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Markets Morning - Is news China will "significantly" boost US purchases a game changer for risk assets???

Market Analysis /
Greg McKenna / 20 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary

It’s going to be an interesting start to the week in Asia after news broke over the weekend that China and the US have an in-principle agreement that China will “significantly” increase its purchases of US goods. As I writer (on Sunday evening Sydney time because I have to be on Sky Business from 6am) what’s not clear is the quantum of the deal and what it means for the battle over technology.

So whatever traders do in Asia – likely positive for the USD and risk assets - it won’t be until we see the reaction of European and US traders as they come on line to start their week that we’ll know if deal is a game changer for stocks in the US who’s rally stalled last week.

China’s Global Times summed up the deal on Sunday saying China’s trade envoy, Vice-Premier Liu He told media “the two sides agreed not to launch a trade war and to stop slapping tariffs against each other, which are the most remarkable fruits of the consultations” between President’s Trump and Xi.

We’ll see.

Quickly around the grounds then – given the perception of the end of the trade war could render Friday’s close as a poor guide.

The S&P finished down 0.26%, 7 points, to 2,712, the Dow was essentially flat at 24,715 and the Nasdaq 100 lost half a percent to 6,866. On the week the S&P was down, however, losing about 15 points on the previous week’s close and finishing about 30 points below the week’s high around 2,742.

Europe was lower too Friday as was the ASX 200 and the SPI 200 which closed down 30 points at 6,066 for a loss of half  percent. Where the local market goes Monday will be heavily influenced by how the S&P futures open in Sunday night trade.

Bond rallied a little with the 2’s in US finishing at 2.55% while 10’s closed Saturday morning at 3.07%.

To forex now and the US dollar was a little better bid with the DXY at 93.66. Euro ended at 1.1775 and it’s worth noting the CFTC data Friday showed a stubborn net long of the big specs with positions only down around 5,000 lots, to 115,114, from the week before. Maybe a break of 1.17 is the key?  USDJPY gave up its highs above 111 to end at 110.74. Sterling ended the week under pressure at 1.3475.

Of the dollar bloc the Canadian dollar did worst with the despite mixed inflation and retail sales data – or perhaps because of – which saw USDCAD rise to 1.2878. The Kiwi had a nice bounce to end the week at 0.6910 and the Aussie held 75 cents for the week to close at 0.7511.

On commodities it’s looking a little like the bad news and geopolitics might be baked into the cake as prices run into overhead resistance. WTI ended the week at $71.28 while Brent ended at $78.51. $77.61 looks like an important support level Brent needs to hold this week. Gold is still struggling and at $1291 looks to have downside bias. Copper too was lower closing the week at $3.0495 down 0.9%.

ON the day ahead the big story is the reaction to the weekend news on China and US trade. Other than that it’s fairly quiet with Japanese trade out in Asia before the Chicago Fed National activity index tonight in the US.

Have a great day

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


  • Here’s a link to the full statement from the US and China on trade. It’s framed very much such that it could be characterised as a victory for both sides. It’s worth a look at the full statement but the key part I wanted to highlight, the part which fits with Liu He quoted statements in the Global Times is the following (my emphasis), “There was a consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China. To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services. This will help support growth and employment in the United States. Both sides agreed on meaningful increases in United States agriculture and energy exports. The United States will send a team to China to work out the details”.
  • And this is where the uncertainty about how the markets might respond tomorrow comes in. There is no mention of the $200 billion the Larry Kudlow said the Chinese had offered and was disputed last week. There is nothing about Steel and Aluminium. And it’s still unclear about what and how the US is going to deal with ZTE.
  • And while the US is playing nice with China,  Japan reserves the right to take countermeasures against US steel tariffs while the EU is apparently considering routing money through Iran’s central bank to dodge US sanctions. CNBC reported both stories over the weekend. At the same time, Reuters reported that the EU energy chief was seeking to reassure Iran over the weekend.
  • Here’s an interesting one – Goldman says “This is the first time since the start of 2009 that leveraged funds have had a substantial net long position in US equity futures”.  Here’s the chart via ZeroHedge:
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The Brexit battle is hotting up. The CBI has argued that the UK should stay in the customs union with the EU “unless or until an alternative is ready and workable”.  Will, can, Mrs May delivery such and outcome, any outcome really.
  • The battle for the next ECB chair has been joined. The two protagonists I’ve identified previously as the most likely candidates – Bundesbank president Jens Weidmann and Bank of Finland governor Erkki Liikanen -  are quoted in a Bloomberg article as demurring at present but also signalling they’d be happy to serve.


  • Auction clearance rates are still falling it seems. That’s the preliminary assessment of the weekends auction results and it’s important in the context of the further potential house price falls, the impact of same on household spending and consumption, and then possibly rate cuts. My sense is prices will continue to fall along with the drop in demand for housing finance. That, when combined with APRA’s macro-prudential regulations and their impact on all of the above then I have to say the chances of rate cuts do seem to be growing. Naturally I hope there is no material deterioration in households or consumption that necessitates this, and it’s equally true that Macro-Pru could have been effective a few years earlier. But this is the situation we now find ourselves in as a nation. And it is one that will need to be watched closely. Here’s a tweet from AMP’s Shane Oliver summarising the last decade or so’s auction clearance rates.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • To the markets now and the Aussie dollar ended the week with two days of uncertainty if you look at the candles. Thursday was a reversal off a high of 0.7543 while Friday was a recovery from a low of 0.7488ish. Both days closed in roughly the same place at 0.7510 or thereabouts. Looking at the day ahead where the Aussie goes depends very much on what the markets response to the China-US trade news is. On the one hand the deal is USD positive – especially against the Yen. But if we see a rally in stocks then the Aussie is likely to outperform as it too can benefit from a an increase in risk appetite. The trouble of course is that the news came over the weekend and Monday morning’s in Asia can be fraught. So the best guide is likely the Charts. Resistance is 0.7527 and then 47 and after that recent high at 0.7566. Support is 0.7488/90 and then 0.7442/47. I’ll update my thoughts on the AUDUSD after I’ve been on Sky Monday morning.
  • To the SPI now and it too is uncertain in terms of the very short term and how the markets react to the news. What happens tomorrow is not necessarily a good guide until we see what US markets actually do. On balance the question is about the specificity the market wants to take from the news. An agreement not to start a trade war seems pretty solid to me and that could likely see stocks do a little better this week. Which might mean that after falling to close just above the important support zone at 6,058 Saturday morning – close 6,066 for the SPI – that level may hold. If it doesn’t we could see a big fall in the SPI. Elsewise a bounce could ensue. For the moment though, the price action still looks toppish.
Click on me, I'll expand
Click on me, I'll expand


  • It’s Monday and that means the weekly look at the CFTC data as well as the relative prints were are seeing from data flow coming from the big economic regions. Looking first at the positioning data released Friday it’s worth noting that Euro longs – or at least the big specs – are a stubborn lot it seems. Certainly, the market isn’t as long Euro as it was a month ago. But at 115,114 there is still a decent long that can be washed out. Perhaps that will require a break of 1.17. And if that happens it’s likely that the US dollar surge gets reinvigorated both against the Euro and across the board more broadly.   
Click on me, I'll expand
Click on me, I'll expand
  • As the table also shows, the market is getting a little more bearishly positioned in the Aussie, and Swissie. There is still a net long for the Pound which is kind of remarkable really. More so than the Euro move I think. But I’m really curious about the move to a small net long Yen position. But Friday’s data is as at last Tuesday so this pre-dates the negative Q1 GDP print.   
  • And that is the other interesting part of this USD move and relative performance in currency markets right now. If you look at the chart below you can see clearly that for every jurisdiction there has been a deterioration in data flow relative to expectations (hence the title “economic surprise”) over the past 4 weeks. The net result is that only the US and China are still in positive print territory. But the US is slipping.
Click on me, I'll expand
Click on me, I'll expand
  • What’s also important about this as a driver of forex, and something we saw with the mixed data in Canada on Friday, is that traders are taking a jaundice view of anything that can be perceived as negative and which may impact on central bank activity. So even though the inflation was only mildly lower on a yoy basis at 2.2% for April and retail sales printed 0.6% and 4.1% yoy in April (both beats) it seems the focus was on the -0.2% retail sales print when autos were taken out. And of course that’s a risk for the USD if the data keeps slipping. Something to watch.
  • Anyway, to the chart of the day for forex today which is USDJPY Weekly and the great big wedge it is in. The top of the wedge at present is coincident with the 200 week moving average which comes in around 112.90/113.000. SO on any USDJPY rally this will be a level to watch. 112.40 is the 50% retracement level of the fall from 125ish to  just below 99 a few years back.  
Click on me, I'll expand
Click on me, I'll expand
  • And because it’s Monday I’ll look at the weekly set up in my video a little later Monday morning.


  • The St Louis Fed last week released a note saying that shale oil can come on line very quickly. In fact it said (my bolding), “…oil production may be restricted to a price band governed by the cost of unconventional oil extraction. When oil prices rise above the point where shale extraction becomes profitable, producers will start extracting from the shale wells. If prices continue to increase above this point, shale production will continue to ramp up until prices reach the top of the band and production hits full capacity. If the price band theory is correct in practice, unconventional drilling may have a dampening effect on oil price spikes”.
  • And it is this ramp up in production which BP CEO Bill Dudley believes, along with an reopening of OPEC’s taps,  which will dampen crude oil prices after they rose strongly again over the past couple of weeks. Indeed Dudley said that just as prices below $27 were not healthy so too, “when you get above $80, it is not a healthy price either”. What he said.
  • And while it is too early to sy the rally has ended, it is worth again reitereating that last weeks rally in Brent took it into the $8-10 target zone I had over the break of the range at $71.25 a while back. That, what Dudley said, and the overhead resistance we are seeing in both Brent and WTI suggests that without a further escalation in geopolitical risk oil might be due a pullback. That’s especially the case if the market gets a sense the Saudis might actually play ball and signal they will step into the void the US withdrawal from the Iranian nuclear deal and eventually any fall in Venezuelan production. Time will tell. Short term a break of $77.61 would suggest the reversal is at hand. Here’s Brent.
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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