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Markets Morning - Mild risk aversion as Trump withdraws from the North Korean talks

Market Analysis /
Greg McKenna / 25 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (6.21 am Friday, May 25)

It looks like we are back to fire and fury as the modus operandi for the White House again after President Trump announced a new 25% car import tariff and cancelled the summit with North Korea that’s as due to take place in June. Not only was the summit canceled but it was back to threatening the DPRK with a military response.

Markets seem less bothered about that than I might have guessed 18 months ago. But the mostly sanguine reaction in stocks is in keeping with the past year's trade. Rather it seems the prospect of a looming increase in the supply of oil to counter the Iran sanctions was more important.

So at the close, the S&P 500 finished at 2,727 down 0.2% - 5 points. What’s important about that though is price is still trapped in this 40 odd point range between 2700 and 2742/45. That’s the zone the S&P has trading in around 3 weeks now.  The Dow fell 0.3% to 24,811 and the Nasdaq 100 was just 0.06% lower at 6,949.

European stocks were lower across the board with the FTSE and DAX off around 0.9% while the CAC lost 0.3%.

Here at home the SPI fell into the mid 5,980’s at one point overnight but it’s back at 6,013 now suggesting a mild down day for the index in trade today.

On forex markets traders were consistent in how they’ve approached these types of things in the past 6 months or so. That is, the US dollar has again lost a little ground and is down 0.25% in DXY terms to 93.765. The Euro is up roughly the ame amount at 1.1725 in what looks like a nascent recovery which could propel it toward 1.1950/1.20. The Yen is naturally higher as well with USDJPY at 109.27, off 0.75% as the bad news and a weaker US dollar combine to buoy the Yen.

Sterling is up about 0.3% to 1.3388 while the commodity bloc largely marketed time with the Euro. The Aussie is up at 0.7582 and it may have further upside toward 0.7630, maybe 60, as long as stocks don’t go into a funk. The Kiwi is at 0.6933 and USDCAD is at 1.2885.

Also impactful on the US dollar was a response to a question from Dallas Fed president Robert Kaplan agreeing that the Fed tightening cycle might be done in 2019. That and worries about th US associated with North Korea seemed more important than the lingering concerns about Italy, the Turkish lira getting belted again, and ECB minutes that suggested there can be a further moderation in EU growth. Oh, and right on cue, German Q1 GDP hit consensus of 0.3% down from 0.6% in Q4 2017. YoY growth decelerated from 2.9% to 2.3%.  

It’s also worth noting China is currently actively courting Germany on Angela Merkel’s visit. Or is it the other way around. Likewise, Macron and Putin have said they are working together to keep the Iran deal intact

To commodities then and the Russians are suggesting that oil production may soon rise. Readers know my tea leave reading suggests OPEC will move so news that Russian energy minister Alexander Novak pushed that idea last night as did the CEO of Lukoil progresses the theory. Novak and Saudi energy minister Khalid al-Falih were due to meet overnight. The washup is that both Brent and WTI are lower by 1.2% and 1.5% respectively to $78.87 and $70.67 a barrel.

Copper was up 0.8% to $3.085 while the news on North Korea finally shook gold from its torpor with prices rising to $1306 this morning.

On the day today, it is again quiet here at home. In Japan, the Tokyo CPI is out and then tonight it is the Ifo business survey data is out in Germany. UK GDP is out with the 2nd read expected to show Q1 growth of 0.4% with a yoy rate of 1.4%. 2nd read? We are still waiting for our first here in Australia :S.  In the US tonight durable goods promise to send the week out with a bang.

Have a good day and weekend.

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


  • When I wrote yesterday that President Trump’s erratic behaviour was back I didn’t think that this would include the use of a 60’s era law to wack a big tariff on car imports was part of that instability. But it seems he’s sick of the lack of results from the NAFTA negotiations – which really are dragging on – and is keen to hit the Mexicans between the eyes with that move. That Germans, Europeans, and Toyota (RAV-4) are collateral damage doesn’t matter. The pull out of the Korean summit was less unexpected. But did he really need to say in the letter to KJU that the US’ nuclear arsenal is “so massive and powerful”?
  • This new instability is important folks. Stocks may not be overly worried about the impact and the reaction function we’ve seen overnight is consistent with practice over the past year. While the economy and earnings put a base under stocks geopolitical instability and uncertainty puts a lid over the top. It’s also helped the Yen and hurt the US dollar for the moment as well. That’s important for forex traders and USD bulls like me.
  • An end to the Fed’s tightening cycle may already be in sight.  I’m a big fan of the Dallas Fed and its presidents over many years. The current president, Robert Kaplan, is again a free thinker who seems to walk a pragmatic ground on the outlook for the economy. So when he said, in answer to a question for sure, that we could see the end of the tightening cycle in 2019 – “yeah, it’s possible” – I noticed.
  • I noticed because it did seem to fit with the narrative of the Fed minutes to a certain extent – at least the comment about there being a range of views on the economy. SO maybe my first take was wrong yesterday, maybe the minutes were a little dovish. The market thought so repricing the chances of a 4th Fed hike this year materially. Here’s a chart from the excellent WSJ Daily Shot column via Twitter I saw yesterday.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And I’ll just leave this here for you. German GDP is at it’s weakest since Q3 2016. The Euro rally can continue for the moment but if the US economy stays strong this – and Italy – will be a handbrake on the single currency.
Click on me, I'll expand
Click on me, I'll expand
  • And speaking of Italy, a number of European leaders urged the the new Italian government to – PLEASE, PLEASE – remember they are part of a broader EU and as thus responsible to and for others in the bloc. Good luck with that folks.
  • And here is something utterly left field. The Swiss are taking aim at the modern version of fractional reserve banking with a vote on a sovereign money plan. Essentially it means loans need to be backed by deposits and banks can’t just magic up money the way they do now when they create a loan – yes, that’s exactly what they do. Reuters has an interesting little story here. I can see this gaining traction globally if this vote gets up.


  • The Australian dollar was lifted by the tide of mild US dollar weakness last night. That’s as hard or as simple as it gets this morning. What’s interesting about that is the AUDUSD has outperformed both the performance of copper in the past 24 hours and the drop back – and underperformance – of metals and mining shares to the total market over the past 36 hours. That’s an important indicator for the Aussie medium term if that continues. But for the moment the dominant themes in developed market forex is the mild dovish tilt, or at least the perception of same, of the FOMC and the markets reaction to the cancellation of the US-NK summit.
  • So, if the USD is going to drift a little, if the Euro is going to rally a little, then the Aussie dollar will likely go along – perhaps lead – the move higher. As I wrote in my AUD piece yesterday we are currently trading a trend, within a trend, within a trend. On the day the high for the week of 0.7605ish looks to be back in the frame and if that gives way it opens the chance of a move toward 0.7660.
  • The SPI remains under pressure after a very wild yet indecisive move in the past 24 hours. On balance it looks like it is heading lower. Heading toward the 38.2% retracement of the move at 5,960 seems the best bet to me.
Click on me, I'll expand
Click on me, I'll expand


  • As I noted yesterday the DXY hit the 38.2% retracement of its big fall from last year and the Euro dipped under that level from its recent move.  So the easy money in these retracements has been made. Indeed it is worth stating that moves such as these don’t even negate the bigger trends of Euro strength or USD weakness.
  • Now don’t get me wrong I’m not getting off the USD Bullish bus. But I try to have an utterly open mind when it comes to my trading self as compared to the rhetorical self that holds strong views and largely drives what I write here. I know that sounds a bit weird. But I write it this morning to give some colour into my process. When the technical and my rhetocrical/fundamental views line up is when I’ve had the largest profits.
  • Anyway, for the moment despite tepid growth in Germany, troubles in and with Italy, some mild backtracking on what the ECB might do, the Euro is mildly higher. A weekly downtrend and the emergence – maybe – of a daily uptrend which could extend toward the 1.1950/1.2000 region you can see on today’s chart.
Click on me, I'll expand
Click on me, I'll expand


  • After a stellar rally, one that saw Brent rally into the target zone on the break out I wrote about at the time oil prices are now starting to drift a little. That makes perfect sense technically. But more importantly, the moves toward an increase in production at the June meeting seem to be taking shape.
  • Two things are worth noting here. First the impact on consumers of higher oil prices – especially in the US and India. Recall the change in tone on Twitter of the Saudi oil minister after the phone call from the Indian petroleum minister last week? And second, the Russians have always struck me as production cut tourists keen to get off the boat and crank up production as soon as inventories were stabilised and prices once again elevated. So the comments from the Russian energy minister and the CEO of Lukoil are consistent with what we heard from the Russian 6 and 12 months ago. How a deal will be worked out and what it will look like will be revealed next month. But for the moment that possibility is top of mind for traders and as a result oil prices are slipping.
  • I now have targets for Brent and Crude as $73.95 and $68.64 respectively. That’s the simple 38.2% retracement levels of the recent solid rallies. So in that sense I’d say they are simply garden-variety pullback. Here’s the WTI chart.
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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