Welcome to my daily Markets Musings.
Feedback always welcome
Market Summary (7.39am Tuesday May 15)
The S&P 500 couldn’t get up and through the 61.8% retracement level of this years big fall overnight and has actually closed a little in the red this morning. While this was happening the USD fought back from early – ECB comment induced – weakness to close largely unchanged while US 2’s and 10’s are sitting around 2.55% and 3% respectively.
Poised, ready, and waiting for tonight’s release of April retail sales in the US.
Brent crude was substantially higher last night punching up 1.67% to $68.41 while WTI lagged with a 0.6% gain to $71.10. Both moves comes amid tensions in the Middle East and after OPEC’s report last night highlighted again that while the focus is on Syria, Iran, and Israel it’s the collapse in Venezuelan crude production which is the big sleeper story in global oil markets.
Back to stocks now and the attempt to rally stalled overnight. At the open in Asia yesterday it seems traders were a little excited about President Trump’s Tweet on ZTE which seemed to suggest a cooling in trade tensions. That saw S&P 500 futures up a little less than 10 points as I excited my office. But this morning those futures are down about 1 point and the physical S&P 500 is up just 2.56 points, 0.1%, at 2,730.
The Dow rose 0.27% to 24,899 while the Nasdaq was up 0.17% to 6,964. The big three in Europe were all lower and the wash up here at home was that SPI traders took the June contract up to around 6,137 but it’s back around 6,123 now – up just 1 point.
On forex markets some aggressive comments about the end to QE and the first rate rise being quarters, not years, away from BdF boss Francois Villeroy de Galhau helped lift the Euro up to a high of 1.1995 but comments from Loretta Mester helped cause a a sagging in USD bears spirits. EURUSD is 60 points from the high now at 1.1935 – down slightly on the day. Mester said she thinks inflation will become entrenched above 2% and said the Fed is on the right path in raising rates.
So the DXY is back at 92.63 (bonds higher helped too) and the Australian dollar is back at 0.7528 (-0.2%) after again failing at the 38.2% retracement level of the recent down move in the mid 0.7560’s over the past 24 hours. The Yen lost about the same amount with USDJPY up at 109.64 this morning while Sterling is at 1.3559 – actually up against the USD. The CAD is largely unmoved with USDCAD at 1.2797 but the Kiwi was absolutely poleaxed and is now down at 0.6911 for a loss of 0.76%.
Elsewhere on commodity markets copper was lower by 0.8% to $3.07 after LME inventories rose a little while gold continues to look like a test of the range low – perhaps break – is on the cards. It’s at $1313 this morning.
On the day today we get plenty of catalysts from which we could see a decent reaction in markets.
The RBA minutes are out here at home. But it would be a surprise if there was a surprise. More interesting will be the triple treat of Chinese data with the release of retail sales, urban investment, and industrial output for April. The Reuters poll says the market has forecast 10%, 7.4%, and 6.3% respectively for that data.
Tonight also holds plenty of interest with the release of German flash GDP for Q1, EU area Q1 GDP (2nd estimate), French inflation, UK employment data and the ZEW surveys for Germany and the EU more broadly. And then of course we’ll get US retail sales for April. The market is expecting 0.3% after the previous month’s 0.6% while ex-autos expectations are for a 0.5% increase.
Have a great day
Here's What I Picked Up (with a little more detail and a few charts)
- Noted North American strategist David Rosenberg says the S&P 500 should be 1000 points lower than where it is today. He’s not exactly a perma-bear in the John Hussman mode. But Rosie is certainly a little jaundice about the outlook. MarketWatch reports that Rosie, chief economist and strategist at Toronto-based Gluskin Sheff, said this is one of the strangest securities-market rallies of all time. That’s because all asset classes have gone up, even ones that are inversely correlated. Among other things, Rosie said only 9% of the time in history have U.S. stocks been so expensive and that given GDP and the multiples stock buyers are paying more for less. Anyway here’s one of his charts.
- In other ominous warnings, Goldman Sachs says the government borrowings could fuel much higher interest rates. They are expecting the 10’s to head to 3.6% by the end of the year. Stocks won’t like that if its true.
- China is reportedly close to removing tariffs on agricultural products in exchange for relief for ZTE CNBC reports. It helps explain why President Trump said he’d work with President Xi on this company which the US government has essentially shut down for doing business with Iran while NSA John Bolton is threatening European countries with sanctions if THEY DO BUSINESS WITH IRAN. Can’t end well folks. I expect EU pushback.
- There were a few different inflation gauges out last night. In Europe, the 5/5 rate is higher while in the US the NY Fed’s inflation expectation index was higher as well.
- Brexit is a mess folks, it really is. Scottish leader Nicola Sturgeon warned overnight the UK could end up with a catastrophic no deal Brexit. I would not rule that out at all. And in the mean time, Sky reported last night that UK shopping is in an unprecedented decline with the BRC saying foot traffic was down 4.8% in March. Anyone else think Sterling could head into the 1.20’s????
- I must say I didn’t expect the rally we saw in the local stock market yesterday. We had a couple of big banks going eEx and even though the big global miners had had a very solid run Friday night the move caught me out. But I guess I didn’t get as excited about President Trump’s ZTE tweet as some others. Now that we see there might be a ZTE – Ag commodity tariff sign off I can see why some folks are a little excited. Anyway time will tell.
- Locally this 6,130/50 zone on the physical looks particularly toppish to me. But the reality is it depends on what the US and other global markets do from here. To me the SPI still looks like it is topping for this run. But as I wrote yesterday – and previously I think – it would have to fall back through 6,058 to turn the outlook much lower. Otherwise, we’re trading sideways for a bit.
- The Australian dollar hit the 38.2% retracement level again yesterday but found resistance too solid. That’s two days in a row that this level has been too hard a nut for the bulls to crack. That’s important, because even though we know that some part of the reversal last night was about the US dollar’s recovery it’s also interesting that Aussie and copper sold off together as well. And of course the Kiwi got crushed. So as I intimated yesterday when discussing the relative moves of the big spec positioning it does seem to me the bears are coming a=harder for the Aussie dollar than they are for some of the other majors. Against this backdrop while it would be a surprise if the minutes from the last RBA meeting were a surprise there is clear room for downward pressure on the AUDUSD if the minutes reflect a discussion about the outlook for housing and households and how long the RBA will be on hold for.
- Resistance is at 0.7565/70 and support is at 0.7505/6 then 0.7489.
- I had a bit of a rant on Twitter yesterday about the lazy narrative that says the USD move was just about position squaring. As I highlighted with my CFTC table in this not Monday there hadn’t actually been a lot of movement in USD positioning in real terms up to last Tuesday (that’s the date the data reflects) and indeed in contrast to fresh AUDUSD selling Euro bulls hadn’t given up at all with positioning only down 20 odd thousand from a month ago and pretty close to exactly where it had been 12 weeks ago.
- Anyway I raise this because it’s important to understand what really happened last week in the USD and why it lost a little lustre. Essentially the data this month from the US has begun to slip back relative to expectations. More particularly though the inflation data has been printing a little weaker than the market had feared. Not weaker than Fed expectations mind you, but weaker than traders had worried might accelerate the pace of Fed hikes and drive US 10’s and 2’s sharply higher. Anyway, as readers know I’m not doing this to say that I’m right and the market is wrong. We all know that often I’ve got the wrong end of the stick. My point is that we should all be careful of simplistic narratives which ex-poste fit moves to reasons. The biggest risk to the USD right now is the subtle slide in the data. Certainly the CESI for the US is still positive at +19 (while the EU CESI is -94) but it has been slipping. Retail sales tonight are very important for the next leg of the USD’s move.
- But as I’ve highlighted above, whatever the data flow right now the Fed still thinks its on track for at least another two rate hikes this year. And that helps explain why the USD fought back last night from the early weakness we saw in Asia and then after Villeroy’s comments about ECB QE and rates. Retail sales tonight are going to be huge. 0.3% or better will help the USD.
- Now, to my Forex Chart of The Day - and it’s clear after all of the above that I have to use the Euro this morning . What you see is a suggestion in the MACD and stochastic of higher levels – a suggestion I thought might take Euro back to the 38.2% level at 1.2047. But last night we see a clear reversal candle with a peak just below 1.20. That means the bears won the day yesterday and suggests some further weakness unless US retail sales are a miss tonight.
- Someone has to fill the void if Iranian oil is going to disappear out of the market and Venezuela is still struggling. Of course it is mostly likely to be the Saudis with a little help from increased US shale production – there are more than 7,000 wells ready to go. But there are few signs so far that the market gets the impression anyone is going to be able to plug what might end up a yawning gap – at least for a time. But last night’s release of the latest OPEC report didn’t suggest the cartel is in a hurry to fill that gap. Rather the report suggested any material increases in production would flow from the US, not OPEC.
- That helps explain why the Brent-WTI spread continues to blow out. It sits around $7.10 a barrel at the moment which the widest it’s been for over 3 years. And that helps explain why thre is a clear divergence in the charts between the two oil benchmarks. While the for the last three trading days WTI has stalled a little Brent has pushed on to new highs for this run. AS you can see in the chart below however, Bent is now at the top of the current channel. It looks toppish – but I don’t have a sell signal yet.
Have a great day's trading.
Chief Market Strategist
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