Markets Morning - Oil, the USD, and stocks higher

Market Analysis /
Greg McKenna / 07 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

Greg

Market Summary (7.29 am Tuesday, August 7)

I feel like I’ve been to this movie a few times in the last couple of decades. But the US seems hell bent on regime change in Iran and is reimposing sanctions at midnight Washington time as the 6th becomes the 7th of August.

That news, along with reports that the Saudis have reduced production saw oil prices rally overnight. But nowhere near as much as you might have thought. So WTI is up 0.51% at $68.84 while Brent is up 0.63% at $73.67 – both are off between 80 cents and a dollar below the highs overnight.

That and a more bellicose China state press failed to dent the enthusiasm of US stock traders even though their counterparts in China and much of Europe had been more circumspect. At the close the S&P 500 is up 0.36% at 2,850, with most sectors in the green. That’s it’s highest close since January 29, just 25 or so points from the record high, and a full gap fill from the physical market’s gap lower after the Volocalypse.

The Dow is up 0.16% at 25,502 and the Nasdaq 100 is up 0.55% with Facebook up more than 4% as it broke through its post funk top. Europe was a little lower with the DAX down 0.14%, the CAC down the tiniest margin of 0.03%, while the FTSE 100 in London was up a tiny 0.06%. China’s Shanghai composite and CSI300 both lost around 1.25% yesterday.

But that didn’t hurt the ASX200 which rallied nicely to close at 6,273 – still below the recent high and still respecting the solid uptrend from March.  SPI traders are more circumspect this morning only adding 4 points to yesterday’s 38 point rally on the ASX200 physical.

To forex now and the USD has had an okay night. That’s especially the case against the Pound which has made a new low for this run after more worries about a hard Brexit surfaced following comments from a spokesman for PM May saying she still believes both that a deal will get done but also that no deal is better than a dud deal. GBPUSD is down 0.5% at 1.2943.

Euro is also lower after a shock 4% fall in German factory orders in June. But the weakness has only been mild as EURUSD has respected range lows. It’s at 1.1553 down just 0.13% now. The Yen has lost the same amount despite news breaking the BoJ had intended to jack rates up this year before the market funk in Jan/Feb and a lack of inflation got in the way. USDJPY is at 111.37.

The commodity bloc has had similar moves as well with loses of between 0.1% and 0.15%. The AUDUSD is at 0.7388 despite the fall in copper of 1.36% in US trade. The RBA this afternoon will be interesting. No change is expected but any signs of dovishness will hurt the Aussie. The Kiwi is at 0.6732 and USDCAD is trading 1.2999.

On commodity markets besides the oil and copper moves gold is down again with a loss of half a per cent to $1207. It really does look like it needs to test support in the $1182/87 region. Bitcoin is still under pressure and trading $6,882 this morning. That’s down about 6.6% from Friday’s US close.

US rates are subdued with the 2’s at 2.65%, the 10’s at 2.94% and the curve at 29 points or so. Speaking of which ST Louis Fed President James Bullard said overnight that the Fed does need to pay heed to the message the curve is signaling on a possible recession in 2 years or so. But, possibly more tellingly, he seemed to support President Trump’s approach on trade saying other nations should drop tariffs but they won’t because they are “protectionist”.

On the day the RBA is the big event here in Australia. No change is expected but we hear from the RBA – including today – three times this week so if they ant to tweak or change their message this is the week to do it. So be on the lookout at 2.30pm AEST.   

Offshore the highlight is going to be the German trade data and industrial production. Coming a day after the IMF popped the Germans for their surplus and the pressure it puts on other nations this will garner some coverage. House prices are out in the UK tonight and in the US its JOLTS and the IBD/TIPP optimism survey while in Canada we get the release of the Ivey PMI.

But the big data release given the Yuan’s slide and the trade war is probably the Chinese foreign reserves data at 6 pm my time this evening.

Have a great day

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

International

  • The Trump sanctions on Iran when coupled with comments he’s made along with his Secretary of State, Mike Pompeo, suggest the US is going after regime change in Iran. This feels like a movie we’ve all seen before in Afghanistan and Iraq and would appear to go counter to the approach President Trump seemed to have mapped out for the Middle East. It’s a dangerous strategy given historical precedents and the entrenched Iranian regime.
  • But, like the trade war with China and almost everyone else the Administration is pursuing this too looks like a negotiating tactic. MarketWatch reports, “Trump reiterated that he’s willing to meet with Iranian leaders, saying ‘I remain open to reaching a more comprehensive deal that addresses the full range of the regime’s malign activities, including its ballistic missile program and its support for terrorism’.”
  • Watch this space I guess. Like trade though the rhetoric is likely to amp up before it amps down. Something for oil traders to note.
  • And speaking of rhetoric amping up, it looks like President Xi may have released the hounds of State Media who have become a lot more bellicose in the past few days. I won’t bother to give you the quotes but I would suggest you read John Auther’s take on China from the FT yesterday. He says, “Standard analysis of Chinese leadership and foreign policy tends to have a clear image in mind. China's leaders tend to be portrayed like Bond villains, evilly stroking a cat and murdering all those who stand in their way as they chart a course to world domination… The reality is different. I strongly recommend former colleague Richard McGregor's great book The Party to get a better sense of the way the Communist party comes to its decisions. It involves committees, fights over patronage, and a reactive approach to holding on to power more than it involves any grand strategy”.  
  • That’s my take too. And it’s why President Xi can’t fold. He’s too early in his President for life tenure. He needs a win, or a face saver at least, and with the President, Ross, Kudlow, and everyone else on the US side digging in that’s difficult.  
  • 5% 10 year anyone? That’s something Jamie DImon, JP Morgan CEO reckons is a chance eventually. That would really roil markets. !0’s seem happy below 3% for the moment though.
  • The IMF say that the German trade surplus contributes to trade tensions.  What is it Mr Holmes used to say to Sherlock. Anyway here’s Reuters take on what the IMF said.
  • And and and. I suggested last week the BoJ action in widening the band that 10’s can trade in was an important signal of changing policy. They haven’t been able to get inflation higher, they recognise the long terms impacts and risks on their financial system and the economy and thus are stealthily exiting. Softly, softly and all that. But a Reuters exclusive overnight say the bank was actually ready to raise rates earlier this year before the market funk and then lack of inflation derailed them. Key here is the BoJ is keen to make a change. What they are doing isn’t working so that’s exactly what they should do.  

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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