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Markets Morning - Oil down, stocks rally, forex traders quiet as they await the Fed

Market Analysis /
Greg McKenna / 01 Aug 2018

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 (7.43 am Wednesday August 1)

Stocks are higher this morning on a report from Bloomberg that the US and China have sought to restart trade talks in order to defuse the trade war. Apparently, representatives of US Treasury Secretary Steve Mnuchin and China’s vice-Premier Liu He are holding private conversations.

That’s helped sentiment, but just in the last half hour or so the Wall Street Journal reported that the talks have made little progress.

But, at the close of play US stocks are higher with the S&P 500 up 0.5% to 2,816 as it ratchets backwards and forwards in the recent range. Clearly, that tech stopped collapsing was important, but the fact that industrials, healthcare, utilities, and basic materials sectors lead the market higher is a testament that it was more than that. Indeed, the leap in industrials of 1.69% and basic materials rally of 0.93% is a good pointer to strength in Australia, on the ASX, today. SPI traders have added 21 points as result. That’s going to put the physical market right near recent range highs.

Anyway, back overseas and the Dow was 0.4% higher to 25,415, while the Nasdaq 100 lifted 0.5% to 7,231. Apple's earnings (a beat and after hours rally) after the bell will be important for the tech sector in the day and days ahead. Across the Atlantic the DAX was up marginally, the CAC rose 0.4%, and the FTSE 100 was 0.6% higher at 7,748.

To forex markets now and the USD is a little stronger in index terms, mostly on the back of the post-BoJ surge in USDJPY (and a little risk appetite perhaps) – it’s at 111.80, up 0.65%. The Euro is largely flat at 1.1696, as is the Pound at 1.3130. Both are off their highs for the night though of 1.1745 and 1.3172 respectively. So, the USD hasn’t had a bad night.

On the commodity bloc the rally in copper and base metals more broadly, the lift in basic materials stocks, and a generally more positive tone has helped the Aussie dollar hold yesterday’s post-building approvals gains. AUDUSD is at 0.7430, off a high of 0.7440. Kiwi is 0.6816, down 0.1% and USDCAD has fallen 0.26% after the Canadian economy recorded stronger GDP growth than expected in May data released overnight showed. USDCAD is at 1.3003.

Oil was lower. It’s a classic fit the narrative to the move. Because even though the Trump entreaty was out this time yesterday, his offering to meet the Iranians is being blamed for the fall. Forget about Rouhani’s repudiation of the offer. Anyway, WTI is down 2% to $68.74 and Brent is off 1% to $74.96. That could be it folks. Copper rose 1.6% to $2.8225 and gold is at $1224.

Bitcoin is off again. Stalled below very important resistance for a week, momentum has waned and prices fell 5% overnight to $7724. Speaking of stalled momentum, US 10’s are at 2.96%, 2’s are at 2.67%, and the curve is at 29 points.

On the day today we get New Zealand employment and labour costs this morning and then it being the start of the month we get the raft of manufacturing PMI’s across the globe. Here in Australia we get the AiGroup’s version. Also, out is an RBI decision on interest rates. Tonight, it’s the ISM in the US I’ll be watching closely along with where Europe is at and then tomorrow morning at 4am my time the Fed will do nothing the market is betting. 

Have a great day.   

Macro Stuff that affects everyone and everything – either today or eventually


  • The data out of the US was interesting last night. It suggests a continuation of the consumer-led expansion of the economy. The employment cost index, ECI, rose 0.6% in Q2 after a 0.8% gain in Q1. Labour costs are now up 2.8% year on year which is the fastest rate of increase since the GFC kicked off properly back in September 2008. As the labour market continues to tighten the rate of wages growth could continue to accelerate putting further pressure on the Fed to ratchet rates higher. But they are only doing that because the economy is in decent shape. They are also only doing it to ensure that speculative excesses don’t build up in the economy – in a sense they are leaning against the strength not trying to stop it.
  • And wages growth begets spending growth. That’s what we also saw last night with consumer spending up 0.4% in June while May’s 0.2% increase was revised up to 0.5%. We knew this though, consumers spend solidly at a 4% annualised pace the Q2 GDP data showed.
  • Across the Atlantic though EU GDP decelerated to 0.3% in Q2. Zero point three percent – awful. But inflation was reported as 2.1% for July so even though growth is not strong the ECB will be on track to end QE this year and may even start thinking about hiking earlier than is currently forecast. That will help the Euro a little.
  • President Trump doubled down on his threat to shut the government in a tweet overnight. He said he doesn’t care about the political implications for the mid terms saying, “our immigration laws and border security have been a complete and total disaster for decades, and there is no way that the Democrats will allow it to be fixed without a Government Shutdown”. Conventional wisdom was he wouldn’t do it, so this is something to watch.
  • As the trade battle continues, and hopefully as the protagonists are again talking, reuters reported China’s President Xi is upbeat on his obviously slowing economy (that’s editorial from me). Reuters said state radio reported Xi as saying ‘ China can win the battle against various economic risks and challenges and needs to maintain confidence…China’s economy had resilience and room to maneuver”.
  • And in order to do this it seems more fiscal stimulus is coming as this tweet from the WSJ’s cief of China Economics highlights.
Click on me, I'll expand
Click on me, I'll expand
  • A couple for the afternoon when it’s okay to have an adult beverage. Like many of us, JP Morgan’s Jamie Dimon is worried about the reversal of QE and what it might rener in the global economy and markets. CNBC reported yesterday that Dimon said, “I don't want to scare the public, but we've never had QE. We've never had the reversal. Regulations are different. Monetary transmission is different. Governments have borrowed too much debt, and people can panic when things change." Indeed, and panic is what might happen if a Morgan Stanley analyst thinks might happen. CNBC reported Chief U.S. equity strategist Michael Wilson said, “we think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps”.  
  • BUT, but, but.  A Reuters monthly survey of 50 global investors “increased their U.S. equity holdings to the highest in more than three years in July, but trade conflict between the United States and China encouraged them to trim their exposure to emerging-markets stocks”. And there’s good reason for that. John Authers, writing in the FT yesterday said, “At present, the proportion of S&P 500 companies beating their forecasts (which were optimistic) is on course for a post-crisis record. But the pattern of positive surprises is a strictly US phenomenon and owes at least something to continuing difficulties in calibrating the effects of the tax change. As HSBC shows, there is a growing divergence between the US and the rest of the world” Here’s the 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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