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Markets Morning - Traders react to news China Trade and North Korea are not a lock

Market Analysis /
Greg McKenna / 23 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.48 am Wednesday, May 23)

If it really was the case that the US China trade talks were driving the market or that expectations about North Korea were top of mind we would have seen the S&P higher over the past week or so and we’d see it much lower this morning. I say that after the reaction, or lack thereof, to the news from President Trump – meeting with the South Korean President Moon Jae-in overnight – that the June 12 summit with the DPRK “may not work out”.

That, and news there is no deal on Chinese firm ZTE and the President is still unhappy with the China trade talks should have knocked the market for six overnight. If that’s really what the driver is and not just what the headline writers say.

Anyway, the lack of reaction in stocks, with the S&P 500 down just 0.3% to 2,724, in the USD, with the DXY at 93.59 and the Euro at 1.1780, or in bond markets, where the 10 year rate sits at 3.06% suggests traders have bigger fish to fry than the ebb and flow of the President’s moods, tweets, and outlook for trade and North Korea.

Today anyway. It could be different tomorrow.

In other headlines there was a curious lack of reaction to news OPEC might increase production after its meeting in June to cover the shortfalls emerging from both Iran and Venezuela. The second WTI contract – the first one rolled off last night – is down 0.44% to $72.03 while Brent is still up by 0.2% at $79.37.

It was also an interesting night of central bankers across the globe Fed speakers continued to signal that rates are on the rise as did their counterparts from the BoE. In particular, BoE governor Mark Carney gave a clear impression that rates will rise but neither swiftly or soon.

So in the end forex traders, who had been selling dollars aggressively from early Europe, gave back the dollars loses to leave most pairs largely unchanged. The Ausie dollar is at 0.7574 down a little more than 0.1% after a failed break above 76 cents which saw it top out around 0.7605. Likewise Sterling is well off its highs at 1.3431, roughly unchanged while the USD gain around 0.2%-0.25% against the Kiwi and CAD which are trading at 0.6932 and 1.2812 respectively.

USDJPY is back under 111 at 110.90. That’s off a high near 111.20 yesterday and 111.40 the day before. Watch stocks and the Yen folks.

And speaking of stocks it was an appalling day on the local bourse here in Australia yesterday. The collapse in price on the back of further woes at the banks and a pullback from the nose bleed levels miners have ascended to recently saw the 200 index close at 6041.90. That’s below the trendline from the recent rally. Overnight the SPI dipped another 4 points to 6,043.

With the S&P’s fall, a Dow 0.7% lower at 24,834, the Nasdaq 0.2% lower at 6,893 and Asia off yesterday it could be another difficult day for the ASX. Yesterday’s lows must hold or the technical suggest another 60-80 points of space till support.     

In other commodities copper bounced again gaining another 0.8% to $3.11 a pound. Gold is still becalmed at $1291 and holding trendline and Fibonacci support $10-15 lower.

On the day today we get a speech by RBA governor Phil Lowe titled “Australia's Deepening Economic Relationship with China: Opportunities and Risks”. That’s at 6.05pm tonight.  We also see “flash” PMI’s for Japan, Europe, and the USA as well as inflation data in Britain, home sales in the US and then – at 4am tomorrow morning – the Fed releases the Minutes from the last FOMC meeting.

Have a great day

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

International

  • Yesterday I noted that the S&P couldn’t break that little resistance zone at 2,742/5 and while I’m not overly bearish it’s worth updating the chart this morning to show the bearish engulfing candle from last night’s trade. For the uninitiated “bearish engulfing” is shorthand for say the market went up and made a higher high than the day before but also made a lower low than the day before and closed down at/near it’s lows. It’s a suggestion of further weakness to come. And while the 2700/2745 range is where the S&P has traded for the last 9 days a break – either way – might make things interesting.
Click on me, I'll expand
Click on me, I'll expand
  • Also yesterday I shared a chart from Callum Thomas on US stocks and Margin debt. It got a few people exercised about the relationship and there were a few discussions about whether it was relevant or not. For me the level of leverage, or margin debt, in a stock market is indeed important for the direction of stocks. But to me its not just the amount of debt – though in a funk that is important to know who might bail and by how much. Rather it is the rate of change of debt as it grows and then as that growth stops which is important. Remember what Tom DeMark says. It’s not the sellers who necessarily knock markets lower – it’s the absence of buyers.
  • BoE governor Mark Carney said overnight that Brexit has cost each UK household 900 pounds. He also said snow had hurt the UK economy lately. But for me the key is that Carney admitted the UK economy is 1% smaller than expected 2 years ago. “In the short term, over the last year and a half, there has been an impact relative to what we would have expected, even with some pretty good tailwinds on the back of this economy,” Carney said. Yup. And while one of his colleagues suggested 2 rate hike a year for a few years I got the sense in Carney’s testimony that he is in now rush to see rates higher just yet.

Australia

  • 76 cents. That’s where the AUDUSD traded up to last night as the US dollar was fairly creamed during the European morning. Copper too was higher as the residual impact of traders who had had a day to think about the impact of the trade news thought the cooling of tensions might be good for the global economy. But with President Trump airing his reservations about both China trade and the DPRK summit it will be interesting to see where copper and the Aussie dollar go in the next 24 hours. On the day that 0.7600/10 region remains resistance with support at 0.7545, 35 and then 16. Governor Lowes speech tonight could be interesting.   
  • Check out this chart of the SPI. It’s almost very ugly. I say almost because the trendline is holding for the moment. But if it breaks we could be in for a run toward the 38.2% retracement of the recent upmove which comes in around 5,960  
Click on me, I'll expand
Click on me, I'll expand

Forex

  • Noted investor Jeff Gundlach gave a presentation in the US this morning where he said the Dollar’s countertrend rally is almost over and it will start falling again from levels near here. That’s sentiment that many forex traders seem to share if the level of positioning in the Euro is a guide. Fighting the dollar’s rally they remain stubbornly bullish Euro. But Gundlach’s comments is a good segue into a topic I often talk about in this daily note. That is asset prices don’t usually go straight up or (except for companies going broke) straight down.
  • There are trends and waves, countertrends, and extensions. It’s all very Elliott Wavy. But you don’t need to be an Elliott Wavician to understand the psychology of why the market tends to move in this manner. That my way of saying that I have sympathy with folks who see the USD as falling from here. Where we differ at the moment is that I see this potential recovery in the Euro, Yen, and others as the second leg of a bigger USD move. It’s the one where the bulls feel like they might be wrong and the USD bears start to get their courage again. We’ll see. In this context the flash PMI’s and then the FOMC minutes tomorrow morning will be important.
  • Using Euro as a guide then I see the chance of a bottom building the longer it stays above this week’s low. It’s only early in that process at the moment. But last night’s high at 1.1829 was just a few points above the 1.1822 low from a few weeks back – the orange line. So for me the break and close above 1.1830 would suggest Euro is heading higher for a time. The target would then be 1.20 initially.   
Click on me, I'll expand
Click on me, I'll expand

Commodities

  • We had a good run a couple of years back, before the production deal was agreed, by following the behavioural traits, words, and suggestions as a guide to what OPEC might do. Back then I often wrote about the fiscal imperative of higher prices because of OPEC members dire budgetary positions as a key driver to an agreement. Fast forward to May 2018 and the shoe is on the other foot. Success has largely been achieved at running down inventories, demand is still growing across the globe, and the imperative now seems to me to be not crimping that demand with oil prices pushing gas at the pump to far. That’s because at some point that rise will hurt consumers and in turn the US and global economies.
  • So now is about the time, at the current levels, for OPEC to show some flexibility. That’s particularly the case from the Saudis side of things given the US is essentially helping it prosecute its argument with Iran.
  • All that means I reckon the stories overnight saying OPEC may decide to ease oil supply restrictions in June to offset declines in Venezuela and Iran have more than a kernel of truth. For the moment price hasn’t really reacted. But as I’ve been writing. It does look like a topping pattern is forming in Brent. That’s particularly the case with prices this morning $1 off the overnight high. It might be a double top. 
Click on me, I'll expand
Click on me, I'll expand

 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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