Home / Blog / Market Analysis / Markets Morning - Oil soars as the US demands ZERO Iran purchases, stocks and US dollar lift

Markets Morning - Oil soars as the US demands ZERO Iran purchases, stocks and US dollar lift

Market Analysis /
Greg McKenna / 27 Jun 2018

 

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.43 am Wednesday June 27)

It used to be that traders and markets girded themselves for economic and policy announcements and every now and again something would come out of left field that would itself move markets. These days, under the Trump Administration, it’s the left-field stuff that has become mainstream and market moving in a sustained and ferocious manner I haven’t experienced in my three decades on the desk.

And so it was again overnight that the US State Department’s demand allies cut their purchases of Iranian oil to Zero by November 4.   

It’s not a surprise, or it shouldn’t be. Indeed it’s one of the reasons the US pressed the Saudis to lift production. Yet the headline chasing algo’s and a few humans too, ripped into the market and hit the buy button hard. That’s sent WTI up 3.4% to $70.43 a barrel while Brent rose 2.18% to $76.36. No wonder the CME has lifted its margin on oil contracts. And thank goodness I couldn’t make sense of the price action – I wanted to sell – and stayed out of the market.

So, energy stocks have shot higher which together with a recovery in tech has lifted US stocks a little higher overnight. I must say I’m not utterly convinced though by the price action with the S&P finishing at 2,723 for a gain of 0.2%. But that was off the high of 2,732. The Dow is up just 0.12% while the Nasdaq 100 lifted 0.43% to 7068 and the Russell 200 rose 0.66%.

In Europe it was a mixed day with the FTSE in London up 0.4% while the DAX fell 0.3% and the CAC was essentially flat.

Here at home I thought the performance of the ASX 200 wasn’t too bad yesterday all things considered – like the continued fall of Chinese stocks. Overnight however the SPI traders have knocked another 16 points off prices with the September future at 6,136 this morning. Technically it’s an inside day so we don’t get much clarity for the outlook other than a high looks in place.

To forex then and fresh from a test near resistance at 1.1720/30 the Euro is back down at 1.1644 this morning for a loss of 0.5% as macro traders re-evaluate the relative outlooks now that the parties seem to be digging in for a bit of a trade war. The DXY is up around half a percent to 94.71 while the Pound has lost about 0.4% to 1.3221.

Looking at this trade war thing, it is worth noting Dallas Fed president Kaplan explicitly called out China this morning as a reasonable target for the Trump Administration to tackle. “Let’s fight what I think is actually a very big threat, which is the relationship with China,” he said. THIS IS A FED PRESIDENT FOLKS!!!!!!!

On the commodity bloc it was the Kiwi’s turn to be the worst performer – of the G10 actually. It’s at 0.6851, down 0.65%. The CAD is roughly flat but back above 1.33 as the competing forces of oil and the USD battle it out. The Aussie too is lower having lost around a third of a percent to 0.7388. That’s just 40 or so points above the recent low. Will it hold? Can it?

And on other commodity markets, gold is still drifting lower as it heads toward my $1235/40 support zone. It’s at $1258 down about half a percent. Copper is up a smidge at $3 a pound amid a mixed night for industrial commodities. But Iron ore is a little higher.

US Treasury bonds are strangely benign right now with the 2’s at 2.53% and the 10’s at 2.88%. The curve is at 34.4 points when you get a little more exact on the rates. Bitcoin lost a little under 1% and is at $6,180.

Looking at the day ahead we get Kiwi trade and Chinese industrial profits then tonight we get a very important data point for the US with the release of durable goods orders for May. This is a genuine market mover for forex and stocks and the Reuters poll says the economists are forecasting a fall of 1%.

Have a great day.

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

International

  • Pet Peeve, I hate this ludicrous notion that a 10% is a correction and a 20% fall is a bear market.  It’s made up rubbish for headline writers to have something to put at the top of the page. Why 19% isn’t a bear market but 20% is is just a construct. ANYWAY, you’ll read today that “Chinese stocks have entered a bear market…blah blah blah, blather blather blather”. But as you can see in the price action in developed markets no one cares this time. Seemingly no one cares about the gap lower in the Chinese Yuan either – though I’d argue that was a big source of the USD strength overnight. But perhaps we do need to keep an eye on what’s happening on the Shanghai Comp and other Chinese stock markets if this chart from Santiago Capital, via twitter,  is any guide. Of course the Dow is an awful ndex, but it’s still a benchmark folks watch. Will the tractor beam of Chinese weakness impact the Dow?  Time will tell.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Boston Fed governor Raphael Bostic gave a big warning about the impact of the trade war overnight saying, “the more it progresses in this more contentious way, the more it leads me to feel the risks are on the downside for the broader economy.” That kind of echoes what Fed chair Jerome Powell said last week at Sintra that the Fed is already seeing some change to investment and hiring intentions because of the uncertainty. Bostic said that meant, “If this [the trade war] progresses the way it has been the last couple of days there is some likelihood I will be moving away from four as a real possibility”.  In the end though, like the rest of us he said we’ll just have to see how it plays out. But he did add, “the disruption that comes from this type of trade war is not going to be good for the cost basis for businesses and it makes me a bit concerned how robust the economy will perform moving forward”.  Indeed.
  • For the moment though the US economy still looks strong. The Atlanta Fed’s GDPNow is still at 4.7% for the quarter. We’ll get some important updates in the next two weeks as the data flow recommences.
  • I noted above the Fed seems to agree with the Administration over the prosecution of its argument with China. Or at least Robert Kaplan from Dallas does. I think it’s broader than that though across the Fed and many other arms of the US government and business sector. That means the battle is likely to be protracted even if the President – as he did this morning – tries to couch the moves as not directed at China. To that end I wanted to give you the full quote from Kaplan relevant to this debate. Via Reuters, Kaplan said “intellectual property rights and technology transfer are very big issues, where China is using the joint ventures to get technology and then compete globally…Let’s fight what I think is actually a very big threat, which is the relationship with China”.
  • This is a very important battle folks for the high ground in the global economy. The US won’t back down on intellectual property and technological theft. It can’t. And I know that I often say we have to view this through a Thucydides trap lens, but we do. The US military will not want to go up against its own technology if push and shove ever come to shooting. Let’s hope that doesn’t happen. But overall the US will try to maintain its dominance while China tries to establish its own hegemony. Not easily resolved, and not in a single year.  
  • Oh, and what’s the quickest way to undermine what the Administration is doing on trade? It’s for other nations to put up barriers which then induce US corporations to do what Harley Davidson has done by announcing its moving inside the tariff wall in Europe. President Trump was tweeting about it again overnight. He’s not happy. We’ll see how this side of things play out because both Trump and Harley Davidson are just trying to serve their consistencies.  

Australia

  • The Aussie dollar came under selling pressure again overnight as the USD caught a bid. While it’s fall was a little less than the Euro and the DXY move the reality is that with the swoon in Chinese markets, fall in copper, and growing uncertainty about the global and local economies the downsides seems to be the beacon that attracts the strongest. So, as we’ve seen for some time now the AUDUSD remains offered on any rallies of susbstance.
  • The question now of course is whether the lows around 0.7345/47 can hold or whether the next leg of the Aussies fall is beginning. I won’t overegg it, because like the Euro the lows have to give way to get the bears raging again. Add in the fact the market is now carrying its shortest position since late 2015 and you see the issue for further falls. But there are plenty of position limits left to sell based on history. So, with the copper price suggesting a fall for the Aussie to 0.7350 my sense is we’ll get a chance to see the Aussie test its lows.
  • The ASX 200 did okay yesterday all things considered. What we’ve ended up with on both the SPI200 and the Cash based CFD (below) is an inside day. Indeed we’ve got inside days everywhere on stocks. So that doesn’t help us much because it simply tells us markets and traders are waiting for the next show to drop. For me though a close below 6140 is the level to watch for cash and 6060 for the SPI. If that breaks then the ASX is in for a decent pullback. For the moment though the high does look like it is in for a while.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • Folks you have to watch emerging markets and the Chinese Yuan. What we are seeing here, particularly in the USDCNH and USDCNY in recent days is a complete capitulation of the USD bears. While I don’t talk about the Yuan much it is something I look at all the time and a long time ago I suggested the USDCNH/Y was bottoming at an important FIbo level. We’ve seen that base form and now we have a reversal.  It’s been sharp and it’s been in response to the RRR cut this week. But it’s also a response to a weakening economy, US economic strength, and no doubt official relaxation of any handbrake on Yuan weakness. I was chatting with a journo and I said last night I expect the Yuan to head back toward 6.70 or 6.80. I wonder if that will spook developed markets in a way the fall in Chinese stocks hasn’t? I think it might.
Click on me, I'll expand
Click on me, I'll expand
  • And if that is the case then the USD is in for a good period ahead. As I’ve been writing a lot depends on the data flow in the coming weeks from the US and the EU. For the moment the battle is over this outlook and at 1.1650ish the Euro is just on the low side of half way in this 1.15/1.1850 range it is establishing.

Commodities

  • Some days I’m glad I have no idea. Yesterday was one of them. Even though I said I thought Brent was going to go down the disquiet I felt over the outlook for WTI and the confusion the price action was causing me – befuddlement actually – led me to completely stand aside and ignore my bearish bias.
  • That the State Department came out and demand now imports of Iranian oil from allies just after the OPEC meeting is something I should have expected. I say that because it’s become clear the Saudis were part of the decision making process which lead the US to withdraw from the nuclear deal.
  • I need to think more about the outlook though.  I’ll write more tomorrow.

 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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