Welcome to my daily Markets Musings – a little late this moring as I was on Sky Biz from 6.30-7am
Feedback always welcome
Market Summary (7.59 am Thursday, July 5)
With the guiding light of US markets out celebrating the United States 242nd birthday traders decided to take things a little easier overnight. But not easy exactly.
The Iranians again warned that if they can’t export crude oil why should anyone else be able to. This time it was the head of the Revolutionary Guard’s Quds force who said he was ready to serve the president’s wishes after the President comments the previous night. That helped keep a bid in Brent and it is up half a percent to $78.16 a barrel. WTI is at $74.33.
But while oil was up again industrial commodities had a shocker as the PBOC’s plan to stabilise the Yuan lost traction with stocks investors in China very quickly. If only uranium had such a short half-life – we’d all be nuclear fuelled and on our way to the stars. Anyway, I digress. The Shanghai Comp fell 0.94%, the CSI300 lost 1.3%, and the China A 50 was 0.32% lower.
These falls seemed to resonate with commodity traders who knocked another 1.9% off the price of copper which is now at $1.86 a pound. Aluminium lost 0.9%, zinc dropped 1.17%, tin 0.48%, and nickel was 2.4% lower.
Against this backdrop you can understand why the Aussie dollar had another aborted foray above 74 cents yesterday. It’s at 0.7382, about where it was this time yesterday, but about 50+ points above where copper would suggest it should be. Elsewhere on Forex some decent dataflow out of the UK (CESI now just -5.5 after a solid services PMI of 55.1) helped GBPUSD rally once more and its at 1.3226, up 0.24%.
Euro was under a little pressure at one point last night but a Bloomberg story saying some ECB members see the end of 2019 rate hike as too late helped it rally back to 1.1652. USDJPY is holding around 110.50, the Kiwi is a smidge stronger at 0.6759, and USDCAD is at 1.3142. Not a lot of action really at all.
Gold IS higher again and picked up another $4 to $1256. Has it bottomed?
European stock markets felt a little of the heat of the Chinese falls with the DAX down 0.26%, the FTSE was down a similar amount though the CAC in Paris was up 0.06%.
Somehow, amid all of the above, SPI traders have manager to find 12 points of gains. I’m not exactly sure why with that backdrop. But technically the continuation SPI is still holding, and respected overnight, the uptrend its wedged in at the moment. I’m a bear.
Bitcoin is up again, gaining another 1% to $6688. The key level it needs to regain is $7,100/50.
On the day today we have a speech from the RBA’s head of economic analysis at the UDIA at 1.05pm. We also have a speech from a BoJ board member and then German factory orders at 4pm AEST this afternoon. Tonight in the US its services PMIs. Challenger and ADP jobs data as precursors to tomorrow night’s NFP. And of course the Fed minutes are to be released at 4am tomorrow morning.
Have a great day
Here's What I Picked Up (with a little more detail and a few charts)
- President Trump just Tweeted at OPEC. It seemed a weird tweet on the 4th of July, but then Ellen Ward explained it. Anyway. There is nothing veiled about the threat here, or at least the expectation of a quid pro quo for the US helping the Saudis prosecute their argument with Iran.
- Earlier this week Bundesbank President Jens Weidmann said the next ECB boss has to be able to raise rates. He’s still making a play for the top job clearly. Then overnight, surprise surprise, we hear via a Bloomberg story that, “some European Central Bank policy makers are uneasy that investors aren’t betting on an interest-rate hike until December 2019, according to people familiar with the matter”. Plenty of other ECB members aren’t I’m betting as well. Inflation is rising, oil’s spike will do that. And the hawks on the ECB worry we are at the start of another Weimer Republic and inflation will slip anchor and prices will run rampant. Or at least that’s the way they conduct themselves. QE needs to end, that’s happening. Higher rates in the EU would be better for proper allocation of capital, I’ll grant them that. But whether rates rise in 12, 15, or 18 months will depend on the data. So stories like this are just internal bickering until Draghi goes.
- The focus this week is going to be on US non-farm payrolls, but its inflation which will also be of interest to the Fed. We might see that in a wages pick up associated with the release of the NFP. But as Jesse Felder Tweeted this morning, “inflation is rising everywhere”. At least in the US.
- The UK economy seems to be improving. I know, I’m surprised too. But last night the services PMI lifted to 55.1 for June’s print against economist’s forecasts of a 54 print. So, whereas the CESI for the UK was at -60 on June 8 it is at -5.5 this morning. That’s either a big improvement, or expectations have been recalibrated lower. Either way though it impacts on sentiment toward the BoE, Andrew Haldane’s surprise move to vote for a rate hike, and the chances that rates will rise sooner than expected. That in turn is helping Sterling stabilise as well.
- On the trade war. China said overnight it’s not going to institute tariffs before the US did. It’s a bit arcane and time zone based. But China won’t formally retaliate until the US clocks click to a new day, July 6, and the tariffs become live. Otherwise the Chinese ran the risk, because Beijing is ahead on the global day clock, of actually instituting its tariffs first. Also, Handesblatt reports the US ambassador to Germany is suggesting ZERO tariffs on automobiles as a solution to the trade war with the EU. At present the US levies a 2.5% tariff on cars and a 25% tariff on trucks while the EU has a 10% tariff on cars. The FT reports the US ambassador has found traction with German carmakers saying, “the heads of Germany's big three automakers met the US ambassador on Wednesday to reaffirm their support for zero tariffs on EU-US trade in cars as they step up lobbying efforts to avert a trade war.” Ahem. Probably politically untenable though given its German, and other EU workers, politicians might worry about not company profits.
- Yesterday’s retail sales for May were stronger than expected with a 0.4% print and an upgrade to the previous month which now shows a 0.5% outturn. But, as with everything, the devil is in the detail and for me that devil was the 1% fall in cafes, takeaway, and restaurant spending. This is pure discretionary and as such its worth noting the overall headline print seems to have been lifted by weather-related features. SO, I’m not going to poo poo the number outright. But I am going to say the internals give me pause to remain concerned about households.
- Perhaps it was that recognition, together with the continued fall in Chinese stocks, and the collapse in industrial metals, which sapped the Aussie dollar’s strength. That’s a pretty potent cocktail of bad news on any normal day. But at 0.7380 the Aussie has outperformed what I might usually look for given that backdrop. Indeed as I highlighted in the introduction it’s probably around half a cent above where it should be short term based on its relationship with copper. No doubt that’s because the USD has stopped rising against the majors which has in turn released some of the pressure on the Aussie dollar’s downward trajectory. But as yesterday’s price action showed, sellers are still keen to hit the bid on any rallies.
- On the day today levels I’m watching are 0.7370, 0.7335, 0.7310/15 and then of course 73 cents. Topside it’s 0.7397, 0.7424 and 0.7445/50.
- I’m not exactly sure why the SPI traders have marked prices up 12 points this morning. It’s doesn’t seem reasonable to me given the moves in Chinese and European stocks nor in industrial commodities. That’s my rhetorical self talking though. Technically the SPI, is wedging itself toward some sort of resolution though – likely lower based on this setup. A break of yesterday’s low at 6127 – give it a few point tolerance - would likely open the floodgates.
- On China – this tweet from yesterday still has resonance. That’s especially the case given Reuters reported this morning that, “China is comfortable with a weakening yuan, intervening only to prevent any rapid and destabilising declines or to restore market confidence, as the economy loses momentum and faces further risks from a heated trade dispute with the United States, policy insiders said”.
- If China is genuinely sanguine about the impact of the weaker Yuan, which It probably is till 7 or maybe a little higher, then this helps put upward pressure on the USD especially against emerging markets. That’s something to keep an eye on. I say that with reference to something Tom Keene said on Bloomberg radio a week or so back -which I referenced at the time. Keene said when have we every had an EM funk that didn’t turn into a full-blown crisis (I’m paraphrasing). Certainly, we aren’t there yet. But if the trade war hots up after Friday we could get there.
- In the interim, there is a hiatus in the USD rally which is manifesting itself in some base forming in a number of currencies. GBP and EUR are the most obvious candidates. And the Euro is breaking higher out of a tentative trendline I’ve got in place on my daily chart. 1.1720/30 is still the key level for me and then above that it’s 1.1850.
- If the Iranians are serious about disrupting supply through the Strait of Hormuz then there is going to be little the Saudis or the US can do short of a fire fight which will calm the nerves of oil traders. Indeed for me what President Trump’s tweets highlight is the lack of available productive capacity absent Aramco right now as the Iran sanctions are about to bite, as Venezuela drops further into the mire, and as infrastructure constraints looks set to slow the growth of US production. So in many ways he can tweet as much as he wants. But until the oil flows successfully, or there is a real belief it will, prices will remain elevated.
- That suggests perhaps Brent will fill that gap from last week. And perhaps trade back toward recent range highs. I’m not expecting those to break anytime soon though.
Have a great day's trading.
Chief Market Strategist
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