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Market Summary (6.33am Monday May 14)
Cause and Effect. Catalyst and reaction.
That’s the story of the last week's recovery in stocks and reversal in the US dollar after US CPI inflation was less scary than it might have been.
But it won’t have done enough to dissuade all but James Bullard at the Fed that rates are already neutral.
So the question for markets this week, with a raft of European data, Fed speakers, and US retail sales is whether there will be further catalysts to give last week’s moves in stocks and forex another leg up or rather whether it was just a short-term move driven by headline chasing robots.
Indeed if I look at US 2 year Treasuries at 2.54% and the 10 year at 2.97% I’d argue bond traders see the Fed on the path expected.
In the meantime looking back to Friday and without a fresh catalyst markets were fairly quiet. The S&P ended just 0.17% higher at 2,728. But that was after a clear break of the downtrend from January’s highs and a gain of more than 2% on the week. Likewise, the Dow has a good week closing out Friday with a gain of 0.37%. The Nasdaq 100 too broke out last week and like the S&P and Dow rose more than 2%. But ended Friday down 0.16% at 6,952.
Locally stocks have an interesting week ahead. Buoyed by the rally in US stocks the ASX was still unable to push up and through resistance. With 3 big banks going Ex this week it will again fall to offshore to keep the bid in the market. That said SPI traders moved prices 4 points higher Friday night – so they remain hopeful.
In forex markets the US dollar lost a little ground but fought back against the worst of the pressure currency traders could throw at it. The Aussie dollar failed for the second time in a week in the mid-7560 zone and is trading at 0.7545 this morning. The Kiwi is at 0.6958 and the Canadian dollar lost a little ground as oil’s rally stalled Friday - USDCAD is at 1.2780 as the week’s trade begins.
In DXY terms the USD is a little lower at 92.55 with true Euro at 1.1949 we’ll off the low for the week at 1.1820/25. Sterling is off the mat as well at 1.3546 while the sellers sat in the mid 109 region at week’s end in in USDJPY - it’s at 109.39 this morning. A rallying stock market helps.
To commodities now and oils rally stalled with WTI and Brent finishing under pressure at $70.48 and $77.12 respectively. Gold ended the week at $1311 - surely another test, perhaps break, of range lows is in the offing. Copper ended at $3.095.
Just quickly on the data front in the US Friday export prices for April rose by 0.6% (+0.3%). Import prices rose by 0.3% (0.5% exp) while Michigan consumer sentiment was unchanged at 98.8 in May.
On the day today, it is very quiet with all the economic data action kicking off tomorrow.
Have a great day.
Here's What I Picked Up (with a little more detail and a few charts)
- Italy has a new government. It’s insanely populaist and as my former colleague from Business Insider – now writing at the WSJ – Mike Bird said on Twitter this morning “This is the biggest win for populist parties in the EU in I don't really know how long, the lack of noise around it is fascinating”. Yup, agree. Here’s the WSJ’s take which begins “Italy’s antiestablishment 5 Star Movement and hard-right League party have reached an agreement on a government program, likely clearing the way for the formation of a governing coalition between Italy’s two largest antiestablishment parties”. You see what I mean?
- Here’s a different look at the S&P 500. Rather than the usual technical chart I use here’s a simple price close chart with the linear trend since 2011/12 and the 200 day moving average on it. What do you take away from a quick look at this picture? Me, I see a market that’s held both the uptrend and the 200 day moving average. So as fully priced as US stocks might be at the moment they have not lost the confidence of traders yet. It’s as I’ve written often since the second bottom in March which was a little higher than February’s low. I can’t get too bearish unless or until that 2,530/50 region breaks. How high prices can go after last week’s break is interesting – a move through and close above 2,743 would be a positive step.
- But here’s another view of US stocks from somewhat perma-bear John Hussman. He’s run a few metrics and suggests this period of good times in the US economy is often associated with all the good news being priced in with the S&P’s returning nothing in the following 3 years. You can read his whole post from his website here, but what he says is the key point is that, “ strong investment opportunities are almost always born out of discomfort. Likewise, market collapses are almost always born out of confidence and euphoria”.
- I guess we have been warned. Yes, again. But as John Authers of the FT tweeted when sharing this article himself over the weekend, “This is interesting. And yes, @hussmanjp has been incorrectly bearish for a long time - but those who disagree with him still need to explain why this time will be different”. They are folks, the most dangerous words in finance – This Time Is Different. Do you reckon? I don’t know. But I agree with Authers in the sense that Hussman is ont something and will – eventually – be right. But I’m not going to get too bearish from a trading perspective unless or until the levels I mentioned break. Anyway, here’s Hussman’s chart.
- It’s almost better to be a US adversary than a US ally these days. I say that because although US President Trump does seem somewhat indiscriminate in who he targets to make America great he does seem to prefer to deal less aggressively with the strong and powerful leaders around the planet. That naturally means China and, again, although he is not backing off on China at present he is apparently working with President Xi to help ZTE “get back in business”. It must be frustrating to be a world leader but look at the consistency in the tweet below – “too many jobs lost”. He’s a remarkable fellow this Billionaire who genuinely seems to care about workers. Remarkable.
- AUSTRALIAN HOUSING: Apparently the auction clearance rates in Sydney and Melbourne are still falling. I’m not surprised. The high water market for borrowing capacity, and thus the ability to pay the top prices has passed thanks to the combination of APRA regulatory measures and the recent Royal Commission exposing some dodgy practices in the home loan origination market. Thus, to my mind, we are effectively seeing a credit crunch at the same time folks are not so scared of missing out in the market – no rush to buy, prices are coming my way the buyers are thinking. Like any market it’s a n absence of buyers or sellers where you see tops and bottoms. So the combination of lower demand – and ability to generate – debt and buyers in less hurry means auctions aren’t clearing the way they were an prices are going to keep falling.
- Indeed my favourite chart of house prices and demand for debt – something the ABS calls housing finance lest we all get too worried about that debt word – looks ominous. The chart comes via my mate Flano at Curve Securities. Dave and I used to work together when I was Treasurer of Newcastle Permanent and I remember the abuse I got online when we first released this chart into the Twitterverse. Anyway, it’s stood the test of time and it tells a story. And yes, I had an adult beverage after Flano sent me this chart Friday.
- Danger Will Robinson!!! But, be careful what you wish for the angel on my shoulders whispers – and some on Twitter have said. But I’m a home owner and I’m a behavioural economics and finance guy. So a collapse in prices is not what I wish for. But equally, as I have written often over the past 6 months or so – I truly believe most folks underestimate just where house prices may go. And thus, where they might lead the economy. Okay, sorry, taking my Dr Pangloss pills again – putting on a happy face.
- The Australian Dollar couldn’t quite kick on Friday as the last 4 hours of trade saw the US dollar mount a rearguard action and retake some of the lost ground since the release of the benign – but on track – US CPI data earlier in the week. And until we get the release of April employment data here at home on Thursday it is the moves offshore, in the US dollar, and in commodities, which will be the key driver of the Aussie dollar. If it can climb back above the 0.7566/70 region – which is the 38.2% retracement of the recent fall from above 78 cents - then it can run toward 76 cents, maybe a little higher toward 0.7630/40. But to get much higher would need the US dollar to fall out of bed – retail sales in the US tomorrow night will be an important event in that respect. Support on the day is at 0.7520/25.
- Looking at local stocks now and we see the ANZ and Macquarie go ex-dividend today with the NAB doing the same tomorrow. So that’s a little price headwind for the index and it reinforces the price action we saw last week where the index couldn’t push up and through the top of this 6,100/6,150 region in the ASX 200. Likewise the SPI 200 is at an interesting juncture. It’s not exactly bearish – we did see a couple of retests of the recent break. But it hasn’t gone on with it either really has it? As I think I wrote last week. A break back below 6,058 would be necessary to turn the outlook substantially lower.
- A couple of things I want to highlight this morning. The first is we have not seen the position clean out that many thought we might have for the Euro. Personally, I find it remarkable that the CFTC data released Friday shows that the big speculators had hardly touched their net long Euro positions in the week till last Tuesday as the Euro fell. That puts a lie to the idea it was a position cleanout which drove the Euro lower. Rather it suggests it was a buyers strike from this part of the trading universe. Interestingly Aussie dollar traders – the big spec kind anyway – did get more short Aussie dollar before the bounce. So perhaps we ca see here the narrative of forex markets. Traders still haven’t given up on the Euro, but they are giving up on the Aussie dollar. Keep an eye on that one folks – it might prove important for the Aussie in the weeks and months ahead.
- The second thing I wanted to highlight for Forex traders this morning is the Citibank Economic Surprise Indexes (CESI’s as I write for short hand). Europe is in an appalling state, China is holding up very nicely, the UK, Japan, and Canada are all stuck well below zero but Australia and emerging markets are on the improve. EM on the improve? Probably not if you abstract Chinese improvement. Also worth noting is the slippage in the US CESI – again retail sales will be interesting this week because if the US data keeps slipping a little the USD might struggle.
- Which brings me to my Forex chart of the morning and its not related to the above. Not really anyway in the sense that most always I talk about USD pairs. Today I want to focus on EURJPY, its recent support and the chance that maybe if that support breaks then we might have seen a head and shoulder break. It looks to me like 128.90 is important support on the weekly charts. And while this recent bounce back to the 38.2% retracement level around 130.60 reinforces that level EURJPY would need to run another 100 points to negate what looks like a high chance of a retest of the lows.
- Maybe some recognition of what the new Italian government might mean for the EU project might help knock this pair lower?
- Around a million barrels of oil a day is likely to disappear from global oil markets if the US sanctions on Iran bite. That’s the conventional wisdom based on Iran’s production when the last round of sanctions were in place. But it is still far from certain that they will bite in the way intended. Germany has said it will protect its companies from US sanctions, Iran has said French oil giant Total has yet to pull out of its fields and all the while it seems the Chinese are ready to fill the void created by the US effectively banning its allies from doing business in Iran. That has to infuriate Brussels as Trump plays nice with President Xi to help ZTE stave off collapse his actions look likely to cede European assets to the Chinese in the Middle East. We’ll see how it played out but NSA John Bolton on telly in the US Sunday threatened European companies if they continue to do business with Iran. We’ll have to see how things play out in the days and week’s ahead. But my guess would be Europe is infuriated with this one.
- Looking at the price action then and while there are many strategists now falling over themselves to upgrade their price targets and explain why and how oil can trade to $100 a barrel it’s worth noting the big speculators are getting back toward the types of net longs we saw at the peak earlier this year. That does not mean prices can’t go higher. But I do wonder at the amount of available limit to keep buying.
- Certainly the fundamentals appear to be moving in oils favour and certainly both Brent and WTI are clearly in an uptrend. But I wonder if – as I intimated Friday – it’s not all baked into the cake right now. At least without an escalation in the battle between Israel and Iran in Syria. The price action suggests to me we might see lower levels. I’m wrong in the short term if we trade above last week’s highs. Here’s the WTI chart.
Have a great day's trading.
Chief Market Strategist
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