Welcome to my daily Markets Musings.
Feedback always welcome
Market Summary (7.40 am Tuesday June 19)
This was never going to be an easy OPEC meeting given two of the members would essentially be voting on a proposal to increase production to inoculate US consumers from feeling any pain associated with the sanctions being placed on themselves (Iran and Venezuela) by the United States itself.
And so it is that after weakness in Asia yesterday – when news of Libyan supply disruptions were ignored – that headlines the supply increase may only be 300-600 thousand bpd saw oil prices shoot higher in European and US trade. That the Ecuadorian oil minister has said in the past few hours a 1.5 million bpd deal is actually on the table had no dampening effect on the rally is interesting.
So this morning we have Brent up 2.63% to $75.37 and WTI up 1.18% to $65.83. Wild times in oil markets.
Naturally the corollary of that move is that energy stocks are the best performer on an otherwise lacklustre day for the S&P 500 which has lost around 0.2% and currently sits at 2,774. For the second day running that’s well off the low of the day which shows the S&P has support – but equally that it is slipping. The Dow fell 0.41% and the Nasdaq 100 was just in the red with a 0.1% loss.
Asian and European shares were lower yesterday. Mostly it seems on concerns about the trade war. Indeed that seems to be a troubling narrative for stocks more broadly at the moment. Stocks in China, Singapore, Korea, and Japan were all lower which gave a weak lead to Europe where the DAX lost another 1.36%. Merkel’s political troubles can’t be helping. In Paris the CAC dropped 0.93% but in London stocks were flat.
Here at home it’s a close out squeeze it seems with the SPI 200 up another stonkingly solid 38 points to 6,157. Energy up and the Aussie down appear to have the futures traders frothing. But then again the banks did well yesterday and Rio and BHP, among other miners, did okay overnight.
To currencies now and the Aussie dollar is getting hit again. Whereas the Euro is mildly stronger at 1.1628 (the Bundesbank said growth will pickup) the AUDUSD is down 0.25% at 0.7423. The Sellers are coming for it and a break of 74 cents can send it toward 0.7150. The Kiwi too is under pressure at 0.6933 while oil has helped the CAD resist and its largely unchanged at 1.3200.
Of the other majors, USDJPY is down slightly at 110.58 and the Pound has lost 0.34% to 1.3240 after Theresa May suffered another Brexit setback with a vote in the Lord’s overnight.
On the rates market US 10’s are quiet at 2.94% while the 2 year Treasury is at 2.55%. That’s despite Fed’s Bostic reiterating rates are still heading higher and John Williams saying that the US economy is in great shape. Of course, it is both outright and relatively – its why the USD should continue to strengthen.
In other markets Bitcoin is still holding the very important $6,000 level and has lifted another 3.25% to $6,707. Gold is still pressured at $1278 and copper lost another 0.88% to $3.11. No wonder the Aussie s under pressure.
Looking at the day ahead then we get the RBA meeting minutes which – after last month’s confidence and stability comment – will garner more than usual attention. The house price index is also out in Australia and then it’s fairly quiet with another Draghi speech as well as one from ECB chief economist Peter Praet and then housing starts and building permits in the US.
Have a great day.
Here's What I Picked Up (with a little more detail and a few charts)
- It’s no surprise to anyone that the Fed thinks the US economy is in great shape or that the FOMC is going to continue to increase rates. So the comments from Boston’s Raphael Bostic and John Williams to this effect weren’t market moving in any real sense overnight. But the fact that Williams is now the number 3 at the Fed – now he’s taken the job of head of the NYFed – was so optimistic about growth, the jobs market, and that inflation is near the Fed’s goal simply highlights to me that policy and economic divergence will be key drivers of markets in the back half of 2018. I know you’ve heard it from me before so I won’t belabour the point. But I remain a USD bull. And as the BAML survey this month showed stock pickers are coming back to the US markets from elsewhere too.
- On Brexit, Business Insider reports that overnight, “House of Lords voted by 354 to 235 on Monday in favour of an amendment which would hand MPs a bigger role if the government doesn’t have a Brexit deal by February”.
- Interested in how much trade is actually algos? Then here’s an interesting one. ZeroHedge ran a yarn yesterday about Goldman Sachs co-head of trading saying the market may “break” and not come back. You can read it here. But what I wanted to highlight is a chart which shows the percentage of turnover that is now being done by algo’s across various markets. Stocks, futures and the US are the big ones. Even forex though is 30% and climbing.
- In the most surprising news of the day – President Trump has done something I’m pretty sure the nations of the world had agreed not to do – militarise space. Before a meeting of the National Space Council the President is reported to have said, “it’s not enough to merely have a presence in space. We must have American dominance in space”. Oh, and as if Angela Merkel doesn’t have enough trouble on immigration right now, the President Tweeted, “the people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition. Crime in Germany is way up. Big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture!”. And speaking of Mrs Merkel, her coalition partners have given her two weeks to sort out the immigration mess.
- Reuters has an interesting story saying, essentially, Australian wages can’t rise because the workforce has become too de-unionised (and I’d add fractured by the gig-economy). Say what you like about unions but behaviourally the reality is an employer – most anyway – has no incentive to pay higher wages unless they have to. So they don’t and as a result capital reaps a bigger slice of the economic growth pie. As this chart suggests.
- What’s important about this, and the FT article I’ve highlighted a few times, is that it is clear the narrative around Australia, its economic outlook, and thus RBA policy and the Aussie dollar has turned negative. Sentiment is as important as anything in markets, sometimes it leads, sometimes it lags. But also it impacts market pricing.
- And so it is this morning that the Aussie dollar is under pressure once more. For the moment the May low has held with the AUDUSD trading down to a low of 0.7414 overnight. But the price action fairly screams downside pressure. And why wouldn’t it? China data is weakening, there are genuine fears that this trade war kicks to the next level, worries about the Australian economy and the changed narrative around it now that the RBA has essentially said nothing is happening till wages growth lifts – a remote prospect. So the Aussie is offered on any rally and at risk of a material break toward the 0.7125/50 region.
- This backdrop, and last month’s own goal about stability and confidence, makes the release of the RBA minutes important for the Aussie. Given governor Phil Lowe has spoken since the meeting and also since the release of GDP there should be no surprises. But traders will be watching closely for any hint, subtle or otherwise, the RBA is drifting toward a cut – or not as may be the case.
- To the SPI now and the rip-roaring rally that seems to have come from nowhere the last three days continued overnight. It’s a classic case of my two selves when I write this note. My rhetorical self looks at the market and says “what the heck”. But my trading self – the one who looks at the technicals rather than makes rhetorical pronouncements – recognises the bullish engulfing day we had last Thursday, Friday’s rally, and then the move we’ve seen overnight as a clear indication that the bulls have it right now. Equally from the ground up, the fact the banks were chased back from false breaks of important trendlines and range bottoms was also important – they ae 26% of the index after all.
- That doesn’t mean my rhetorical self is comfortable with this move given the current global backdrop. On a continuation basis the front SPI futures contract has overnight made a fresh 10 year high, I have to respect that. But I’m not participating in the move. Oh, and my trading self says the 138.2% target from the break of the recent high is 6,310!!!
- Forex was quiet overnight so I won’t overburden you with too much rhetoric this morning. It is clear that traders in Europe, or traders of the Euro, see the chance of a trade war escalation as negative for the US dollar. I’m not convinced that is the case in either the short, medium, or long-term other than that is where sentiment is right now. If we look at what the Trump administration is doing they are trying to bring production back onto US soil and reduce the reliance on foreign-sourced product. Sure that means higher prices for US consumers but only if US companies can charge higher prices – it could mean lower margins and thus reduce the corporate take of growth. Anyway, there are many permutations of how that could play out. But to me the US is trying to suck growth from other nations and bring it back to the US. Under this scenario, I see the USD as a longer term beneficiary not a casualty of the trade war. After all, most of the world’s nations have set up their economic business plans and prosperity in selling to the US consumer in some small or large part. Time will tell.
- Closer to hand though, 95.20 on the DXY and 1.1500 for the Euro are the big levels to watch. Of course there are many big levels across a number of key currency pairs right now – just look at the CAD, the Aussie, or the Yen to name just a few. The question is does Euro need one more rally s=to set up a big fall or will 1.15 break and all heck break loose. Here’s a tweet I saw flash past yesterday from Mystery Trader.
- Let the games begin. Okay, so the games have been being played for ages. The key here is that OPEC is fractured or fracturing. Yesterday morning we heard from Iran that it, Venezuela, and Iraq would seek to veto the production increase. And why would Iran and Venezuela vote to inoculate US consumers from the price rises they see associated with the sanctions the US has placed on them? They wouldn’t unless it’s a fait accompli or there is some other deal in the wings.
- And while it took headlines saying the production increase may only be 300-600 bpd to really get oil prices moving overnight the reality is that we could be seeing the long term relationship between the Saudis and Russia pushing OPEC into second place. It’s too early to tell just yet. We’ll know more with the actual decision later this week. And it seems, according to the Ecuadorian oil minister the 1.5 million bpd increase the Russians seem to want and have floated is going before the meeting.
- It guarantees more oil price volatility in the week ahead.
- Brent found support at the 61.8% retracement of the upmove yesterday – or thereabouts – before the solid bounce. That’s interesting and reinforces that $72.00/50 region seems important (I thought it might get a little lower first). The level to watch in Brent for resistance, or a break, is $76.30. Otherwise the downtrend is intact.
Have a great day's trading.
Chief Market Strategist
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