Welcome to my daily Markets Musings.
Feedback always welcome
Market Summary (6.39 am Tuesday July 3)
Stocks in the US closed on their highs this morning as tech recovered and traders seemed to react positively to comments from President Trump that the US and Europe will be talking soon on trade and that the US isn’t planning anything on WTO now. Though he did also say if the WTO doesn’t treat the US properly “we will be doing something”.
Anyway, whatever the reason – and I’ve probably just fallen into the trap of fitting the narrative to the price action – the key is the downside, to and below last week’s lows, has been resisted. So while stocks still look a little tenuous they have held for now.
So at the close, even though China’s bourses had another big down day, even though the CAC (-0.88%), DAX (-0.55%), and FTSE (-1.17%) were all lower US markets finished in the black with the S&P 500 up 0.3% at 2,726. The Dow was 0.15% higher while the Nasdaq 100 rose 0.81%.
That’s left the ASX 200 poised for a positive open with the September SPI up 21 points after yesterday’s dip to 6,177. Still very strong despite the drop in commodity prices over the past 24 hours.
On forex markets the Euro came under pressure from trade tensions and retaliation (EU to impose up to $300 billion in tariffs), manufacturing PMI’s slipping (EA 54.9, 18 mth low) , and concerns about the stability of the German government and Angela Merkel’s tenure as Chancellor. EURUSD fell to 1.1591 but it’s back at 1.1642 now after news broke the immigration impasse between the coalition partners appears to have been resolved.
Sterling too was under pressure as it becomes clear a negotiated Brexit is slipping away and as the USD rose a little (ISM mfg 60.2, BOOM). GBPUSD is at 1.3141 off a low of 1.3095. USDJPY is up 0.2% to 110.85.
For the commodity bloc the Aussie and Kiwi were belted in the past 24 hours as trade tensions and commodity weakness weighed. The Aussie is down 0.89% at 0.7336 off a low of 0.7315ish. The Kiwi is at 0.6713, down 0.8% and the CAD has lost 0.4% with USDCAD up at 1.3187.
On commodity markets, copper is down again with a loss of 0.7% in US trade with HGc1 at $2.93. Oil is lower too. And while the front WTI contract only lost 0.3% to $73.95 it’s worth noting the 2nd contract lost 1.15% and Brent’s front two contracts lost 2.4% with September Brent at $77.33 this morning. Gold is down again losing 0.84% to $1241. It’s now in a very important zone of support.
US 10’s are at 2.87%, the 2’s are at 2.55% and Bitcoin continued it’s weekend surge bouncing to $6,610 which is around 12% higher than Saturday morning’s New York close.
On the day today, we get the RBA meeting outcome and statement from governor Lowe. No change is expected in the rate but we’ll all be hanging to see if there is a shift in the rhetoric given falling house prices and demand for debt. Building approvals are also out. Elsewhere it’s German factory orders, EA PPI and retail sales as well as US factory orders and IBD/TIPP economic optimism index out.
Have a great day
Here's What I Picked Up (with a little more detail and a few charts)
- Markets were thin last night. Apparently, it took until 20 minutes before the close for the S&P pit to hit a million contracts. That doesn’t mean I’m trying to discount the rally. It simply reflects the fact it’s summer, it’s a holiday week in the US, and markets have thinned out quite considerably. That’s important for two main reasons. First, many investors will have set their books for caution as they relax a little through the northern hemisphere summer and as the trade and tariff battle continues. Remember China tariffs come into force this Friday. Second, the price action continues to look a little wobbly on the S&P and many global indexes. As I highlighted yesterday the key levels haven’t broken yet – so I won't over-egg it. But a slip in the S&P 500 below last week’s lows could open the floodgates from a run toward 2,600 at a minimum. That would drag other markets with it.
- Angela Merkel dodged another bullet this morning. The deal to hold border camps to process refugees seem to have alleviated the existential threat here coalition faced and so Merkel retains the Chancellorship and Europe’s political stability experiences another near miss. That’s been good for the Euro this morning. But it is worth noting that Joachim Lang, director general of the Federation of German Industry (BDI), told CNBC’s “Squawk Box” on Monday that “there is a thunderstorm coming from the west of the Atlantic, and we should all prepare for this in Europe and we should work on these issues (around trade)”. We saw that in the manufacturing PMI last night.
- And germane to that discussion, Volkswagen effectively said it would do a Harley Davidson if necessary and move production behind tariff barriers to access the customer. That’s the key result of this battle if it becomes entrenched. The bet President Trump and Wilbur Ross are making is that the USD is the net winner in that battle. Or that they genuinely want zero tariff barriers which is a regime they believe US companies will win from production at home.
- It’s RBA day today. No one expects the bank to change rates but there is growing room for a shift in rhetoric given the headwinds that appear to be strengthening for the economy. Readers know I have a jaundiced view on the outlook for housing, households, consumers, and thus the economy. This morning the AFR has a note saying tat economists are now starting to get concerned that housing is going to fall further than they thought. My sense is they still haven’t factored in the kind of price fall I believe is coming. So we’ll see further recalibration as the Kouk implies in this tweet below. The question is whether the RBA is yet ready to recalibrate its own expectations or whether it will wait till August and the SoMP which comes out a week after the next meeting.
- Looking at local markets and the weakness of the Aussie dollar continued overnight. Concerns about China, the local economy, commodity prices, and the USD are all part of that overnight weakness we saw in the AUDUSD price again overnight. It bounced off the ~0.7315 low along with the Euro which tells us there is still a large element of USD strength and weakness in the Aussie dollar’s moves. But the downtrend remains in place for the Aussie and the inability to break and hold above 0.7445/50 suggests further weakness to come. Last night’s low and the 73 cent level is now the key support that must hold. Resistance is 0.7393.
- SPI traders are once again ebullient. Okay that’s probably over-egging it a bit. But this market remains resilient that is for sure. Rio, BHP, and global miners got belted overnight as commodities slid. Yet the SPI is up again with a 21 point gain on the books this morning. When I look at the charts now my technical self is starting to align with my rhetorical self. That is that a fall is coming. We have a nice pattern though and the uptrend is still holding. But if 6,098 breaks in the SPI, 6,090 in the ASX200 then there is a big fall coming. ON the cash basis today 6161 is the key.
- I’ve highlighted my belief for some time now that it’s relative growth and central bank policy stances which will be key to the outlook for the USD. And in Monday’s note I also highlighted that this week’s data flow is going to be important. SO it’s worth noting that last night’s divergence between the ISM in the US and the Euro Area manufacturing PMI highlight the different paths these two economies seem to be on. Euro Area is the blue bars and the ISM the black line.
- Of course trade tensions, politics, USD availability, and many other factors – including technical and the ability of EURUSD to hold 1.15 – are also important drivers of the Euro and the US dollar more broadly. And certainly once we get the Fed minutes Thursday and US non-farms Friday we’ll get a better feel for the real divergence we have in an economic and central bank policy sense. On this front it’s worth noting the Atlanta Fed’s GDPNow guesstimate of growth was revised back up overnight to 4.1% from 3.8% last Friday. Data folks, data.
- For the moment though techncials are fundamental. And nothing appears more fundamentals to the outlook for the USD than the 1.15 level we’ve all been watching for some time now. It’s ability to hold didn’t help the Aussie last night though as it made another new low for this run. Likewise the Kiwi. But structurally if, or when, the 1.15 goes the floodgates will open for the USD to surge and that will knock so many forex pairs for six. On the technical front though the move in Euro has held below the current downtrend. Here’s the chart. Something has to give, soon.
- Don’t be fooled by the small, 0.3%, fall in the front WTI contract. The move in the 2nd WTI and both of the front two Brent contracts are a better indicator that President Trump’s tweet about the Saudis helping to alleviate high prices has found some resonance with the market. There is no sneezing at those Brent and second contract WTI moves. But the front end is where most of the day to day speculation is done in WTI and on that front, the market bounced back strongly from the lows. For the moment though there still appears to be significant technical resistance overhead for WTI. Here’s the chart.
- And it’s worth noting that the summer driving season is underway in the US but that the growth in miles traveled has slowed and actually slipped back last month. As Reuters John Kemp wrote in a tweet accompanying this chart, “U.S. TRAFFIC VOLUMES have slowed at the same time that gasoline prices have risen”. That’s how its supposed to work. That’s important for prices going forward and what’s priced in.
Have a great day's trading.
Chief Market Strategist
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