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Markets Morning - Stocks cautiously bullish despite China carnage, USD mixed, WTI higher

Market Analysis /
Greg McKenna / 29 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.45 am Friday, June 29)

The pressure on Chinese markets – the Yuan, Shanghai Comp, CSI, China A50, China sovereign CDS – continued over the past 24 hours. But the lack of contagion into developed markets, to my mind at least, is truly remarkable.  

That the world’s second-biggest economy can see its currency tank with USDCNY at ~6.64 from ~6.39 mid-month and see its 5-year credit default swap rise 19 points in the last 10 days to 79 basis points yet no one takes much notice fairly screams complacency when other markets look away.   

As an old boss used to say to me, it is what it is. Until it’s not folks. Until it’s not.  

Anyway, in the US a lack of aggressive headlines on trade wars, a bit of a bounce in financials after 13 days of losses, and a reversal in tech saw the sellers exit (except for Pharma where Amazon is making a play) and that’s seen a big turnaround in the S&P 500, Dow and Nasdaq which rose 0.61%, 0.41%, and 0.9% respectively.

For the second day in a row though Europe got the wrong end of the stick closing in the middle of the US session. As a result the DAX closed down 1.39%, while the CAC lost 1% and the FTSE was roughly flat.

Here at home the squeeze in the EOFY continued with the ASX200 up 20 points to 6,215 yesterday. The gals and guys of the SPI have added another 13 points overnight. I’m going to stay out of this till next week when I might get a chance to sell again.

On forex markets the USD was sharply stronger in early Europe but that rally faded (US Q1 GDP revised down to 2%) and the DXY is up just 0.1% to 95.32 largely on the back of weakness for the Pound (-0.3%) with GBPUSD at 1.3071 and the Yen (-0.23%) with USDJPY at 100.50. Euro is at 1.1565 up 0.1% (German CPI at 2.1%) and around 40 points off its lows for the night.    

Of the commodity bloc the CAD did best gaining almost 0.6% as USDCAD reversed back to support near 1.3250. It’s at 1.3263 as I write. The Aussie is up 0.11% at 0.7348 as the Euro’s ability to hold 1.15 continues to support it. Across the Tasman the Kiwi is still under pressure having lost another half a per cent to 0.6751.

And speaking of losses, gold is still under the pump as its grind lower continued overnight. It’s at $1248 this morning down around 0.3%.  Copper too is down, losing more than 1% to sit around $2.95 a pound this morning. Oil was higher though as worries about Iran and other supply disruptions continue to drive the buy side. WTI traded to $74.03 a barrel – the highest level since November 2014. It’s at $73.30 though now, up 0.74% for the front contract. Brent is less excitable at $77.69, up 0.1%.

Elsewhere US 10’s are trading 2.84%, the 2’s are at 2.52% and Bitcoin is still holding the important $5,950/$6,000 region. It’s at $6,080 – down 0.75%.    

As we close out the financial year here in Australia today RBA credit data might be interesting but not market moving. South Korean industrial production and retail sales might give a lead on next weeks PMI’s across the globe while Japan repots production, unemployment, and Tokyo CPI data.

Tonight in Germany we get import prices, retail sales, and unemployment while we also get Euro Area inflation. In the UK it’s consumer credit, current account, final Q1 GDP, lending and business investment data.  In Canada its PPI and in the US it’s PCE prices as well as personal income and spending.

Have a great day and weekend.

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


  • Are Europe’s banks signaling something about the outlook that currency traders are missing? That’s the question Holger Zschaepitz alluded to on Twitter when he shared the chart below and said the “Euro [is] still underpricing European risks, RTRS reports citing big drop of European Banking Index”
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And while I’m talking about risks the fall in Emerging market currencies, in sovereign CDS’ climbing continues. I noted the pressure on China in the introduction and I wanted to highlight something Bloomberg’s Tom Keene said to a interviewee a couple of days ago. Keene asked why everyone is trying to be so sanguine about EM when moves like we have seen recently always seem to end up in a crisis. It’s a good question. I don’t know the answer. But worth remembering the Fed is still both hiking and reducing its balance sheet. USDINR hit a new high last night and EM currencies are still under the pump. It’s all good though folks. Nothing to see here, move along, please.
Source: Bloomberg
Source: Bloomberg
  • Oh and while I’m on a downbeat,  make sure you read David Scutt’s piece from yesterday over at Business Insider saying A group linked to the Chinese government has warned of a looming 'financial panic'.  And while I’m on China authorities are cracking down on property speculation Reuters reports as it “steps up property market scrutiny in 30 cities”.
  • And even as China opens up more industries to foreign investment it said yesterday it will, “closely monitor the legislation process and evaluate its potential impact on Chinese companies”. Commerce ministry spokesman Gao Feng also said, “China does not agree with (the U.S.) tightening foreign investment conditions using national security as reasons”.


  • The Australian dollar is holding up this morning on the back of the improvement in risk appetite with US stocks higher overnight and the reality that the US dollar’s surge has stalled. The headwinds I have been writing about are unchanged. But the Greenback is a big factor in the Aussie’s outlook and on that front it seems to need further impetus to drive it lower. As David Woo suggests below the market is still underpricing the strength of the US economy and thus the real policy and economic divergence that is coming down the pipe. With the CESI for the US slipping below 0 (-2.3 this morning) for the first time early October 2017 the Greenback needs strong data in the next week to support it. Failing that the Aussie could find its feet and have a counter trend rally. But that’s what it would be, countertrend.
  • On the day 0.7359/64 looks to be a critical level for me with 0.7384 above that the key to a run back toward 74 cents. Overall though the downside still beckons through time.
  • Levitators got to levitate. And so it is the local bourse is still marching to the beat of its own drum. I’m not going to bother to pretend I have a fundamental clue why the index is outperforming the globe so strongly in the current environment. I don’t for a moment buy the idea that Australia is a safe haven in this trade battle. But I can’t argue with the price action – the tension I often talk about between my rhetorical and trading selves. So suffice to say the SPI 200 looks toppy up here. It’s forming a nice little pattern that could lead to a break lower. But it hasn’t broken yet. SO I sit and wait.
Click on me, I'll expand
Click on me, I'll expand


  • David Woo – BoA’s head of Rates and FX strategy told Bloomberg he’s never been so bullish n the US economy. I have to say I hold a similar view to Woo when he says, “that’s the fundamental story here, which is that this economy is growing gangbusters and the market remains in denial”. Yup.
  • Of course, that has implications for markets. It implies that the Fed WILL keep hiking rates because it will need to. It implies that bonds will continue to have an upward bias. It implies that earnings for US companies should do okay. And it implies that the US will stand out as an investment destination as the desynchronization of global growth sees other blocs and nations lag behind. And all that means the US dollar should continue to rally. Bloomy says Woo reckons – as I do – that if trade tensions escalate further it will be European and emerging markets and economies which will bear the brunt of the damage. Thus the Greenback will surge. Or it might surge anyway says Woo because if trade tensions don’t escalate, “this economy is going to go crazy and I’m telling you the dollar is going to surge because we’re going to see a massive repricing of the federal funds rate”.   
  • For the moment though while Euro is holding above 1.15 the DXY looks stalled with a somewhat indecisive weekly candle.
  • It strikes me we’ll have a better indication of whether the USD needs another leg lower before it heads higher or whether it's about to burst higher in the next two weeks as the next round of monthly data is released across the globe.
Source: Investing.com
Source: Investing.com
  • USDCAD and GBPUSD look interesting though. I’ll talk more about them in my daily video a little later this morning.


  • The residual impact of that monster draw of 9.9 million barrels together with further concerns about Iran after the State Department again reiterated it’s seeking to get imports down to zero by November combined to drive WTI sharply higher once again overnight. Brent is less impressed than WTI but in many ways that reflects the repricing of the spread – now $7.15 from $11.25 in early June - between the two benchmarks last month as Brent rose higher and faster than WTI.
  • But the question I’m asking myself this morning with this backdrop is, could that be it? Has the run above $74 overnight in WTI exhausted the bulls for this run? I think it might have given the sharp move in the past three days but the original Fibo projection rom back in April was $75.60 so maybe I’m being too pessimistic. But as you can see in the chart below the weekly channel comes in around $74.80/90. So we are getting close. I don’t have a signal yet to sell. But I’m on the look out.  
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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