Markets Morning - Stocks break higher, USD and Oil prices fall, bond rates up

Market Analysis /
Greg McKenna / 05 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.44 am Tuesday June 5)

I’m not sure that I communicated it properly in this place yesterday – though I did on my daily video – that when I looked at those numbers Friday and I couldn’t help but be bullish on anything linked to growth – especially in the USA.

Of course we have still plenty of storm clouds on the horizon with Italy and its new governments policies, with the trade war between the US and its allies and with the potential for a big trade battle with China.

But against that we have the prospect of a surge in Q2 GDP growth in the US which could hit 4% or more. Indeed the Atlanta Fed is currently sitting at 4.8% on its Nowcast while the NY Fed is at 3.3%. The truth is in their somewhere but it looks like a strong GDP result.

So is it any wonder this morning that we have US stocks higher again? The S&P 500 is up 12 points for a 0.45% gain and a subtle break of the recent range top – its closed at 2,747. The Dow is also higher, up by 0.77% to 24,823, while tech has again helped lead the rally with the Nasdaq 100 up 0.8% to 7,140. Apple made a fresh record high.  

Europe had a positive night with the DAX up 0.37%, the CAC up 0.14% and the FTSE rising 0.5%. Stocks in Milan however were down 0.45% on the FTSEMIB as worries resurface about the policies the new Italian government will pursue.

The SPI 200 June contract is down 25 with September down 21. Honestly, I have no idea why. Maybe the surge of the Aussie dollar?

Bonds are higher as a result of the positivity even though US factory orders undershot – because of aircraft – with a 0.8% fall in April. Ex-transport the rise was 0.4%. So, as I write, the 2 year Treasury is at 2.52% and the 10 year is at 2.94%.

Looking at forex now and confess to being conflicted. I’m a USD bull who is hoping for a rally in the Euro and others to resell. I’m a bull on the dollar because of economic and central bank divergence but hopeful of a reversal based on the charts. The question though this morning, after the Euro failed at 1.1744 is whether that is it? More in the main body.

On balance though the USD is a little weaker at 94.04 in DXY terms and the Euro is 0.3% stronger at 1.1696, but that’s a long way from the top overnight. Sterling dipped 0.25% as Brexit concerns continue to weigh on any positive sentiment it might garner – GBPUSD is at 1.3311 this morning. USDJPY is higher as risk goes bid and US rates rise – it’s at 109.82.

Of the commodity bloc the Aussie is the winner with a 1% gain to 0.7648. That’s off the high of 0.7665 but the strength reflects the very solid dataflow from Australia yesterday which suggests the economy is in good shape.  The Kiwi came along for the ride with a 0.66% gain to 0.7025. USDCAD was buffeted by competing forces of oil and the USD lower and is largely unchanged this morning at 1.2934.

On commodity markets technical factors and genuine belief (and comment) that OPEC will adjust its production cut targets at the June 22 meeting weighed on oil prices. Brent is down 1.85% while WTI is off 1.4% to $75.37 and $64.89 respectively. Gold is quiet at $1291 while copper and base metals generally did well to start the week. The Dr rose 1.2% to $3.12 a pound.

The day ahead is an interesting one. We have the services PMI here in Australia, in China, and around the world. We also have the RBA decision and governor’s statement at 2.30pm this afternoon. JOLTS, IBD/TIPP survey, and ISM non-manufacturing are also out.  

Have a good day

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

International

  • Yesterday I mentioned the Chinese said if the US imposes tariffs then any negotiations or prospect of a deal are off. We got some more colour on the Chinese view of things from the China Daily yesterday.  Reuters reports, the China Daily said, “Trump claims that he is seeking fairness and reciprocity in the U.S.’ economic relationship with China but so far he has sought to extort gains from China using the economic advantages the U.S. has”.
  • On the US side t two people close to the negotiations told them, “the focus was exclusively on narrowing the trade deficit, with a particular focus on energy exports…the focus was not what the US business community would like to see” – Trump Ideology. More importantly though.
  • Watch this space folks, especially with China upping the ante on Taiwan and a big event on the island June 12.   
  • And I also mentioned that if you think the tariffs and trade battle are a negotiating positions you might be misguided. Or words to that effect anyway. President Trump, Wilbur Ross, Peter Navarro and others are prosecuting an ideological argument which I why I raise the following as evidence that they are not going to back off. I saw comments via Breitbart over the weekend that the new US ambassador to Germany, Richard Grenell, had said he wanted to “empower” conservative forces within Europe and that he thought Austrian Chancellor Sebastian Kurz was a “rockstar”. You can imagine how that has gone down with Angela Merkel and her coalition partners. That Grenell has diverged from usual protocols should be no surprise under this Administration. But it is a big departure from the protocols of an Ambassador and suggests to me this Administration will push and push till it either gets what it wants or hits a brick wall. G7 this week will be very interesting. Trudeau and Merkel might be that wall.
  • Something to think about with regard the recent run up in oil prices and why I think the Saudis have backed off quite a bit from their belligerent bullish push. Here’s a chart from Jesse Felder on Twitter showing the relationship between surging oil prices and US recessions. Felder said, in the tweet accompanying the chart, “Rapid oil price increases have preceded 10 of the 11 U.S. business cycle peaks since World War II; only in 1970, 1973 and 2003 – during or in the immediate aftermath of recessions – did a run-up in prices fail to herald the peak”.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And when you throw in rising job costs in the US you get a sense the Fed might be a little behind the curve. Which is why I’m still thinking definitely 2 hikes this year with a very high chance of a third. From Deutsche Bank’s Torsten Slok via Business Insider comes this chart. Slok told BI that, “The economy is not necessarily overheating quite yet. But if you look at all of the indicators combined, you do get somewhat worried about the overall picture”. Indeed you can.
Source: Business Insider
Source: Business Insider

Australia

  • That data yesterday was pretty solid. Company profits were up a sharpish 5.9% against expectations of a rise of 3%. Business inventories were also up 0.7% against a 0.1% expectation – I guess we hope that was voluntary though. And the really good news in these two releases was that the increase in profits is facilitating this increase in jobs we’ve seen in the economy which saw total wages up 0.8% for a 5.1% year on year run rate. That’s really good for business because it tells us the pies is getting bigger. But it doesn’t take into account, and is very different from, the individual wage rises we see across the economy which are running at a much lower run rate – 2.1% as we saw recently. Business and consumers are in different places, even if more consumers are actually in work. That’s a good thing.
  • Also a good thing was the 0.4% increase in retail sales. But I’m watching my caving indicator – sales at cafes, restaurants and takeaway – because it was down last month and up this one. Will we go back to a positive trend, suggesting consumers are on the way back? Or will we see a saw-tooth pattern suggesting saving before spending and thus consumer caution. Time will tell.
  • But the expectation that GDP on Wednesday now has an upside bias above the already strong expectation of a 0.8% growth rate helped the Aussie dollar rocket higher.  From around 0.7582 just before the data dump the Aussie roared to a high overnight around 0.7665 (bottom of the up channel from 2016 lows). That was just a few points above the 61.8% retracement of the fall from just above 78 cents to just above 74 cents. So last night’s high is going to be a level to watch to see if the Aussie can kick toward the top of this downtrend channel and perhaps even 78cents.  The reality, however, is the Aussie backed off with the Euro. So there is still a little, or a lot, of USD in this move. On the day resistance is 0.7665 then the channel top at 0.7680. Support is 0.7607, then 0.7589.
  • No change from the RBA expected today in either rates or rhetoric.
  • Why the ASX is pointing to a weaker open this morning after the positive performance here in Australia, across Asia, and in Europe and the US in the past 24 hours I know not. But the futures biys and girls have certainly marked prices lower as I’ve noted above. The charts don’t give me much of a guide either other than to say the bears won the day. There does look like there is some resistance in the 6040/60 region as you can see on the chart. BTW I've had a look at the correlation between WTI and the ASX over 30 and 90 days and its  around 0.48. But if you look at a chart of WTI and the SPI you can see a clear directional indicator. 
Click on me, I'll expand
Click on me, I'll expand

Forex

  • The Sentix survey in the EU showed that investor morale in the EU dropped for the fifth month in row in June. Of course the problem this time is Italy according to respondents. And that seems fair given the policy prescription the new coalition government is going to pursue. But the data again highlights the divergence between the EU and US economies and as such the ECB and the Fed. While it is true there are some bets coming back that the ECB will be raising rates and while the 2yr forward 2 yr rate in the EU is rising again the divergence is so stark that the US economy and the USD will continue to outperform.
Source: Investing.com
Source: Investing.com
  • For the moment though we are having the pause we had to have in the USD’s rally. In DXY terms it hit my target of 95.20 and has now backed off a little. The lows so far are at the 23.6% retracement level but the chance of a move to the 38.2% level around 92.82 seem reasonable if last night low gives way.
  • Whats interesting about this USD move is that there are two schools of thought. The wise sagely nodding folk who believe the USD’s goose is cooked and we are about to see another big fall in the Greenback and those of us who believe economics and policy divergence still matters and that after this Euro rally, dollar pullback, we’ll be off to the races once again. That notion fits with the Elliott Wave folks as well.
  • Here’s an outlook from one of my favourite EW guys on Twitter – Henrik Zeberg Jensen
Source: Twitter Screenshot
Source: Twitter Screenshot

Commodities

  • Oil continues to fall on the back of expectations the high watermark is in and that OPEC has reacted to pressure from President Trump and the Indian petroleum minister and will increase output at the June 22 meeting. We got that sense from the GCC meeting over the weekend and then last night Bloomberg reported Kazakh Energy Minister Kanat Bozumbayev said, “I believe the OPEC+ deal may be reconsidered toward softening. There is almost balance in the oil market”.
  • When the market is long of oil, a little nervous, and when technical levels break the result is what we saw overnight – selling. Both Brent and WTI are biased lower now. In the case of WTI it has broken the uptrend from the start of the rally in early Feb but did find support at the 61.8% level of the latest leg higher. That level, $64.47 is now the next hurdle the bears need to jump in order for WTI to head toward my target around $62. Brent needs to take out last week’s lows at $74.45 to kick lower toward $72. 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

gregmckenna.com.au

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