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Markets Morning - OIl and gold tank, stocks slip, USD quiet as Trade war escalates

Market Analysis /
Greg McKenna / 18 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.45 am Monday June 18)

Many folks will tell you this isn’t a trade war.

But when one side wacks a bunch of tariffs and the other side retaliates with its own set of tariffs against the other side that looks very much to me like the battle has been joined. Whether it escalates is a different question.

Yet, despite the fact, President Trump did announce the imposition of a broad range of tariffs on Chinese goods and the Chinese have retaliated with their own tariffs on US exports (perhaps including some that impact oil) markets still seem fairly sanguine on the possible impact on the outlook for global growth.

Certainly, the USD felt a little heat – or at least lost a bit of the bid it received after the Fed and ECB meetings. And sure US stocks ended the week a little off the highs but in real terms with the USD index at 94.78, the S&P 500 ending the week at 2,779, and US 10’s at 2.92% it’s a fairly sanguine outlook markets still continue to have.

Worth noting, as we head toward a fresh set of monthly global data next week, is that China’s data flow is materially underperforming expectations with the CESI now down at -52.7. Perhaps President Trump and his team WILL be able to wring further concessions out of the Chinese.

To the markets then and the capitulation in Crude oil was the other big story of Friday night with prices utterly collapsing as it became clear the Russians and Saudis are pushing ahead with a production increase at this weeks OPEC/non-OPEC meeting. The fact they want to cement their relationship long term was also noteworthy. So Brent and WTI fell completely out of bed losing more than 2.5% to close the week at $73.44 and $65.06 respectively for the front months.

Other commodities were also lower with Copper dropping 2.6% to $3,13 for a full round trip while gold collapsed below important support and is at $1279  this morning.

Back to forex now and the USD tried but failed to break 95.20 in DXY terms last week and ended Friday at 94.788. Likewise, the post ECB collapse in the Euro stalled as both the sheer speed of the move to 1.1540 combined with some concerns over the US getting caught in another trade war to see Euro at 1.1600 this morning. It’s just a pause that refreshes I reckon. GBP to recovered to 1.3280 and the Yen is at 110.62. All are poised for but wary of further USD strength – substantial in my opinion eventually.

On the commodity bloc, the Aussie remains under intense pressure and like oil closed on the lows. It’s at 0.7438 as the perfect storm of negatives threatens to overcome it. 74 cents is the key – as are the moves in copper, oil, iron ore, and other commodities. The Kiwi is at 0.6939 with the lows of a month or so back beckoning while USDCAD has broken out with 1.3350 the target. It’s at 1.3189 this morning.

To stocks then and as noted above the S&P 500 slipped 0.1% to 2,779. That was off the low 2,761, so things could have been much worse. But price does seem to be rolling over. The Dow ended down 0.34% with the Nasdaq 100 off a similar amount. They finished at 25,090 and 7,255 respectively.

Stocks in Europe were all lower as traders worry about the trade war. The FTSE dropped 1.7%, the CAC dipped 0.74% and the DAX fell 0.74%. Keep an eye on Germany, Chancellor Angela Merkel appears to be under intense political pressure over immigration.

Here at home after a ridiculous 70 odd point rally – in the current environment – on the ASX200 Friday it seems the soon to expire June SPI contract finished largely unchanged on Saturday morning. Certainly, the banks bounced off important levels Friday, the question today is what they, and the miners do.

Bitcoin managed to hold $6,000 last week. It’s at $6500 roughly this morning and the $5,950/6,000 level remains the key to a potential fall toward $3,000.

ON the day today it’s pretty quiet on the data front here at home and across the globe.  German Ifo, and US new home sales are the highlights.

Have a great day.     

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

International

  • The trade war between China and the US is clearly a negotiating tactic from the US administration.  That much is certain. But as I highlighted above this is a genuine trade war now that both sides – and other nations – are wacking tariffs on each other exports. Any other characterisation is pure semantics. Indeed $50 billion here or there sound big but aren’t really material to either side’s economy because the real argument is over China’s plans to dominate certain global industries and the United States decision to lean into that desire. But what’s most interesting about the Chinese response is that it included a threat to levy tariffs on imports of US energy products like crude and natural gas. China is a big customer for US crude, but they are also happy to continue to buy Iranian crude in spite of the US sanctions. So this could get messy regardless of President Trump’s attempts to say he and Chinese President Xi are mates. Something to watch folks although my guess is both sides actually want to do  deal that they can find mutually acceptable.
  • I’m surprised stocks aren’t overly bothered by this spat. I have to respect that from a price action point of view. But I don’t have to agree with it. AS I highlighted above China’s data flow has collapsed in a very meaningful way. As you can see in the table below the CESI for China was close to 100 and now it’s -52.7. Australia is just clinging to positive territory and that leaves the United States as the only bastion of growth excellence right now. Maybe that explains why US stocks can still hang in there. That and the global leaders in Tech which don’t exist on other exchanges. That said though,  I have to agree with global – giant – commodities trader Cargill Inc who reuters reports said Friday, “The impact of trade conflict between the world’s two largest economies will lead to serious consequences for economic growth and job creation and hurt those that are most vulnerable across the globe”.  
Click on me, I'll expand
Click on me, I'll expand
  • I’ve run out of time so quickly and briefly:
    • Bill Dudley still reckons two more hikes this year but Dallas Fed’s Kaplan said his base case is just one more hike from the Fed.
    • The TICS data Friday showed it was the Russians who were selling Treasuries heavily in April when rates spiked.
    • The NY Fed disagrees with the Atlanta Fed’s bullish outlook for growth. NY is at 2.98% for Q2, still solid though.
    • ECB’s Jan Smets said QE could return if needed.   

Australia

  • The day to machinations of the ASX are often lost on me. I look often for the market to rise or fall only to be blindsided by selling or buying which seems to come out of nowhere. Such was the case Friday when I highlighted that I had to respect the bullish engulfing candle on the SPI – trading self - but didn’t feel – my rhetorical self – like we were going to see the type of rally the SPI traders were forecasting. Instead, I was utterly wrong and we saw at 74 point rally on the ASX200. I’ve characterised it as ridiculous in the intro. The reason I did so was it made no senses given the global backdrop for stocks right now. Sure the buyers came in for the Majors to lift them off range and trendline supports ranging back 5 years and it may be we are now at levels for this 26% of the ASX200 where folks see value. That would be a big support of the index. But as global growth slips, as demand for debt here in Australia continues to diminish so I hold a troubled view of the prospects of the SPI and Cash index. For me 6100/50 is a zone where I’m happy to be out of the market. Anyway, I’m much better at economics, forex and commodities than I am at stocks, so you can take that with a grain of salt.
  • Chart wise it looks like the highs beckon. But I’ll be happy to sell some I think in that zone.
Click on me, I'll expand
Click on me, I'll expand
  • Copper is down, oil collapsed, China’s data flow is starting to stink, and a trade war is kicking off properly now. These are all bad signs for the Australian dollar and ones which point to lower levels yet. Indeed when you read the press – last week’s FT article – or comments from many pundits you can sense the worm of sentiment turning further against the AUDUSD. 74 cents is going to be the key level to watch. And if it breaks the 0.7150/0.7200 region comes into play. I’m a USD bull so for me it’s just a matter of time before the AUDUSD heads lower. But one not of caution, the ratio of global mining shares to the overall global stock market index is fairly stable, although it has taken a dip. That suggests that global traders haven’t exactly capitulated on the positive outlook for growth and relative value. The question is whether that can save the Aussie dollar. The answer I believe is no. The domestic economic outlook and thus the RBA and bond market moves will predominate.
  • On the day 0.7400/20 is key support. Any rally to 0.7500/25 is likely to be offered.  

Forex

  • I’m fascinated by decision rules that traders use in markets. That’s because if I can understand the decision rules then it helps me understand traders behaviour and what influences it. That means I’m doubly fascinated by the stickiness of Euro bulls and the fact that they are still long of Euro in substantial amounts. That’s based on the CFTC data released Friday night which of course predates the ECB meeting that caught the market on the hop last week. As the chart of the big spec in Euro shows, if they didn’t capitulate last week there is still plenty of room – perhaps 1.15 is the big level.   
Click on me, I'll expand
Click on me, I'll expand
  • Milan will be out with his note on the CFTC data a little later, but worth noting  is that the short in US 10’s is getting smaller, gold bulls picked a bad time to increase their longs, the oil market is at serious risk of a capitulation if the Russians do get their way, and there is still plenty of room for AUD and CAD shorts to be built up.
  • 95.20 and 1.15 are still the key levels for me in DXY and EURUSD terms – and by extension for the entire global forex market. Last week the USD again attempted, but ailed, to break the 95.20 level and the Euro bottomed out around 1.1540ish. So for me the levels highlighted are the key ones to watch short term. As the CESI chart above shows the US stands out as the bastion of growth in a world where growth is otherwise faltering. That reinforces the USD’s credentials on a policy and economic divergence front not to mention stock market opportunities.
Source: Investing.com
Source: Investing.com

Commodities

  • It’s complicated.  That’s the best way to characterise this week’s OPEC and non-OPEC meeting where it is clear that the Saudis and Russians want to lift production but that Iran, Iraq, and Venezuela do not. Indeed the press reports this morning are that these nations plan to veto any move to lift the production cap. Iran’s representative to OPEC has said that these “three OPEC founders are going to stop it”. He went further adding that, “if the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement”.
  • Of course why would either Iran or Venezuela want to support a deal to raise production which is in fact an agreement to support the US sanctions on themselves. There is simply no other way to look at the production increase. It aids the US in its bid to both impose sanctions on two big producers yet inoculate the US consumer from the impact of those sanctions in raising oil prices. Indeed Kazempour Ardebili also said, “we call upon our brothers in OPEC and Russia that we do not need to appease Trump, who sanctions two OPEC founders and also Russia”.  
  • So it is going to be an interesting meeting. My sense is that the Russians and Saudis have already anticipated the objections and the veto because the language being used since I last wrote on oil has changed into a deal for a quarter, with some obfuscation around an increase in production outside of the current agreement which would still remain in place. Indeed Lee Saks tweeted a TASS comment which read, “'According to Novak, what is being considered is production increase of 1.5 mln barrels per day starting July 1, not reduction of the current quota from 1.8 mln barrels to 1.5 mln barrels as some media outlets reported last week'”Ducks and drakes as they say. But a production increase does seem to be coming. Two of the three biggest users of oil on the planet – the United States and India – have requested it.
  • For Brent, the target now is $71.25/72.00 and if that breaks a big fall could be in the offing.
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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