Welcome to my daily Markets Musings.
Feedback always welcome
Market Summary (7.44 am Tuesday, June 12)
When one country imposes tariffs and then another retaliates we have a real trade war and anyone who tells you different is a Pollyanna.
That’s where the G7 has left us after any sense of a collegiate approach to global trade which included the USA was repudiated by the president himself who has disavowed the G7 communique. In response, French President Macron said “international cooperation cannot be dictated by fits of anger and throwaway remarks”.
So the trade war is likely to get worse before it gets better. Unless the US backs down of course. Hands up if you think Trump, Ross, or Navarro will do that? Bueller? Bueller?
Anyway, markets don’t care. Or at least they don’t seem to this morning if the past 24 hours trade is any guide.
European stocks were solidly up with gains of 0.73% in the UK, 0.6% in Germany, and 0.44% in France. Italy was up a stonking 3.4% after Italy’s economy minister said there is no plan to leave the Euro. Across the Atlantic, US markets are marginally higher but off their highs. The S&P 500 ended the day up 0.1% to 2,782 holding onto Friday’s gains. The Dow is flat at 25,322, while the Nasdaq 100 is 0.2% higher at 7,168.
Here at home, it looks like a good day ahead as traders bet the positivity offshore flows through to the ASX today. The June SPI is at 6078, up another 28 after Friday nights positive close.
On Forex markets the Euro was initially much stronger on the Italian news and a sense the USD might suffer as the Administration isolates itself. EURUSD is at 1.1785, up 0.15% and in short-term 1.1730/1.1839 range. Sterling was belted by more weak data and fell from a high around 1.3440 to sit at 1.3380 this morning down 0.22%. USDJPY is at 110.02 up 0.47% as traders shrug off the G7 mess.
On the commodity bloc the CAD is doing worst, naturally. That’s as a result of being at the forefront of the battle with theUS over tariffs and NAFTA and residual uncertainty about just where oil prices are going in the next couple of weeks as we await a decision at OPEC. USDCAD is up 0.44% at 1.2982. The Aussie is off it’s highs but well off Friday night’s low around 0.7560. AUDUSD is at 0.7609, up 0.15%. NZDUSD is at 0.7022.
Bonds in the US remain fairly quite at 2.52% and 2.95% respectively for the 2 and 10 year Treasuries.
On commodity markets oil was offered early in Europe after comments from Qatari oil minister the cartel would look at short and long term stability in prices. Subsequent comments from the Iraqi minister suggesting that any reduction to the production cap is not a done deal reversed those losses however and WTI is up half a percent to $66.08 while Brent is off 0.1% to $76.38. Gold is at $1300 and copper dipped 1.4% to $3.24 a pound.
Bitcoin was poleaxed over the weekend on news of new regulatory enquiries and another hack. BTC is at $6,744 this morning. It was at $7500 or thereabouts this time Friday.
On the day ahead we get the NAB business survey today here at home along with home loan data. Japanese PPI inflation data is out and then tonight its UK jobs data, ZEW economic sentiment for Germany and the EU and then the big one from the US in the form of CPI for May.
And of course the Summit is ongoing.
Have a great day.
Here's What I Picked Up (with a little more detail and a few charts)
- Given we had the holiday yesterday I’m sure by now you probably have caught with the mess that was G7. If not the short summary is G7 was a ebacle and showed just how deep the divisions between the US and its allies are. There was a communique, but President Trump disavowed it after the straight talking from Canadian prime minister Trudeau seemed to get under his skin. So we have the retaliatory tariffs coming July 1 from the EU in response to the US moves, that’s on top of the Mexican and Canadian tariffs. More tellingly perhaps is that the bromance between Trump and Macron is over with the French President Tweeting, “The American President may not mind being isolated, but neither do we mind signing a 6 country agreement if need be. Because these 6 countries represent values, they represent an economic market which has the weight of history behind it and which is now a true international force”. But what Macro also forgets in that Tweet is that this is NOT the first time – even in the last 105 years - the US has ben happy to be isolated and run its own race.
- So it’s time to stop quibbling about whether or not there is a trade war. It’s time to stop pretending that all this aggression from the US Administration is a negotiating tactic. The belief that America has been wronged, that any nation with a trade surplus with the US is taking advantage of it, that tariffs are a reasonable way to redress this imbalance and make America great again is in the DNA of President Trump, his Commerce Secretary Wilbur Ross, his trade attack dog Peter Navarro, and it is driving US policy and relations with other nations. So yes, when the US imposed tariffs, when G7 became a debacle, and when other nations signalled they will impose their own tariffs on US imports we have a trade war. And it’s likely to get worse before it gets better.
- As I wrote last week or the week before – sometimes a good guy has to have a fight otherwise he’s just soft. That guy is Canadian prime minister Justin Trudeau and he’s got no option but to push back against the White House’s aggressive tactics. That Peter Navarro barked “there is a special place in hell” for Trudeau only guarantees that Trudeau and Canada must fight. His stocks will rise as a result. The trade war will get worse. Can NAFTA survive or will Trump pull out when he gets back from Singapore?
- Speaking of Singapore, the US-North Korea Summit is on today. Given all the other fires he’s fighting Trump could do with a good result here. And he’s likely to get it. Or at least for the confab to be seen as a success given Trump, Secretary of State Mike Pompeo, and others have signalled this is just the first of a series of meetings. As I said on Sky last week, perhaps we’ll get a formal end to the Korean War as an icebreaker. Then we’ll see where things go.
- WHAT’S IT ALL MEAN FOR MARKETS? A positive resolution from Singapore is bullish for stocks with the S&P 500 looking biased toward 2,800 as a first stop. In truth the techs said that a week or more ago anyway. As for the USD the fact that G7 had almost zero residual impact in this first instance this is likely as much as result of uncertainty as to the actual winners and losers from a currency market perspective. Of course the CAD and MXN are losers but what of Euro? It’s an interesting time. BUT for me the big issue is UNCERTAINTY. It’s poison for business and consumers and already we have seen the German Chamber of Commerce say the uncertainty over tariffs and where this mess might go has created uncertainty in its members. That has to lead to a further slowdown in growth. So net on net, even though the ECB is signalling an imminent change in policy and abandonment of the QE program economic circumstances and policy divergence outside of this is likely to remain an important driver of forex. At present that favours the US and the USD.
- As Jonathan Pain Tweeted this morning on the market's response – it is remarkable really. I’m not as amazed as Jonathan and suggest maybe we just have to wait on the data flow which can’t be good given the lift in uncertainty.
- It’s a big week for markets and my old mate Richard Franulovich from Westpac New York reckons markets are underpricing risk. Here’s his tweet which I retweeted adding, “Agree - #Markets have their Pangloss branded sunglasses on”.
- Here’s an interesting one. The US is still one of only two big economies or regions with a positive CESI print at present. But there has been a change from who the other country is. Now that Chinese data has surprised to the downside and the China CESI is in negative territory the other country with a positive CESI score is, drum roll please, AUSTRALIA!!!! Who’d a thunk?
- The NAB business survey remains my favourite indicator of the health of the Australian economy and it is out today. So we will get a real sense of whether we are seeing a continuation of the solid business conditions, profitability, trading, and employment intentions. My sense is we might see a pullback in conditions but that overall we’ll see another good print. That would imply that the strength we saw in Q1 GDP continues as we head toward the end of Q2 which in turn implies that whatever the issues with households at an individual level the aggregate economy is doing well. We’ll know this morning and I’ll discuss tomorrow.
- The Australian dollar fell right out of bed last Friday night and traded down to a low around 0.7560. That’s a big reversal off the highs of last week but in keeping with the rejection of the overhead resistance, we saw at those highs from multiple trendlines. Going forward it is hard to see a situation where a trading nation like Australia still leveraged to commodities and global growth won’t suffer some residual side effects from the growing uncertainty about the trade and tariff outlook. But that is probably still out there in the ether. Equally for the Aussie dollar driven by sentiment toward risk and global growth the risks are rising of more weakness. But, as stocks have shown that is for another day. Today it’s about a positive attitude toward risk assets, about the fact Australian data has started to improve, and that the bond spread with the US has stabilised. So maybe the Aussie might find support on any dips before we see just how aggressive the Fed is at 4am Thursday morning my time.
- On the day the levels to watch are 0.7594, 0.7589, and 0.7560. Topside it is 0.7621, 0.7651 and then 0.7675.
- The SPI should have a good day today. The charts suggest is is breaking higher and will move back toward 6,100/20.
- Forex traders are rightly circumspect when it comes to the USD and the Euro. That’s because whatever the medium to long term fall out of this trade war ends up being the proximity of the Fed decision Wednesday afternoon Washington time which is soon followed the following day in Europe by the ECB meeting are the key big events this week. Of course tonight’s CPI in the US could throw a curve ball into the mix, but the central bank decisions are the big ones.
- Medium-term though I’m not sure the USD wins from the trade war against the Euro. Not until the obviously economic and policy divergence that I believe will result from the uncertainty that will hit European business actually materially impacts growth. Certainly as that CESI chart above shows EU economic surprises are already printing horribly versus expectations. But the reality is it’s a slowdown on a growth acceleration rather than outright slow growth. Nuanced I know. But we could see genuine weakness in EU data flowing in the months ahead at a time the US is likely to be still accelerating.
- So the Fed will hike this week, signal a gradual approach to more, and as long as it doesn’t announce a change in policy with regard to QT or the economic outlook, policy divergence will again be a thing for forex traders. The big question is whether the trade uncertainty will impact the ECB which – via chief economist Peter Praet – in the past two weeks has signaled that the end to QE is near. Waiting one more month won’t hurt. But will they.
- For the moment the Euro is mapping out a clear range that if it breaks will be the key to the next leg. It couldn’t take out the 38.2% retracement level but it also held previous resistance when tested from the topside. So 1.1730/1.1839-49 are the key levels to watch.
- Oil markets remain hostage to swings in sentiment and the comments that are driving them at the moment. We saw that again overnight with h initial selling on the back of concerns about supply increases when the Qatari oil minister said OPEC needs to consider “short term and long term market stability” at the June 22 meeting. Also news broke that Saudi output is back above 10 million bpd which is the highest level since last October. This fits with the theory that the Saudis and Russians are subtly moving toward a change to the agreement at this months meeting. But comments from the Iraqi oil minister, along with the Venezuelans suggests that the meeting in Vienna could be somewhat fractious. Indeed why would the Iranians or Venezuelans – two OPEC members under sanctions by the USA – want to ease he production cap given the US is said to have asked the Saudis for help the day before President Trump exited the Iran nuclear deal. They won’t.
- We’ve seen meetings like these in the past and we’ve heard from smaller members recently that they don’t want to be pushed around by the Saudis who they believe have been influenced by their relationship with the US Administration. So the comments by Iraqi oil minister Jabar al-Luaibi said producers “should not over-exaggerate” the oil markets need for more supplies and that Iraq “rejects unilateral decisions by some oil producers without consulting the rest of the members” are a clear indication this is a widely held view. As such while Russia and Saudi Arabia seem keen to increase the deal is not yet done.
- So when we look at the price action it is clear WTI retains some residual support. It’s back trying to break into the previous uptrend channel after breaking out. Last nights move suggests the bulls have some momentum, but not quite enough to take out this overhead resistance. A break though would be decisive.
Have a great day's trading.
Chief Market Strategist
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