnson’s resignation raising the real chance of more turmoil and the possibility of a hard Brexit – something Theresa May herself warned of.

The messiness didn’t bother the FTSE which closed London trade 0.92% higher at 7,687. But forex traders were not so sanguine, though it’s fair to say GBPUSD has had a wild ride over the past 24 hours. It’s traded through a 1.3189 to 1.3362 range with Johnson’s resignation knocking it sharply lower – it’s at 1.3246 as I write, down 0.35%.

That reversal in Sterling maybe highlighted that the US under president Trump is a bastion of political stability, not to mention genuine economic strength. So the USD made gains across the board reversing most of the acute weakness it had shown earlier.

EURUSD is at 1.1745 unchanged after trading through a 1.1732-1.1790 range – interesting little candle on the daily charts. USDJPY leapt higher with the USD move and is at 110.83 now up 0.35%. The Aussie is at 0.7460 off the high of ~0.7482. Copper is higher by 1.5% which, along with the rally in Chinese stocks, helps the Aussie. The Kiwi is 0.12% higher at 0.6834 and the CAD is down 0.3% with USDCAD at 1.3117.

To stocks now and every single equity index I follow on a daily basis is higher over the past 24 hours. Of course the irrepressible ASX200 was higher again yesterday, gaining 13 points. And SPI traders have added another 24 points overnight in the wake of this globally ebullient mood in stock markets.

At the close the Dow is 320 points higher for a gain of 1.31% to 24,776. The Nasdaq is 0.93% higher at 7,274, and the S&P 500 posted a 0.88% rise to close at 2,784. Things weren’t quite as positive in Europe but still the DAX and CAC closed up around 0.4% while yesterday in Asia it was all Green and Chinese stocks surged with the Shanghai Comp up 2.5% and the China A 50 index posting a more circumspect 0.66% gain.

To commodities and gold has been able to push up to $1265 overnight but it’s back at $1257 this morning with the USD a little firmer. Copper, as I noted above, had a bit of a bounce amid a mixed night for industrial commodities. The FT reports the big fall in copper might have been a position liquidation in China. Oil is a little higher as traders appear to focus on the reality that if Iranian oil comes off market and the Saudis fill the void then global capacity might be maxed out. Hard to be bearish right now. WTI si at $74.06 up 0.35% while Brent climbed a whopping 1.5% to $78.26.

US 10’s are 2.86%, the 2’s at 2.56% which means the curve is at 29.50. Bitcoin is up 2% at $6702. It still has to break up and through $7,100/50.

On the day today we get a couple of really important releases. Here in Australia it is the NAB business survey which will give us a window into just how the economy is tracking. It’s not just headline confidence or conditions. Look at trading, profitability, and employment sub-indexes as well. In China we get CPI and PPI data and then tonight in the UK we get manufacturing and industrial production along with the NIESR GDP estimate for Q2,  while in Germany we see the release of ZEW survey. Nothing really of note in the US other than the JOLTS survey and API crude stocks tomorrow morning.

Have a great day.     

Here's What I Picked Up (with a little more detail and a few charts)


  • Brexit could still be soft as Theresa May plans where there are agreed rules on trade and customs so that the UK/Republic of Ireland border does not have to be “hard”. But the risk is also growing that Brexit could end up hard itself with no deal between the UK and the EU. That’s been about a 35% chance by my reckoning. A significant case, though not my base case as a negotiated settlement was seen as the most likely result. I’m not sure now. We’ll know more in the next few days. But it might be worth edging a hard Brexit toward 40% - still 40:60 though.
  • And of course it was a wild ride for the Pound last night. That’s something that ING currency strategist Viraj Patel summed up neatly early this morning.


Source: Twitter Screenshot
Source: Twitter Screenshot


  • Copper comes and goes as an indicator du jour for many commentators when it comes to the commentariat (yes I know I’m part of it). But it’s recent collapse from $3.30 to last Friday’s low at $2.785 a pound has caught a lot of attention and create much discussion about what it means. Before I get to that it’s worth noting the FT says, “The liquidation of a $1bn bet placed by a Chinese investor has roiled the copper market, triggering a violent sell-off that has seen the metal plunge to a 12-month low”. That liquidation was apparently the equivalent of $800 million of copper selling, or around 26,000 lots on the Shanghai futures exchange. That’s the equivalent of 130,000 tonnes of copper.
  • So the risk is the sell off may have gone further than the underlying conditions in the Chinese of global economy warrant. But either way Nordea Markets, via ZeroHedge, suggest that the fall in copper likely presages further falls in Chinese PMI’s. I tend to agree. Here’s there chart.
Source: ZeroHedge
Source: ZeroHedge
  • President Trump is off to Europe this week. He’s meeting with NATO “partners” (my inverted commas obviously) and as is his want he decided to troll them on Twitter saying the US “is spending far more on NATO than any other country. This is not fair, nor is it acceptable”. He then popped Germany for only spending 1% of GDP on defence as well as other countries. But here is the important part. He tied it to trade with his second tweet saying, “On top of this the European Union has a Trade Surplus of $151 Million with the U.S., with big Trade Barriers on U.S. goods. NO!”. Another G7 rerun? DefSec Mattis will need the patience of Job. Oh, and if you are interested, President Trump also shared a tweet celebrating himself.
  • Say what you want about Crypto’s, the ludicrous boosting an hype we saw last year, the spike, and then collapse, but it seems somehow one or a few of this universe of alternative assets will survive. Not so for 56% of ICO issuers however with Bloomberg reporting on a Boston College study which shows that’s number of firms who raise money through token sales die within 4 months of the initial offering. Where the heck are the regulators? You could mount an argument that despite the hype and collapse, and change of more loses still, that had ICO’s not muddied the crypto water these assets might be further up the “acceptance curve” – if I can call it that.   
  • Oh, and probably the most important chart of the day is this one on US inflation I picked up via a ZeroHedge tweet. It shows the NYFed’s inflation gauge and core CPI inflation. And with both PPI and CPI out this week it suggests USD bulls might get a reprieve sooner than they expect. It also means NY Fed president John Williams speech 6.30am Thursday morning my time is going to be important.
Source: ZeroHedge
Source: ZeroHedge


  • I know one bloke who has called this move in the ASX 200 recently, up and down, almost perfectly. He’s using a technical approach – pivot points – which is the best way to trade this market at present. Take the CBA for example. Why the heck were traders so happy to sell it with gusto down to the low $67 region not long ago but were still buying yesterday as it rose to close at $76.10. That’s one heck of a turnaround. It’s a turnaround which my rhetorical self has been unable to grasp. But like Adam, the technical have been a better guide. Of course the lift in global stocks helps sentiment here at home but again today I’ll ignore the rhetoric and look at the charts. To that end it’s a case of mission accomplished if I look at the physical ASX 200 (using our cash CFD). It’s hit the 138.2% projection of the earlier move. SO 6,308/18 might be enough for the moment. A break and close above however would suggest a run to 6370/75.
Click on me, I'll expand
Click on me, I'll expand
  • The Australian dollar still looks good technically on the daily charts but a little overcooked on the 4 hour charts. The high around 0.7482 was in concert with the moves we saw in the Euro and the Chinese Yuan over the course of the day where both strengthened before the GBP move helped the USD regain some of its footing and knock the Aussie back from its highs. And so it is this morning that it’s been offshore drivers that have been the key for the Aussie. But that might change today with the release of my favourite monthly economic indicator for Australia, the NAB business survey. It will give a window into the state of business and as such into the state of the millions of Australians who work in those businesses. Should we start to see a deterioration in conditions, in confidence, in trading, profitability, or employment then we’ll know the economy is heading for the rocks. But while this survey continues to print positively the outlook remains one of decent economic growth and consumer caution. But the risk must be growing that this survey will slip. Surely?
  • On the day the levels I’m watching are 0.7582, 95, and then 0.7505/10 support is 0.7437/42 then 24.


  • Momentum is against the USD. It was under intense pressure at one point last night with the DXY down around 0.4% before the Brexit news derailed that move and the USD recovered its poise. A big factor in this move, which I see as counter trend, in the Euro and other pairs has been the ability of the 1.15 level in Euro to hold. That in turn helped other pairs stabilise and then that stabilisation has been fed by the recovery in the Chinese Yuan which put the USD under further pressure.
  • But the technical which aided the recovery also reflected the fact the market switched from short USD’s to long USD’s. You can see that in the latest CFTC positioning data which was released overnight (because of the 4th of July holiday in the US) and shows the moves to net long USD in the past 4 weeks. Except for the Euro that is where the bulls remain unbowed.
Click on me, I'll expand
Click on me, I'll expand
  • And that makes this week’s inflation data and the chart I highlighted above crucial if there is to be a refocus on the policy and economic divergence between the US and other regions. Big prints would help the USD bull case while benign outcomes would send the USD tumbling into the mid 92 region in DXY terms and possible high 1.18’s against the Euro. Other pairs would be dragged along for the ride.


  • The key message in oil right now is that WTI is still below recent highs but the pipeline issue in Canada, the focus on it last night coupled with the Iranian sanctions impact and the Saudia Aramco response is highlighting to many in the oil market that global capacity is tight when disruptions are factored in. That in turn is keeping the bid in oil markets.
  • That focus on the capacity constraints has kept the bid in trade as I not e and that's stalled what looked like a set up for lower prices for Brent and WTI. The overall outlook doesn't chance technically if the recent highs hold. But short term it looks like perhaps traders want to test those upper range levels once again. 
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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