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Markets Morning - Risk assets liked that Italy didn't implode and any OPEC moves will be gradual

Market Analysis /
Greg McKenna / 31 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.37 am Thursday, May 31)

What a difference a day makes.

My hypothesis that the players in the Italian political turmoil got the shock of their lives from the market’s reaction to their posturing and the turmoil that ensued has proved correct – at least over the past 24 hours. Positions have been walked back, clarifications made,  emotions calmed, and negotiations on a political government seem to have restarted.

That means Italy may not be headed for a summer election. And that means the EU may not face a referendum on its future.

Phew, storm in a teacup, nothing to see here move along, please.  At least that’s the take markets appear to gone with last night.

Stocks in the US recouped the loses from the previous day with the S&P up 1.26% to 2,724, the Euro has gained a little more than a per cent to 1.1660, in Milan the FTSEMIB is up 2.09%, while Italian 10 year bonds rallied 22 points to 2.96%.

That better tone was aided by the news OPEC may not be in any rush to raise output at the June meeting. Taking a leaf out of the Fed’s playbook sources have told Reuters any movement in production caps will be “in a gradual and deliberate fashion”  to offset any supply shortage with the source adding “the group is not ready yet to lift full controls”.

Naturally that saw a response with WTI up 2.44% while Brent rose a little over 3%.

And thus we have Italy and oil driving a better night for risk assets. Indeed the Dow rallied more than 300 points to close at 24,667, the Nasdaq 100 lifted 0.72% to 6,976 while in Europe the DAX rose close to 1% while the FTSE was up 0.75% and the CAC in Paris dipped 0.2%. And of course that’s lifted the SPI sharply higher with prices up 41 points suggesting a much better day ahead for the ASX 200.

Inflation data out of Germany has put the ECB back in play with state results easily higher than forecast while the German national inflation rate of 2.2% was well north of the 1.8% the market expected. And this combination of an ECB which might be in play and some relief over Italy was behind the move in the Euro’s move. GBP is up just 0.23% at 1.3282 while USDJPY at 108.95 is only up 0.15%.

That USDJPY move might suggest the Aussie had a quiet night. But the relief rally and lift in risk appetite has seen the AUDUSD power around 1% higher to 0.7578 this morning. The Kiwi did even better up 1.25% to 0.6988 while the Canadian dollar also loved the risk and commodity rally with USDCAD down 1.08%. That move is interesting in the context of a hawkish hold from the BoC overnight.

Besides the move in oil base metals had a good day yesterday with nickel, tin, and lead up more than 1%. But copper lagged with a 0.2% move to $3.06 a pound. Interestingly for my other hypothesis that Bitcoin is the anti-establishment hedge it fell 2.3% last night as risk caught a bid and Italy settled down. Gold is still very quiet at $1301.    

And finally, there doesn’t seem to have been any fallout from the latest move by the US administration to impose tariffs on China. These were re-announced yesterday morning amid the Italian turmoil and even though the Chinese hit back with some belligerent comments markets are not concerned. Also worth noting was that US Q1 GDP was knocked back to 2.2% on consumer spending while the Beige Book suggested wage and price pressures are moderate in most districts and consumer spending was soft. Watch THAT space folks but the Fed seems on track for a June hike.

To the day ahead then and here at home we get the release of Private CapEx report which will feed into GDP. The market is looking for an increase of 1%. The Chinese official PMI’s are out as well. Tonight the EU CPI is out along with unemployment. Canada releases Q1 GDP while in the US core PCE prices are out along with personal incomes and pending home sales.

Have a great day   

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


  • German inflation will have the hawks on the ECB governing council all hearts aflutter. Of course inflation is mostly higher because oil has shot through the roof lately. And with little prospect of further big gains this inflation pulse will wash through. But with the German CPI of 2.2% easily eclipsing the ECB’s 2% target level the chatter will increase again on the end of QE and perhaps a rate hike in 2019. ON the end of QE that surely should be a fait accompli. It’s OMT which the ECB may have to deploy to protect Italy, and the EU itself, if the crisis becomes dire. QE’s time has passed.
  • But what’s important about the lift in inflation in Germany if it morphs into something more EU wide – we could find out tonight – is that could provide some support for a counter trend rally in the EURUSD back toward 1.19/1.20. We’ll see how the rest of the data flows, how US data prints, and how sentiment and politics toward Italy evolves.   
  • The trade skirmishes being pursued by the US administration are continuing. This morning the WSJ is reporting the US is still going after the EU for Aluminium and Steel. Oher outlets overnight say China is recruiting allies to fight the US in this battle and French President Emmanuel Macron is apparently leading a charge to change and update the WTO. And of course even though Wilbur Ross and a crew of negotiators have landed in China the Administration is still signaling that it will impose tariffs on China. This tweet from yesterday summarises the response.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The OECD still reckons global growth looks good. Personally, I reckon the US does, as does China, the other developed markets are less certain. Anyway, the organisation says we have two more years of expansion and global growth is nearing the LT average of 4%. Seriously folks that’s a brilliant number and should be held in your head when reading all the doom and gloom we get assailed by all the damn time. Sorry, small rant. You can read more at CNBC here because, you know, there are still risks like oil and trade you need to think about too.   


  • Out of cycle rate hikes by the banks in Australia in Australia. Just what the fragile household and consumer sector does not need but what it might be soon getting. That’s the take of the economics team at Credit Suisse according to a yarn David Scutt wrote at Business Insider yesterday. This is something that I’ve been watching closely and something my mates in the Australian money markets tell me they think is a real chance because of the elevated level of bank funding rates relative to the RBA cash rate. Here’s the chart from CS which looks compelling for rate hikes. Though the Royal Commision might impact the transmission mechanism a little this time.  
Source: Business Insider
Source: Business Insider
  • I was asked on Sky yesterday about the outlook for the local stock market. I said what I think I wrote here yesterday. That is the market needed to hold above that 5,977/83 zone on a close basis or t looked terrible and would target 5,937. Well the ASX200 did hold above that zone and it has now been rescued by the rally in US and other stock markets overnight. As a result the SPI is up 41 points to 6036. That’s a phenomenal bounce from support as you can see in the chart below.
Click on me, I'll expand
Click on me, I'll expand
  • Two days ago the Aussie looked like it might challenge the top of this 2 cent range between 74.10 and 76.10 cents. Yesterday the chances where it would approach the bottom of the range with the concerns over Italy and the risk off tone. Today it looks again like it might test the top of the range. You can see in those few sentences that the Aussie dollar remains hostage to movements offshore and is ebbing and flowing with the moves in overseas markets or more correctly the appetite for risk from global investors as it ebbs and flows with the risks that have arisen and seemingly faded again. But it hasn’t broken the range yet.
  • Today could be that day. Or not as may be the case. It all depends on the rat of data we get here and across the globe. Of most import is the local CapEx number for Q1 which will feed into GDP. It’s a complex number to evaluate though because we get the number that feeds into GDP – expected to be +0.7% the Reuters poll says – and we also get forecasts for future investment. So watch that space at 11.30am and then the NBS PMI’s for China. Key levels on the day are 0.7600/10 then 0.7630 and 0.7660. Support is 0.7545, 25, 00 and 0.7470/75.   


  • Are we there yet? Are we finally, after an Italian political mess induced sell off, at the point where we’ve seen the pessimistic crescendo in the Euro which can ignite the counter trend rally back toward 1.19 or 1.20? That is the question I’m asking myself this morning after the Euro rallied around 150 points from the low near 1.1510 the previous night. At 1.1660 this morning the Euro is finally pushing up and through the downtrend stretching back to 1.2410/15 from wence the sell off started back in April.
  • That, together with my own technical analysis, and a bit of German inflation suggests to me that the much awaited second wave reversal for the Euro may have begun.  Given we have fallen further than when I started to expect this the 38.2% level is much lower than previously expected and sits now at 1.1850/60. The 50% retracement level is at 1.1960. My sense is we can see the Euro head back toward these levels.
Click on me, I'll expand
Click on me, I'll expand
  • Of course such a move has implications for other pairs should it transpire. The short AUDUSD position I got stopped into yesterday looks troubling. But the USDJPY outlook is clouded. If we are heading to a Euro rally that doesn’t necessarily mean the Yen will rally as well. Certainly, EURJPY should. But the Yen’s performance will be heavily tied to stocks, US data, and the overall level of risk appetite.
  • But a Euro rally should help the commodity bloc and the Pound.  We’ll see. But a few days of benign rade around Italy and a US non-farms tomorrow night as expected could be all we need to see the Euro and others higher against the US dollar.


  • The battle has been joined at OPEC.  Some of the smaller nations have accused the Saudis of being clouded in their judgement by their new friendship with the US Administration. The Iranians are actively seeking allies at that OPEC meeting and it appears the Russians have their eye on an exit and increase in production. So it’s likely to be a robust combination when the parties get together next month.
  • For the moment the use of the word “gradual” was all that was necessary to drive oil prices higher. That, along with the fact WTI was sitting on important support gave traders the will to hit the bid and we’ve seen a solid rally in WTI and Brent as a result. WTI could climb to $69.50 before reversing. Brent has resistance at $78.35 from the old trendline. What we now have is uncertainty around the outcome from the meeting which means we are likely to establish a trading range until things become more certain – or we get an outcome.
  • Here’s WTI.
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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