Home / Blog / Market Analysis / Markets Morning - Complacency reigns again as markets ignore rising rates, North Korea and Trumps comments on China trade talks

Markets Morning - Complacency reigns again as markets ignore rising rates, North Korea and Trumps comments on China trade talks

Market Analysis /
Greg McKenna / 18 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.53 am Friday May 18)

It’s incredible that for the second day in a row markets have ignored a trio of drivers that at almost any other time in my 30 odd years in markets would have seen risk assets come under intense pressure.

That trio included continued pushback from North Korea who again cancelled talks with the South, said it wasn’t sure it would attend the June 12 summit and again implied the notion the DPRK would trade its nukes for economic advancement. The trio also included comments from President Trump berating China and the EU on trade and saying he doubted the US China trade talks would be successful. Rounding out the trio was the continued climb in oil, inflation expectations, and bond rates.

But, nothing to see here folks, move along.

Now of course arguing with the market – the muted moves in stocks and the mild rally in the dollar – is a dumb game unless you have a really long horizon and deep pockets. And it’s not really the function of this section of my note. But, some aspects of jobless claims plumbing news lows since the 60’s and the big surge in the Philly Fed really do suggest the Fed is on track for 3 more hikes this year.

Anyway, doing as I’m bid, I’ll move along.

And at the close the S&P was down just 2 points, 0.08% - in the middle of a fairly muted range. The Dow lost 0.22% to 24,713 while the Nasdaq dipped 0.41% to 6,901. With all the headwinds the performance of US stocks has actually been pretty solid. So we’ll see how things play out – Peter L Brandt is bullish.

Elsewhere in the equity market world Europe had a cracking day with solid rises of between 0.7% and 1% for the big three indexes in London, Paris and Frankfurt. And that means that despite the mild dip in the US and despite the weakness in our local market last night SPI traders have lifted prices well off the lows of the past 24 hours having marked prices back up to 6,120 – up 11.

On forex markets the US dollar started to fight back strongly once Europe entered the fray yesterday afternoon and the 10 year rate drifted a little higher. It’s at 3.11% this morning with the 2 year bond at 2.57%. But after a lot of tooing and froing – including the Euro trading down toward the previous night’s lows the USD is only marginally better bid in DXY terms (93.49) and EURUSD terms at 1.1794 (-0.11%). It has kicked on against the Yen though with USDJPY up 0.34% to 110.75.

On the commodity bloc the big mover was the Kiwi which gave up all it – ridiculous – post budget gains and now sits at 0.6872, down 0.3%. With oil up a little again the CAD did okay with USDCAD up only 0.1% while the Australian dollar reversed back from yesterday’s Kiwi induced strength and is back at 0.7510 – off just 0.1%. If copper is your guide it might do okay today.

And speaking of copper it’s up 0.6% to $3.077 a pound in what has been a pretty decent day of small gains in the base metals complex. Gold is becalmed and ignored at $1290. In its lack of care for all the geopolitical news and in inflation you can fairly see the complacent smug of sanguinity traders currently seem to have embraced.

Oil is running into overhead resistance and couldn’t kick too far even though the Saudis again signaled no interest in sorting out the supply and demand imbalance.  The conversation between the Indian energy minister and the Saudi oil minister overnight might be important longer term though.  It’s soon going to be time for the Saudis to act.

Bitcoin is still ranging by gently slipping. It’s down 1% to $8200.

To the day ahead then and it might be one for an early start to your weekend. There is nothing of note in Australia. Tonight’s German PPI will be of interest to me and a few others. Canadian inflation is out and then we have a few Fed speakers, the Bakers Hughes rig count and the CFTC data. Let’s see if those pesky Euro longs have been squared up yet.

Have a cracking weekend – I’ll be at Q Station in Manly for a Police Bank strategy weekend.       

LATE BREAKING: Rumours are floating around now that CHINA WILL offer the US a $200 billion reduction in the trade deficit.

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

International – it’s a bit of an interest rate special today because what’s going on is critical

The three charts below are all important in highlighting that, at this juncture, rates seem to be heading higher which is likely to continue to pressure emerging markets, currencies, and at some point stocks.

  • The Fed might decry the impact of QT (balance sheet reversal) on bond rates, but this chart – via Callum Thomas twitter feed – begs strongly to differ. And who can argue.

 

 

  • But worries about inflation are also pushing rates higher. Oil prices have sky rocketed this year. Petrol prices at the pump are through the roof as a result, and with many companies who reported this earnings season highlighting the upward trajectory of wage pressures in the US then it’s natural that inflation expectations are on the rise. And when that happens interest rates rise too. Here’s a chart Charlie Bilello shared on Twitter this morning.

 

 

  • So, with the 10 year already having broken it’s downtrend the long bond is on the cusp of a big break too. Here’s a long-term look at the long bond from Julian Brigden, co-founder of Macro Intelligence 2, on Twitter. Julian said in the accompanying tweet, “Like Jeffrey Grundlach and Bill Gross (see Bloomberg), we've been telling clients THE level in Treasuries to watch is in 30yr. Since 1985 the 100 month moving average has held the bull trend. We have NEVER closed above. It's now at 3.2169%. So lets see!”. INDEED, it's an important break if it occurs.

 

 

  • And with this backdrop being also driven by the strength of the US economy and relatively benign inflation then, as Danielle Lacalle tweeted yesterday morning, maybe capital will come back to the US. Maybe that’s what is helping stocks stay elevated. It makes sense to me on that basis.

 

 

  • There was of course other stuff happening:
    • President Trump’s actual comments about China, the EU and nothing nations was, “The reason I doubt it [that a trade deal with China will get done] is because China has become very spoiled. The European Union has become very spoiled. Other countries have become very spoiled, because they always got 100 percent of whatever they wanted from the United States. But we can't allow that to happen anymore,"
    • For it’s part Europe is trying to push back – as is Japan – against tariffs and has also rolled out the 90’s era rules aimed at protection European companies from US sanctions over Iran.  
    • The US/North Korea summit is on the edge. But President Trump is trying to keep things on track saying overnight that if KJU denuclearises “he’ll get the protections that would be very strong”. It’s a clear attempt to diffuse the North’s concerns about hawkish comments from NSA John Bolton. I’m backing President Trump and Secretary of State Mike Pompeo over John Bolton. Maybe the market is too??? Around 7.10am the North said it will make more efforts to defuse military tensions. Nobel Prize still on track folks it seems.
    • Brexit is still a mess. GBPUSD went on a bit of a wild ride over the past 24 hours as headlines and rumours about how the UK can stay in the customs union with the EU to avoid a problem with the Irish border issue. We’ve also got a potential constitutional crisis given the Scottish Parliament won’t agree to a Brexit.
    • Bank Indonesia sought to get ahead of the curve yesterday hiking rates for the first time in 4 years.

Australia

  • Yesterday’s employment data was really two stories. The first is that the 22 odd thousand new jobs is another good result for the economy. The trouble is that with the workforce growing more than that unemployment went up to 5.6%. The second story is one of underemployment. My mate Flano over at Curve Securities updated a chart he’s been looking at for a while which is the level of underemployment and wage rises. The bad news is Australia still has plenty of work to do on the underemployment front which means wages rises won’t be risers at a decent clip anytime soon.

 

 

  • It just means what ails households and consumers is likely to continue for some time yet.
  • To the markets now and you just can’t keep the SPI down. While the fall yesterday on the ASX 200 was influenced by Westpac going Ex what’s really interesting is the ebullient mood SPI traders were in again overnight. I confess to having absolutely no idea on what’s going on. When I look at the global miners they were mixed and while commodities were higher it was only mildly so. Throw in the small dip in the US and I can’t really add any value. Other than price action that is. And on that front the key remains the same. While above 6,058 even though the SPI looks toppy the break out is safe.
  • The Australian dollar retains a bid and certainly did reasonably well compared to the other Majors overnight. As I highlighted in my AUDUSD note yesterday the outperformance of Mining and Metals shares relative to the total MSCI world index recently tells us a lot about where real money investors are putting their cash to work and as such gives an insight that while the Aussie is still suffering from concerns about the domestic economy and interest rate spreads moving in the USD’s favour there are areas of demand which may still persist or emerge.
  • Indeed, as I wrote above the fact that copper and base metasla are a little higher suggests the Aussie might continue to outperform on the crosses. On the day 0.7590, then 75, then 45 are important while resistance is 0.7520, 35 and then 60/66.

Forex

  • All of the above stuff about bonds and inflation expectations, about the strength of the US economy seen again overnight in the jobless claims data and the bounce in the Philly Fed highlights that the Fed is on track to keep raising rates. That economic and policy divergence is going to be an enduring theme for forex markets and it is likely to continue to aid the US dollar. So even though we are in a hiatus at the moment in DXY terms we are seeing the Yen come under pressure and the Kiwi is getting pummelled n any rally too.
  • Indeed last night Morgan Stanley put out some research saying the Kiwi, and Aussie and CAD are going to continue to be pressured. “There's a broad basket of highly levered household sectors, which include Australia, New Zealand, Canada and Sweden, which will all be negatively impacted by Fed tightening,” the bank – via ForexLIve – said.
  • That’s essentially the theme I’ve been talking about for a while now -  that is policy divergence is back, and it matters.  

Commodities

  • Overhead resistance and a phone call from the Indian petroleum minister might be enough to start to turn the outlook for oil. I say that because there is a confluence of overhead resistance for Brent and WTI which appears to be restrain prices and also because as the 3rd biggest consumer of oil on the planet – after the US and China – India is exposed and Dharmendra Pradhan said he told Saudi Oil Minister al-Falih of his concern on rising prices.
  • That might have hit the mark because while earlier the Saudis and UAE were reported to have said the market is in good shape and there is no need to increase oil in the last hour or so Khalid al-Falih has tweeted that he has spoken to the IEA and his counterparts in OPEC and Russia and that he was committed to the stability of the oil market. He’s not going to flood the market I’d be pretty happy to bet. But with Brent and WTI both firmly in that $8-10 dollar target range – after the recent break higher – this is a good place for a pause in oil’s upward trajectory.
  • And here’s a chart for today from Mystery Trader on Twitter. S/he wrote in the accompanying tweet, “Daily $WTI : #OIL hitting 3 intersecting resistance trend line points at top of $66-72 trading range. $Oil MACD time running out on support and should roll over soon (magenta). #WTI could enter sideways consolidating trading range for 1-2 months”.

 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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