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Markets Morning - Oil and stocks surge, US 10's at 3%, dollar higher, Kiwi crushed

Market Analysis /
Greg McKenna / 10 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.34am Thursday May 10)

Okay, so oil is up again. Materially so this morning with both WTI and Brent rising more than 3% overnight to $71.15 and $77.22 respectively.

That’s powered energy shares higher. Naturally.

But stock markets more broadly are also higher even as the inflationary impact of this higher oil helps lift US 2’s to 2.53% (a new high for this year and thus more than 10 years) while the 10’s are back to 3%. Stocks markets are higher even as the tax like impact of higher petrol prices will soon negatively impact global growth. And stocks are higher as the Saudis say they want nuclear weapons if the Iranians get them. And stocks are higher as President Trump warns Iran not to restart its nuclear program or face “severe consequences”.

Hands up then if the stock market rally makes sense to you? Bueller, Bueller? No I didn’t think so.

Anyway, stocks are up with the S&P 500 gaining 0.96% to 2,697 while the US dollar has given back some of its recent gains. That’s especially against the commodity bloc where the Aussie is trading at 0.7460 off a low around 0.7411 for a gain of around 0.11% since 7am yesterday. The CAD has done best though via the oil linkage and USDCAD is down 0.73% at 1.2852. But this morning the RBNZ keep rates on hold but has pushed out rate hikes at Adrian Orr’s first meeting. The Kiwi is now getting pole axed as a result. Down 0.72% since 7am at 0.6934

Against the other Majors the Euro is about 20/25 points off its lows at 1.1848. But more importantly, that’s a little less than 50 points off its highs. The Yen has lost about half a per cent with USDJPY trading at 109.70 while the Pound is largely unchanged as we await the BoE decision last night and despite some awful retail sales data yesterday (BRC -4.2%).

Back to stocks now and besides the move in the S&P – which was powered by a 2% lift in energy stocks as well as a 1.56% move in tech, and a 1.4% move in both basic materials and financials – the Dow was 0.75% higher at 24,542 while the Nasdaq 100 ended at 6,893 up 1.14%.

Naturally as a result of this, and the rally in European stocks, the ASX looks set to open in the upper end of this 6,100/6,150 resistance zone with SPI traders adding another 25 points overnight.

On commodity markets besides the surge in oil we’ve seen gold not react to either the inflationary impact not the geopolitical tensions that are increasing. It’s a great sign that perhaps the rhetorical self should really just look at charts. To that end gold is trading largely unchanged at $1312. Copper is up 0.1% to $3.04.

And just quickly on oil, the Saudis say they will work to cover any shortfall in Iranian oil. But is it really in their interests to do so given their stated aim of higher prices? Of course not. OPEC’s next meeting in June might be interesting though. Imagine the face off between the Saudis and Iran.

Also worth noting is that former Malaysian prime minister Mohamed Mahathir is still a formidable political force in his 90’s with his opposition party surging to an unexpected victory in the elections. Amazing.

And Argentina and emerging markets more broadly remain under pressure as the door gets even smaller for those trying to exit.

We get Chinese CPI and PPI today. I’ll be watching these closely.  But the big event is really the BoE MPC meeting, decision, statement, minutes, and press conference from governor Mark Carney. Even though the shadow MPC said hike markets would be surprised if Carney does.

Have a great day

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

 

International

  • There was one part of President Trump’s speech yesterday announcing his withdrawal from the Iran deal which really bothered me. It was when he said that the American people stand with the people of Iran. To me that sounded like regime change and thus to me also sounded like an analog with the lead up to Iraq and thus signalled an increased chance of war in the Middle East. Since the speech Israel has fired missiles at Iranian targets in Syria, the Saudis have upped the ante by saying if the Iranians get nuclear weapons they will seek them too. It’s troubling because if, as Treasury Secretary Steve Mnuchin said yesterday, this is a negotiating position it’s as high stakes as it gets.
  • The trouble of course is if Europe defies President Trump in order to protect their corporate interests and because they wish to avoid war then we have an utter fracturing of the usual alliances as the Europeans would effectively line up with Russia China, and Iran against the US. And folks Europe can do it. They have taken on a US president and his sanctions before and won. In the same way Russian President Putin recently floated a law banning Russian business from adhering to US sanctions so to do the Europeans have regulations to shield business from US sanctions.
  • Anyway it’s messy. And while I acknowledge it makes sense that oil shares rise with oil overnight does it really feel like an environment where you want to go risk on and buy stocks? Quite frankly the only real recommendation for stocks at the moment is that they won’t go down and have been finding support regularly below the 200 day moving average. That in itself is as good a reason to be bullish as any though in a trading sense. But the S&P500 remains in its wedge – for now.
Click on me, I'll expand
Click on me, I'll expand
  • Now my role here is to offer thought provocation. So to that end I want to share with you an alternate view on why President Trump has withdrawn from the Iran deal and why Mnuchin might be right and this really might be a negotiating position. To this end I offer this article from Business Insider which sets it out why the Pres exited the Iran deal. I found it, and the links within illuminating. What was also as illuminating was that Business Insider ran it. As readers know I used to write for BI Australia and BI more broadly is my favourite publication on the planet – along with the free Reuters newsfeed on my iPhone – and it speaks to increased balance in coverage around the President and his agenda. That’s important for markets folks. And the US dollar.
  • On the data quickly.  Last night US PPI for April was released and printed 0.1% against the 0.2% expected which left producer prices 2.6% higher than a year ago. The core measure was however up the 0.2% expected with yoy prices up 2.3%.
  • The trade tensions between the US and China remain. Vice-premier Liu might be heading to Washington but I’m not sure that China will stand for the US targeting its companies either now or if they continue to trade with Iran – as they likely will. So it’s interesting that overnight CNBC reports that ZTE said “As a result of the Denial Order, the major operating activities of the Company have ceased”. Ummm, Mr Administrator are you available? Not yet the company says because it “maintains sufficient cash and strictly adheres to its commercial obligations”.  

Australia

  • The Aussie has been lifted by risk appetite – stocks rising – and the commodity bloc move. But as the Kiwi move this morning shows relative policy stances and economics still matter. So regardless of the hiatus in the selling pressure with last night’s move off the lows the Australian dollar remains under pressure. While stocks keep rising that pressure is reduced somewhat however. Indeed my sense is if stocks keep rising the USD bids likely lessens a little as well. But the key for the Aussie is that any rallies will continue to be offered because sentiment, bond spreads, and the relative stance of the RBA and Fed remain negative.
  • Looking at the price action on the day 0.7470/75 looks like solid resistance with support back at the lows around 0.7410/15.
  • Australian stocks just keep keeping on. After a remarkable rally the local market has stalled recently needing the impetus of a move offshore to kick it sustainably into, perhaps even up and through, this 6,100 – 6,150 zone. That it was energy, basic materials, and financials as three of the top four sectors on the S&P overnight supports a move here at home with the SPI up 21 points to 6,110. 6,113 is the SPi’s high for the year so it will be interesting to see if it can kick on or if we are the range top. For me it depends on offshore and then next week as the big banks go ex we’ll see as well.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • It was a wild night for forex traders.  The US dollar surged into Europe sweeping all before it in what looked like further short capitulation. But the dollar then reversed course a the surge in oil helped the CAD, which in turn helped the other commodity bloc currencies and then filtered through into some profit taking for the Euro.
  • What’s important about all this though is that amidst the turmoil US 2’s and 10’s are still rising and the US economy still stands out as the bastion of relative economic strength and dataflow. Indeed the CESI for the US stands at +27.7 this morning while the European CESI sits at -101. That’s a stark contrast. But it’s not just Europe. Australia, Canada, Japan, the UK, and emerging markets all have – to varying degrees – CESI’s which sit in negative territory at the moment. Only China is in positive territory of the CESI’s I watch.
  • So, remembering Jerome Powell’s warning a day ago that, “some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate”. It’s worth noting that the US dollar looks set to continue to rally after what might be a bit of a reversal before it heads higher once again.
  • The reality though is when you look at the Euro right now there is little sign that the second leg – the wave that flows against the tide lower – has started. Maybe we just have to see Euro make the full round trip to 1.1700/20 – which is also the 38.2% retracement of the bigger move – before that bounce can occur.
Click on me, I'll expand
Click on me, I'll expand
  • Here’s something to pnder for the Pound tonight. The RBNZ decided to leave rates on hold and sounds pretty neutral in their outlook given lower GDP growth and inflation outlook, even though they note the surge in employment. So the Kiwi is dropping like a stone, down 0.66% since the announcement at 7am. Could the Pound break significantly lower if the BoE sits pat? Maybe.

Commodities

  • Geopolitics. It’s something that oil traders haven’t had to really deal with for years until recently and it is a force of nature when it comes to roiling oil markets as we’ve seen again in the past few days. Unless or until there is a resolution that bid is likely to remain. And with Venezuela’s productive capacity crumbling, and with Israel firing missiles into Syria and this mornings reports of sirens in Israel the uptrend remains solid.
  • So while I’ve been fighting it to a certain extent it is worth restating the objectives I set for prices when they broke the 2017/18 highs recently. Those targets were for an $8-10 move for both Brent and WTI which targeted $80/81 and $75/76. These targets remain in the frame. Above that we’ll be talking about $85/86 and $81 respectively. Here’s WTI
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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