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Market Summary (7.46 am Monday, May 28)
It won’t be a surprise to readers of this note that on Friday the Saudis, Russians, and OPEC signaled the potential for an increase in production levels when they next meet in June.
That saw both WTI and Brent crude benchmarks collapse more than 4% to $67.88 and $76.44 respectively at week’s end. The means WTI was more than $5 and Brent more than $4 of the highs for the week.
And, although energy stocks in the S&P 500 dropped 2.59% on Friday US stocks weren’t too concerned overall with the S&P 500 down jut 0.23% to 2,721 which left with a marginal gain for the week as it stayed within the 2,700-2,742/5 range we’ve seen for the past 3 weeks. A break of either side could get things moving.
The Dow dipped 0.24% to 24,753 while the Nasdaq managed an 11 point rally for a 0.16% gain to 6,960. In Europe the FTSE 100 rose 0.18%, the DAX rose 0.65% but shares in Spain and Italy came under pressure as the worries about the new Italian government spread to Spain on rumours of a fresh election.
And it is exactly those issues about Italy and now Spain which helped the US dollar surge around half a per cent in DXY terms and against the Euro. At 94.25 the DXY is just above the 38.2% retracement level of the big fall from last year and on track for the 95.20 level I’ve been targeting. The Euro finished at 1.1650 looking on track for a run toward the mid 1.1550’s, maybe even the mid 1.14 region. But this morning, even with the weekend news the Italian government could collapse it’s up at 1.1686.
In what was a big push by the USD into week’s end the Pound was also lower at 1.3307 after Q1 GDP was revised lower to a 1.2% yoy rate while USDJPY had an inside day and ended at 109.38. The Aussie fell half a cent from the highs to close the week at 0.7549 while the CAD was belted after oil fell and the USD rallied – USDCAD is at 1.2969. The Kiwi is at 0.6915.
This big USD surge came despite the big fall in Durable goods of -1.7% in April. Michigan consumer confidence was also a little lower at 98 from 98.8 previously.
Gold is sitting at $1301 after ebbing and flowing with the moves in USDJPY while copper dipped 0.63% $3.066 a pound. On bond markets the 10 year finished he week sharply lower at 2.935% while the 2’s were at 2.48%
The question for the day as we kick off in Asia after the weekend news the US-North Korea summit may be back on, is whether risk assets – Aussie dollar, commodities, and stocks for example - catch a bid.
But, with the UK and US out tonight the two major hubs of global trading will be absent. That could make trade thin and prone to bigger than normal moves. Or it could take away the impetus to trade. At least perhaps after an initial flurry to adjust to the new news.
Have a good day.
Here's What I Picked Up (with a little more detail and a few charts)
- In an unprecedented move over the weekend it appears that North Korea’s leader Kim Jong-un phoned his South Korean counterpart Moon Jae-in to try and restart talks and Moon jumped in a car and drove to a meeting in the north which seems to have got the summit and the peace process back on track. Maybe this might be a joint Nobel peace prize as President Trump is making all the right noises that a summit is back on. Indeed the US appears to have sent an advance team to Singapore and the President said on the weekend “We're doing very well in terms of the summit with North Korea. It's moving along very nicely”.
- Italy is in a political – there’s a word I could use , end’s in storm, but won’t – mess. Over the weekend a faceoff has emerged between the new government’s pick for economics minister and the president who has the right to veto cabinet posts. I didn’t know that and we now have the potential for a constitutional crisis or at least fresh elections. Here’s a tweet from Silvia Merhler which sums things up neatly.
- Where’s the pain trade? After the level of USD shorts caught traders and investors by surprise we’ve seen a solid rally in the Greenback in recent week’s. Throw in a bit of political instability in Italy, perhaps Spain, and the USD is doubly bid. But while the dollar’s rally has been going on for week’s the reversal in bonds and oil might have only just begun. That’s certainly the case if the latest CFTC data table – in the forex section below – is any guide. Oil is coming off because the Saudis and Russians are suggesting a supply response while bonds in the US have been bid after a combination of a dovish FOMC, EM uncertainty, EU politics, and a risk off tone all combined to see US 10’s close the week at 2.935% down close to 20 points from the high on May 18 of 3.128%. Watch these two spaces folks.
- And here’s the chart of US 10’s for those interested. In the same way that Brent and WTI hit the technical targets of the $8-10 move on the range breaks so too did the 10’s come close to satisfying the 138.2% extension of the break. The high of 3.128% was just 1.5 points below that target. As you can see the 10’s are at a crucial level now,. Below that it’s the trendline at 2.83% and then the 38.2% retracement level of the big move in yileds since last September which comes in at 2.71%a gap to be filled or prices
- The NBS released data for China industrial profits over the weekend. The numbers looked okay but are influenced by base effects. Here’s the snapshot from Yuan Talks on Twitter.
- The Iran sanctions issues is about to get very messy. Not only has the US effectively picked a fight with its European applies, not only have the Iranians threatened to pull out of the deal themselves if the Europeans don’t help out, but now the Saudis are apparently applying their own pressure on Europe to pull out. German publication Der Spiegal reported Friday that Saudi crown prince MBS has apparently ordered no more government contracts to be awarded to German companies in response for the nations support for the Iranian Nuclear deal.
- The Australian dollar is up a little this morning as risk goes a little bid on the back of the back of the news the Korean summit is back on. It’s been a messy few days for the AUDUSD with no real clear short term direction as it has traded through just an 80/85 point range. The weekly downtrend persists however and I’d expect that to predominate on any rallies. The big question though is whether the USD rally is due a hiatus, a pullback, which will allow the Aussie to rally or rather whether the mess in Italian politics will weigh on the Euro and give the Aussie a boost. Against the USD I’m not sure. But against the Euro and GBP it seems the Aussie can outperform.
- The SPI looks set to eventually trade down to the 38.2% retracement level of the big rally we saw recently. For the moment though the oversold nature of the stochastic suggests some point of caution. Overall though the set up is for lower levels as you can see in the chart below.
- What has to happen for big punters to abandon the Euro? That’s the question that flows from the Friday’s CFTC data which shows another week where the big speculators only marginally reduced the net long position from 115,114 to 109,744 as at last Tuesday. Clearly it’s not news of an Italian constitutional crisis or fresh elections based on the reaction to the weekend news in early Asian trade.
- One thing working in the Euro’s favour this morning could be the size and scale of the recent fall. ON Twitter @MarketsContext tweeted this morning that “Last week was the 6th week in a row that GBP/USD had broken the previous week's low. This sequence last extended to 7 weeks on 29 August 2014, 196 weeks ago (when the run lasted for 9 weeks) #fx”. That does not mean this selloff can’t continue. I recall a time when as a fundy running State Super’s currency overlay program I received a call from a bank saying the Aussie had only been below 64 cents for something like 2% of its life. The implication as I needed to buy some. Things didn’t work out well on that run so this framework may not work either.
- But there are large number of Elliot Wavicians who suggest we’ve had wave one of the down move and a rally back toward 1.20/21 before the next big wave lower for the Euro gets underway. I’m not an Elliott Wave guy myself but my own analysis suggested a bounce into that zone was, is, possible. We’ll have to wait and see but for the moment we have the competing forces of technical and the Italian, perhaps Spanish, political mess to deal with. Interesting times.
- Elsewhere on forex markets, it remains the case that the US and China are still the only ones with positive CESI’s at the moment. That’s a boon to the dollar and will continue to pressure other pairs.
- Nothing is certain in the world of geopolitics and OPEC but it looks increasingly likely that the production increase I suggested was coming last week will in fact materialise at the June meeting. It’s equally true that our the Russians appear to be quietly cheer leading such a move with Russian energy minister Alexander Novak saying production levels could now return to where they were back in October 2016 when the deal kicked off. “When we extended the agreement until the end of 2018, we spoke about such possibilities (of returning to the October 2016 level),” Novak said adding “but a decision will be made in June”. Novak also said that he didn’t see the reduction in Iranian production as big as many believe, “some 10 pre cent is probably the maximum level” he said.
- So, after a massive 4% move both WTI and Brent still look like they have further downside. That’s as a result of the combination of the news on a supply increase, the positioning data, and a technical outlook which suggests both contracts could trade back to the original break out levels which projected to the recent highs we have seen. WTI is closer than is Brent which is closer to the action of the Middle East. But both are biased lower nonetheless. Initial targets for Brent and WTI are $75.32 and $66.02 respectively. WTI is closer to the break out level around $66 with Brent still $5 from the $71.25ish region it broke before it ran to $80.45/50 last week.
- Here’s Brent:
Have a great day's trading.
Chief Market Strategist
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