Welcome to my daily Markets Musings.
You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.
That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest
Feedback always welcome
Market Summary (7.36 am, Tuesday July 17)
Donald Trump just wants to be friends, wants to look forward not past, and believes President Putin’s denials of election meddling over his own intelligence agencies work. That’s the extraordinary takeaway Trump made at his post meeting news conference in Helsinki.
It’s important for markets, or might be at some point, because the President has riled both sides of the aisle against him and it could impact the mid-terms given this is unlikely to play to his base. And though he’s since tweeted he has “great confidence in MY intelligence people” he’s managed to turn all but the most rusted on Trump supporters against him on this topic.
Anyway, enough of the semi-editorial we’ll see how it plays out.
To the markets, and the combination of chat that the US could tap the SPR, Steve Mnuchin suggesting exemptions on Iranian oil for a transition period, the reopening of Libyan oil ports, and the potential for increased Saudi and Russian production weighed on sentiment which in turn saw WTI and Brent fall more than 4% to $68.08 and $71.89 respectively. Of note, the Brent move looks like a huge break.
That saw energy as the weakest sector on the S&P 500 which ended the day down 3 points at 2,798. That was despite a solid rally in financials and a strong retail sales report which saw June print 0.5% while may was revised up from 0.8% to 1.3%. The Dow was 0.18% higher at 25,064 while the Nasdaq 100 dipped 0.24% to 7,357.
After a mostly weaker session in Asia where Chinese stocks slid again - as the data dump fairly screamed slowdown- Europe was mostly lower too though the DAX managed a 0.2% increase. The FTSE in London lost 0.8% and in Paris the CAC was 0.36% lower. With oil, copper, the base metals complex, and global miners lower again you’d be forgiven for thinking SPI traders may have knocked more than 12 points off prices overnight. But they didn’t.
On forex markets, the USD had a good week last week but is on the back foot a little this morning after the Euro gained 0.25% to 1.1714. The Yen reversed early weakness and USDJPY is at 112.25 down 0.1% and the Pund is well off the high of the day with GBPUSD at 1.3239 this morning largely unchanged.
On the commodity bloc the Aussie is largely unchanged at 0.7420 after rallying up to ~0.7441 at one point when the USD was weak. It’s still the case that the short-term moves are driven by the USD and Euro though the AUDUSD does look extended against copper which dipped 0.3% to $2.76 a pound. The Kiwi is up 0.15% to 0.6773 and the CAD gained 0.2% with USDCAD down at 1.3133.
Gold is still struggling but hanging in there at $1240 while Bitcoin has shot higher after Blackrock confirmed it was looking into Blockchain and Bitcoin. It’s up close to 8% at $6,665. But don’t tell the bulls Larry Fink also said the firm hadn’t had any clients request access to cryptos :S.
US rates are a smidge higher after retail sales and inventory data with the 2’s at 2.60% and the 10’s at 2.855%. The curve is at 25.5 as a result and Minneapolis Fed president Neel Kashkari has been spooked by the recent flattening back into uber-dove mode. So no ore rate hikes for him.
On the day we get the RBA board minutes hers in Australia. Singapore’s trade data for June is out as are Chinese house prices and industrial capacity utilisation. Tonight we get a window into where the UK economy is at with the release of employment, wages, and a speech from BoE governor Carney. Later in the evening it’s US capacity utilisation and industrial production as well as the NAHB housing index. But the big event is day one of Jay Powell’s semi-annual address to congress.
Have a great day.
Macro Stuff that affects everyone and everything – either today or eventually
- If you pickup enough rocks you’ll find a few spiders. It’s an old saying which means there is always something to worry about or something going wrong. It’s something I’m minded of often with all the hand wringers about the US economy, the curve flattening, and he recession that MUST be coming. And it’s a saying I instantly thought of when I read Business Insider this morning quoting JP Morgan CEO Jamie DImon’s comment that “If you’re looking for potholes out there, there are not a lot”. Likewise, Citi CFO John Gerspach said the bank has seen “little direct impact” from the trade dispute so far adding, “we haven’t seen changes in behaviour of any significance and so right now, it’s the rhetoric we’re tracking…the market’s have fears of what the rhetoric leads to but at this point, we’re not seeing it come through the numbers”.
- It’s only a matter of time though according to UBS analysts. Business Insider also reports the bank says investors are underestimating how bad things could get. “Assuming virtually all trade between US-China is affected by tariffs and other protectionist policies, we estimate that S&P earnings would take a 14.6% hit as US and global growth would be 245 and 108.5bp lower, respectively,” the bank said adding it sees “a 20% plus decline” in stock prices driven by this “combination of lower earnings and multiple contraction”.
- The IMF is worried as well about the impact of trade tensions on global growth. In it’s latest WEO the fund said, “Our modelling suggests that if current trade policy threats are realized and business confidence falls as a result, global output could be about 0.5 per cent below current projections by 2020”. It left 2018 and 2019 unchanged at 3.9%. But it warned the US may be more exposed than many realise. “As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable,” the fund said. Don’t forget though exports are a relatively important but small part of the overall US economy.
- I’ll leave the Trump-Putin summit for others to rake over. But I will say the President may find more opposition to what he is doing with this relationship than with anything else he is doing. He’s biologically incapable it seems to let go of the fact that Russia may have helped him win the US election and defeat Hillary Clinton. After a strong rebuke from the Director of National Intelligence (as strong as he could give) over Russian meddling President Trump tweeted this morning (5.40 am my time) that he has faith in his intelligence agencies but wants to look forward not back.
- Yesterday we got the triple treat of data from China and the GDP for Q2. It was all nicely choreographed with only industrial production’s 6% print materially undershooting expectations. Urban investment printed 6%, retail sales accelerated back to 9% as expected, and GDP printed the 6.7% yoy rate that everyone thought it would. 6.7% growth is nothing to sneeze at. And while Chinese growth has and remains carefully managed by authorities my sense is that growth is slowing and will slow further. I say this because of linkage between debt (credit as many like to call it) and growth.
- Over the weekend China released its loan and M2 growth rates. Loans grew 12.7%, above consensus of 12.5% while M2 was up 8%. But, what’s important here is that as China is trying to delever its economy, it’s trying to shift it to a more consumer-based growth model. That means continued lower growth in loans outstanding as deleveraging takes place and that – as you can see in this chart – will man China’s growth must inevitably slow. Could we be below 6.5% later this year or in 2019? Yes, I think we can.
- As Natixis’ Trinh Nguyen Tweeted yesterday, #China GDP divorced itself from data: IP down ytd, fixed asset investment down...BUT GDP IS UP! YTD 6.8%!!! Either China has inexhaustible sources of growth & defies all micro data & econ theory or ONSHORE downward expectations of Chinese earnings means slowdown INEVITABLE 🤔”. YUP.
- EuroIntelligence’s Wolfgang Munchau wrote an interesting piece about Brexit in the FT yesterday. In it he argued that “the probability of a no-deal Brexit has never been as high as it is today”. It’s a must read on Brexit as I tweeted yesterday afternoon. His argument is largely that the UK government has never quite understood the impact of what it is doing on the rest of Europe – particularly the importance of the freedom of movement. Equally, he says Europe has no interest in making it easy for the UK in this regard or on trade and is kind of sick of the UK’s cake and eat it expectations. He says the EU might grant the UK extra time but “make no mistake: if the UK parliament rejects the deal, Brexit will be hard”. My 40:60 might need to move higher. I’ll give it a couple of weeks.
- And on Brexit the politics is getting interesting. Rumours are there aren’t enough votes to bring on a challenge to Theresa May and that she’d probably win anyway – I’ll leave the editorial on the state of British politics to you to write in your own head :S. Anyway, there is also a growing move toward another referendum with a prominent conservative suggesting that path yesterday. May has ruled it out.
Have a great day's trading.
Chief Market Strategist
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