Markets Morning - It's complacent out there

Market Analysis /
Greg McKenna / 17 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.41 am Thursday May 17)

Markets are strangely complacent again.

Yesterday we had an uptick in rhetoric from the DPRK saying it would not go the way of Libya while at the same time expressing KJU’s repugnance for NSA John Bolton. Then we had President Trump saying “we’ll see” about whether the June 12 meeting goes ahead.

Throw in Iran and elevated oil prices, concerns about the new Italian government’s plans, especially about debt relief and new spending, plus the inability to get a NAFTA deal done by this week’s deadline, Trump berating the Mexicans – again,  US 10’s at 3.10%, a Fed intent on continuing to raise rates, and we have a witches brew of concerns that at most other times in my career would see a more cautious response from traders and investors.

But not at present. It’s intriguing the way markets have trained themselves to ignore all the potential potholes and pitfalls. Everything is awesome it seems. Anyway…

The washup is that US stocks are higher once more with the S&P 500 rising 0.4%, 11 points, to 2,722. The Dow is up 0.25% to 24,768, and the Nasdaq 100 was 0.6% higher to close at 6,929. Not to be left out the smaller cap Russell 2000 made a new record high close after a 1% gain.

In Europe, the big 3 were higher with prices in London, Paris, and Frankfurt up between 0.15% and 0.25%. In Milan, though it was a different story with worries over the new government’s approach to debt, to the EU, and spending knocking 2.3% off the FTSEMIB.

Here at home after a solid run higher yesterday – which faded a bit into the close of the physical market – SPI traders have marked prices up 12 points overnight to 6,111. Basic materials have done well again across the globe, as have base metals themselves. So it might be another good day on the ASX.

On forex markets, traders didn’t miss the events in Italy and that put the Euro under pressure. It’s down 0.2% at 1.1810. Sterling is up 0.2% to 1.3511 after turning around a loss in the last hour on news the UK is going to stay in the EU customs union. The Yen is largely unchanged at 110.30. Those moves however belie the swings we saw in currency markets – Euro made a low around 1.1765 – and the reality the USD gave up a chunk of its gains.

Indeed against the commodity block the USD went backwards. Base metals had a good day, oil shot higher again and the corollary is that the Aussie dollar is up 0.56% at 0.7514 as we await what’s expected to be another solid employment print today. The Kiwi gained half a percent to 0.6893 while the CAD is stronger as well with USDCAD off 0.65% to 1.2787.

Gold is largely unchanged at $1,290 but Brent surged again, rising 1% to $79.26. WTI in contrast was up an almost benign 0.34%. Copper rose 0.58% to $3.06 after being down around the same amount at one point overnight.

On the day ahead the release of April  employment is the big one here in Australia. The market expects 20,000 jobs and an unemployment rate of 5.5%. Otherwise it’s fairly quiet with jobless claims and the Philly Fed in the US the highlights.

Have a good day.

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


  • An interesting change in central bank thinking is occurring I think with respect to forward guidance.  To recap, forward guidance was a tool instituted during the financial crisis as a way for central banks to assure markets they were going to allow the economy to heal by keeping rates low rather than reacting to any upticks in growth or inflation in a manner they may have pre-GFC. But, like QE and other emergency measures, it seems like forward guidance is a tool who’s time has passed. That’s the message from both incoming NY Fed president John Williams and BoE deputy governor Ben Broadbent overnight.  In Williams case Bloomberg ran a story saying It’s almost time for the Federal Reserve to stop holding the market’s hand. While in the UK Broadbent told the Telegraph the central bank won’t “spoon feed” markets with meeting-by-meeting guidance on interest rate hikes.  
  • The debate rages about the outlook for markets. In just the last 24 hours I’ve read yarns about inflation worries being misplaced, about stocks heading much higher, and also about inflation ticking higher and stocks heading much lower. It’s an interesting time for the Fed and the US economy. As a result it is an interesting time for individual economies and the global outlook. It is also an interesting time for forex, commodity, and stocks traders. Readers know that so I won’t belabour the point. But I did want to share a chart I picked up by Crescat Capital via Mike Shedlock’s blog. As the title says, Fed Tightening Cycles Coincide With or Lead To Bursting of Global Asset Bubbles. Clearly the reaction function differs – but you get the point I’m sure.
Source: MIke Mish Shedlock's Blog
Source: MIke Mish Shedlock's Blog
  • Yesterday I suggested we keep an eye on North Korea and just a few short hours later the DPRK was out with a somewhat aggressive attack on John Bolton and his comments about Libya and regime change in the North. Bolton made these comments over the weekend and they have clearly hit their mark in Pyongyang. Given the US has just pulled out of the Iran deal that – as former UN boss Ban Ki-moon noted – sends a terrible signal itself to the DPRK the June 12 summit and the thawing of tensions on the Peninsula is now at risk. As President Trump said last night – we’ll see where things go.


  • So wages data yesterday was disappointing. I won’t gibber on about that, we all know it’s true. But I think you can see where the rubber of low wages, high house costs, big debts, and now falling house prices hits the road in the Westpac Consumer Sentiment survey released yesterday. While unemployment expectation index looks great -4.5% mom & -11.5% yoy (remember lower is better for this one) and economic conditions 12 months out was +3.4% mom and +9% yoy this was more than tempered – in my view – by the fact that respondents said they felt their family finances versus  a year ago fell 6.5% mom. As I tweeted yesterday after looking at the data - that folks is households!!!
Source: Westpac
Source: Westpac
  • Related to this is retail sales. Earlier this month the ABS released the March data which was flat month on month. Not good, only food retailing grew in March. But the bad news is that maybe April’s data will be disappointing as well when it is released. That’s the call anyway from the NAB which released its measure on “cashless retail sales” which covers around 2 million personal transaction through its network each day. Alan Oster, the NAB’s chief economist, said yesterday “while the monthly data are volatile, our latest Australian Business Survey also showed retail business conditions turning negative in April for the first time this year, further suggesting that the retail sector is losing momentum again”. Not good. Here’s the chart.
Source: Business Insider
Source: Business Insider
  • And of course we have the April employment data out today. The forecast, according to the Reuters poll, is for another increase of 20,000 jobs and the unemployment rate to stay at 5.5%. This data is notoriously volatile with a massive standard error relative to the usual print. So anything could happen. But, based on what the RBA has said, what the government suggests, and what the NAB business survey points to anything other than labour market strength would be a shock.
  • To the markets then and the Aussie dollar is at 0.7513,  up half a per cent against the USD from this time yesterday. It’s up further if you count the dip to 0.7448 after the WPI yesterday. In that context the move might seem a little weird, especially given the USD strength and the Euro’s fall under 1.18. But, the Aussie’s move is consistent with the rally in the commodity bloc currencies – Kiwi and CAD – and it is absolutely consistent with the move higher in copper we’ve seen in the past 24 hours.
Click on me, I'll expand
Click on me, I'll expand
  • As readers know I use this 10 minute Shanghai copper chart as a very short-term indicator for the direction of the AUDUSD. And what’s important here is that Shanghai copper was down around half a percent at one point in our day yesterday but it’s ended up half a percent. That, and the rally in other base metals, not to mention the basic materials sector on global stock markets has helped an otherwise friendless Aussie dollar. On the day support is 0.7490, 75 and then 45. Resistance is 0.7560/66. If that breaks then 76 cents, maybe 0.7630 comes into the frame.  


  • The USD was surging at one point overnight but it gave up a fair chunk of its gains by the close this morning. In DXY terms that’s set up a somewhat ominous candle as you can see below.
  • That doesn’t mean I’ve gone cold on the USD’s rally. But the back end of the month has less data and events which might be important for the rally in this headline driven, momentum chasing market environment we sit in.  Without fresh catalysts perhaps the USD’s rally might stall for a bit.
  • But overall this USD rally looks intact. That’s especially the case against the Euro which looks like it has just rejected the top of a very long term downtrend in the past few months. Short term I’ve been talking about 1.1700/20 as a target. But on a monthly basis the 1.1550 region looks like a decent target and then if that breaks, look out.
Click on me, I'll expand
Click on me, I'll expand



  • So much for the previous day’s candle suggesting Brent might be topping. Instead we saw a bullish outside with the price dipping below Tuesday’s low but surging to settle more than a percent higher day on day. The catalyst for the latest move appears to be more concerns about the state of the supply and demand balance and OPEC’s apparent unwillingness to do anything about it even as Iran faces fresh sanctions and Venezuelan production is pressured. Overnight the Paris based IEA said in a report, “the potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality”. Indeed Neil Atkinson, the IEA’s head of the oil industry and markets division, told CNBC, “it's not beyond the realms of possibility that by the end of 2018, production in Venezuela could be several hundred thousand barrels lower than in its today. If that shortfall there coincides with a large shortfall in Iranian exports as the sanctions are implemented that potentially poses a challenge”.
  • And thus prices are higher once more. Prices are now squarely in the $8-10 target zone I suggested was on the cards after the break of $71.25. So this might be a reasonable place for the rally to pause. But sentiment and the fundamentals are working for enduring support right now. Here’s the Brent chart:
Click on me, I'll expand
Click on me, I'll expand

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