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Markets Morning - No Chinese response lets traders relax and risk appetite return

Market Analysis /
Greg McKenna / 13 Jul 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.45 am Friday, July 13)

Another day where the Chinese haven’t hit is good day for risk assets likes stocks and currencies like the Australian dollar. Another day where Donald Trump appears to get what he wanted – NATO – seems also to have given confidence to US stock traders.  

And so it is this morning that after another decent rally in Chinese stocks and a solid move higher in Europe’s bourses - where the DAX rose 0.6%, the CAC 1%, and the FTSE 100 was 0.8% higher – that US stocks have ended the day in positive territory with the Nasdaq making a new record high.

At the close the S&P 500 is up 0.87% to 2,798 – back to Feb 2018 level - the Dow was 224 points, 0.91%, to the good with a close at 24,924 while the Nasdaq 100 skipped 1.65% higher to 7,363.

These moves came despite clear signs that inflation in the US is accelerating with a headline print of 2.9% and a core print of 2.3% yoy in June. Both were 0.1% higher than forecast. That the stocks rally continued despite signals from 3 Fed speakers – Powell, Mester, and Harker – that the economy is on track and rates will continue to rise is testament to the expectations about earnings season.    

And of course the irrepressible bulls in the SPI pit (yeah I know it doesn’t exist anymore) have marked prices another 23 points higher overnight suggesting that the nice rally off support at 6209 yesterday which saw the ASX200 close at 6,268 has more legs today.

To forex now and the Aussie dollar is half a percent higher this morning and just above 74 cents as the better tone in markets saw the selling pressure release. That risk aversion waned was in itself good, but coppers 1.22% rally to $2.77 is a good thing. The Kiwi rose 0.25% to 0.6775 while the CAD gained 0.4% with USDCAD down at 1.3154.

Of the other majors the Yen did worst as the USD strength continued after the break of the three year downtrend. USDJPY is up half a percent to 112.52 – stocks higher hasn’t hurt. Euro and Sterling are largely unchanged at 1.1669 and 1.3204 respectively. Euro’s hold is despite US inflation data and ECB minutes which suggest “through the summer of 2019” is a minimum for hold rates in the EU steady.

Oil was higher with Brent up 1.23% from this time yesterday at $74.30. There is a clear change in conversation – or at least emergence of concerns – from the current supply/demand levels to longer term capacity. The IEA mentioned it again last night. It’s something the Saudis and others have been banging on about for a while now. Front WTI was down 0.1% but the second contract raise 0.7% to $69.29.

Gold is at $1246 up 0.4% while Bitcoin is at $6,170 and at risk of falling back to last month’s lows and perhaps a big break lower if we start next week below $6,000.

US 10’s are at 2.85%, the 2’s are at 2.59% which means the curve is lower again at 25.7 points. Note though a recent Fed research paper says this is not the best indicator of recession.   

On the day it’s Chinese trade which will be the key release. We are still waiting for new loans and money supply growth as well. Tonight it’s wholesale prices in Germany, US export and import prices and Michigan consumer confidence.

Have a great day

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

International

  • Only got one minute and want to know what I think? This tweet from yesterday afternoon sums things up right now.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • So much winning. Donald Trump is a political force of nature. He’s single handedly remade US politics and he’s doing the same on geopolitics and global trade relationships. And each victory, no matter how small, empowers him to keep pushing his agenda. Last night he again warned Europe it had to negotiate trade in good faith or he’d be back with increased auto tariffs. Markets don’t care right now because the US economy is strong and the Chinese have to yet to hit back. But expect Trump to keep pushing.
  • You can probably expect him to keep winning too. Greg Valliere, Horizon Investments chief strategist summed it up neatly in his note overnight - it’s because Trump holds the cards against very weak hands. “AS WE WIND DOWN A TRIP TO EUROPE, it strikes us that on both sides of the Atlantic the hand-wringing and outrage over Donald Trump is futile. On issue after issue – trade, NATO, the Supreme Court, etc. – he cannot be stopped. WEAK OPPOSITION: If there's one unifying theme on both continents, it's weak opposition from Trump opponents. Angela Merkel's government is on shaky grounds, as is Theresa May's. In the U.S. Trump still benefits from an inept opposition” Greg wrote.
  • And we can stop all these wasted words and copy about whether or not this US-China face of is a trade war or not because the Chinese believe it is. Via Reuters, Chinese Vice Minister of Commerce Wang Shouwen said, “The United States started the war”.  And on that front Steve Mnuchin, US Treasury Secretary, said the US is happy to start talking whenever the Chinese want to.
  • US headline inflation data last night was lower than expected at just 0.1% in June. That hurt the US dollar a little and saw US rates dip from previous moves higher. But the yoy rate accelerated to 2.9% as expected and the core rate was 0.2% for June and 2.3% yoy. What we see here is the continued acceleration of inflation. And even though Philly Fed president Patrick Harker said inflation could run to 2.5% and he only favours one more hike this year you’d have to argue this makes the median view – one articulated by Cleveland Fed president Loretta Mester last night – that two more hikes are coming from the Fed this year.  
Source: TradingEconomics.com
Source: TradingEconomics.com
  • And here’s a link to Fed Chair Jay Powell’s interview overnight.   
  • Remember in the Fed minutes where some participants said the 2-10 yield spread may not be a good indicator of recession as other forces are at work? No? Not many other folks paid attention to that either. But perhaps a new paper released last week by Fed staffers Eric Engstrom and Steven A Sharpe,  titled (Don’t Fear) the Yield Curve may give the recessionistas pause. Engstrom and Sharpe in the abstract say “we show that, for predicting recessions, such measures of a "long-term spread"--the spread in yields between a far-off maturity such as 10 years and a shorter maturity such as 1 or 2 years--are statistically dominated by a more economically intuitive alternative, a "near-term forward spread." And on that front things are nowhere near as troubling as the 25.7 point 2-10 spread might be starting to imply. Here’s Reuters characterisation of that outlook in 3 charts.
Source: Reuters iPhone App
Source: Reuters iPhone App
  • The ECB released its “account” – not minutes – of the last meeting where it reaffirmed the commitment to end QE but also gave clear guidance that rates won’t rise till the third quarter of 2019. The bank reckons the slowdown is temporary noting, “while the incoming data had been somewhat weaker than previously expected, the fundamentals remained in place for the medium-term growth outlook to remain solid and broad-based” and that the bank has “increased confidence that price and wage pressures would strengthen further over time”.
  • Oh and did you see in the press yesterday the chat about the big liquidation in Chinee copper as the culprit for the big fall? Well you heard it here first folks. THREE DAYS AGO 😊

Australia

  • I spend a lot of time each morning researching and then writing from a “narrative” or fundamental point of view. It’s the “rhetorical self” I often talk about. My trading self, as I call it, is the part of me that looks at charts, technical levels, and momentum. Increasingly over the recent past I’m becoming more and more convinced that the trading self is the predominate one I should pay attention to. I’m not sure whether it is because so much price action these days is driven by Ai and robots, or whether it is because so much money is now allocated to passive investment strategies. But it’s not because the world has become more complex. I’ve dealt through some seriously unstable periods and my rhetorical self had more traction.
  • Anyway, that’s a neat lead in to this mornings ASX chart. Don’t fight the tape as many old trading and investment sages used to say. So I won’t. 6,209 was yesterday’s low on the ASX and it was perfectly on the uptrend line. That it held negated the downside – McKenna Mantra – though it is fair to say I did expect we might lower when I wrote this note yesterday. Anyway as you can see the ASX is now trapped between the trendline and recent high – 6209/15 to 6,315 – a break either side will get my attention.
Click on me, I'll expand
Click on me, I'll expand
  • The Australian dollar has lifted from the lows yesterday morning as copper rallied and as stocks rose. All three – and other associated moves – are evidence that this market reacts to headlines, then settles. So to the extent that Chinese stocks have stabilised and the Chinses authorities are still grappling with exactly what their response to the latest round of tariffs might be there was no fresh bad news to knock risk appetite and the Aussie dollar lower. That pressure being relieved has seen the AUDUSD rally back to 0.7404 and AUDJPY – the real forex risk proxy (usually anyway) – rally to 83.32, it’s best level in a month. AUDUSD still looks pressured by the various headwinds however while AUDJPY can rally further while risk aversion is low and USDJPY is headed toward 114.

Forex

  • Where the Pound goes is very dependent on the US dollar, the Fed, the BoE, and relative growth rates. But it also depends on whether or not Theresa May’s WhitePaper gets up. Some characterisations of plan suggests it’s a Ukraine style “association agreement”. The FT reports, “the 98-page document is meant to accelerate negotiations in Brussels so as to clinch a Brexit deal in the autumn”. And if it’s a soft Brexit the buyers will be back in for Sterling as they’ll be betting the Brexit process is less disruptive for the economy than a hard Brexit.  
  • I thought the break of 1.3185 might have seen GBPUSD kick lower. But it’s low was ultimately just 1.3180. That said it does look like this week has seen a failed break of the downtrend and recommencement of same.
Click on me, I'll expand
Click on me, I'll expand
  • Elsewhere on forex markets the CPI result hurt the USD a little overnight. The loss against the CAD is probably the best example of that. It highlights again that policy expectations are important drivers of forex trade at the moment. Indeed the Euro’s recent rally and then sell off has mapped the move in the EU2yr forward 2 year rate – up, and then back down. Last night’s signal from the ECB rates are on hold at least till next September and the downgrading of growth expectations from 2.3% to 2.1% for 2018 by the EU highlights again the policy and economic divergence.
  • Trump is winning, the US economy looks strong, US earnings look solid, the Fed is on track to keep hiking. And as a result the USD is likely to keep rising too. For me this is what’s behind USDJPY’s rally this week when I would have initially expected it to show some weakness. Of course is stocks go very offered at some point questions about the economic outlook and the Fed will raise their heads and that will facilitate a fall in USDJPY. But for the moment the US is in the ascendancy.  

Commodities

  • Brent rallied yesterday.  This is what I told a journalist I spoke to who asked.
  • I won’t belabour all the fundamental news because you know that.
  • But what I would say is that moves, the like of which we saw in Brent and to a lesser extent WTI, last night are often followed by some sort of bounce the following day or session. That’s as much because the emotion of the fall gets washed away as the traders who were at their desk and were part of the wave of selling are replaced by traders who, with fresh eyes, can better evaluate the falls in a more rational light.
  • So to the extent that the selling effectively came out of nowhere last night (lots of good reasons but none that really added up to a 6% fall for Brent) and given that markets in Asia are a lot more settled today, indeed the Shanghai composite is up 1% as I write, has helped Brent stabilise and then rally since the New York session.  
  • The question of course is whether the move in Asia today (yesterday) is a dead cat bounce or something more sustainable. In the short term given that both WTI and Brent hit and fell through my targets of $70.84 and $75.32 (38.2% retracement of the recent rally)  and because the Brent low last night was almost perfectly on the bottom of the uptrend channel which gos back to the ~$44.50 low in June 2017 I’d call this a technical bounce. The next target for Brent would be $75.49. It needs to get back above there to abort another test of last night’s lows.
  • Here’s that long term chart of Brent:
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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