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Markets Morning - Stocks stumble and we might have just seen the US Administration's glass jaw

Market Analysis /
Greg McKenna / 26 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.46 am Tuesday June 26)

Here’s the takeaway.

The White House, and especially President Trump’s belligerent trade team, may have a glass jaw.

I say that because while it is happy to bluster and threaten other nations when the Dow drops 500 points on the back of a story that the Administration is going impose restrictions on China – one consistent with previous on the record comments – we see Treasury Secretary Mnuchin and trade attack dog Navarro walking things back.

Everyone has a plan until they get punched in the mouth.

The washup was that after Mnuchin tried to walk the market back and it failed the White House rolled out Navarro to say there are no plans on investment restrictions on China and the market slide was an “overreaction”. He also channeled his boss saying “things will work out with China”.

Glass jaw.

The comments certainly helped drag US stocks higher and sent USDJPY soaring as the robots followed their headline chasing Algo’s. But human’s are not so convinced yet. So, at the close the S&P 500 was 1.37% lower at 2,721 for a fall of 38 points but that was a reasonable distance from the low around 2,698. The Dow closed 328 points lower at 24,252 while the Nasdaq 100 dropped 2.2% as the “maybe not a safe haven” meme seemed to infect tech now folks fear China will “punch back”.

Naturally, the fear of trade wars hurt European stocks as well. More so than Asia strangely, but I guess that’s because Europe’s close was when US markets were still under intense pressure. Thus, there may be a catch-up rally this afternoon when Europe opens after the DAX fell 2.46%, the CAC dropped 1.92%, and the FTSE in London lost 2.24%.

Here at home SPI traders have had a dose of the reality the ASX can only stand-alone form global markets for a short time. September futures are down 59 points as a result pointing to a soft day ahead.

To forex then and the US dollar suffered as sentiment shifted against the Greenback in the wake of the trade war news. My sense is the US economy is still the better place to be and thus the USD will recover. But at every turn in the trade war headlines on escalation have initially been met by dollar selling.

As a result, the DXY is down 0.2% at 94.32, the Euro is at 1.1703 up 0.4% just a little below the high of 1.1712. The 1.1730/1.1850 should again pull the Euro’s rally up. USDJPY fell to 109.36 but it’s back at 109.76 now after a leap to 110.03 on the Navarro comments. GBP is at 1.3279, largely unchanged.

On the commodity bloc the Aussie has done better than it should have given the sell-off in risk and global growth assets. Copper dropped 1.35% to $2.99 a pound which is suggestive of a short-term AUD level around 0.7350. Yet the batller is hanging tough with AUDSD at 0.7409 down just 0.39%. The Kiwi is off just 0.16% at 0.6895 while the CAD gained 0.2% to 1.3294.

Elsewhere on commodity markets gold fell again, losing 0.2% to $1,265. I’ve still got a test toward $1235/40 penciled in. Oil was lower too, but Brent recovered from the early selling in Asia to post a 0.78% loss to sit at $74.96. WTI did better in Asia but played catch up overnight and has lost 0.71% to $68.09.

A day of turmoil saw US rates strangely quiet. The 10 year is at 2.88%, where it was in Asia yesterday and the 2’s are at 2.54%. Bitcoin gained from the carnage though, respecting this important $6,000 region with a 3.4% bounce back to $6,273.

On the day today, it will be interesting to see how Chinese markets – stocks and commodities – react to Navarro’s comments. That will be a scene setter. Here at home it’s a speech by the RBA’s Tony Ricj=hards at a payments conference that’s the highlight :S Offshore it’s quite but I will be watching the Richmond Fed manufacturing index, and the speeches from Bostic and Kaplan.

Have a great day, it might not be as tin hat as it looked a few hours ago.

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

 

International

  • As noted above Treasury Secretary Mnuchin was out denying the news the Administration is targeting China. As is the want of his boss Mnuchin used a Tweet (because that’s where the media is looking and thus will report it I’m guessing). Mnuchin didn’t deny that there are new restrictions coming rather that they are not China specific.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Which may be why the market ignored him. The quibble was with the specifics of the WSJ article on China, not the reality there are new rules coming.
  • Which brings me to Navarro’s market moving comments. Two things are worth noting here. First, what he said is the usual BS and bluster we’d associate with the “she’ll be right, everything is awesome” narrative of this administration. For example Navarro channeled his boss saying the economy is “off the charts” with “nothing but blue skies ahead” and that “there’s a misunderstanding about Trump’s trade policy” and that “everything will work out fine” with China. The second point worth making is that Navarro contradicted Mnuchin and in doing so made a patently untenable comment when he said, “there's no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan”. Yeah right.
  • Navarro also reacted to news in the FT  that Harley Davidson is moving some production to Europe to get around EU retaliation by saying more Harley’s “will be produced in the US under Trump’s trade policies”. The President then had a pop at Harley in a tweet. My sense is this will rock the Administration more than any aggression from other nations. If team USA fractures then what's Trump got? Will he turn on corporate America??? Watch this space folks. Indeed, as I noted in a Twitter chat US corps have a different agenda to President Trump. He is seeking to deconstruct their profit extraction chain and reinsert US workers into the equation. So they'll fight back, when and where possible to maintain margins
Source: Twitter Screenshot
Source: Twitter Screenshot
  • I’ve focussed on the US side of the Trade dispute, but what about China’s President saying the US needs a punch in the face? Okay I’m paraphrasing, ut that’s the essence o the message he’s given a bunch of CEO’s the WSJ reports.  “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” the Chinese leader said, according to the people. “In our culture we punch back.”
  • Now to the price action and Charlie Bilello shared a chart showing the Dow finished below the 200 day moving average for the first time in 2 years. The S&P found support at the 100 day moving average overnight. But this is something to watch.
Source: Twitter Screenshot
Source: Twitter Screenshot

Australia

  • As I alluded to in the introduction it’s my view the AUDUSD has outperformed the market funk in terms of both risk and growth asset falls overnight. Certainly the loss of 0.4% is nothing to sneeze at but it still seems a somewhat elevated level in the very short term relative to the overnight moves and escalating tension together with fears about the outlook for global growth. Of course the USD’s impact on the Aussie can never be underestimated. And its weakness is in no small part what is keeping the Aussie above 74 cents. But as this chart of the short moves in the AUD and US High Grade Copper (HGc1) futures shows the Aussie could easily drift back into the mid 73 cent region on the back of this relationship.
Click on me, I'll expand
Click on me, I'll expand
  • On the day then,  I’m watching support at 0.7395, then 0.7373 and the low 0.7440 region. Topside it’s 0.7445/50 then 0.7472/77.
  • 6135 has given way overnight in the SPI 200 and that is a big reversal for local stocks. It was always a matter of for how long the ASX could beat its own drum while other markets pulled back. It’s back in the range now and the big level I’m watching on the SPI is 6,062. If it breaks the SPI could fall toward 6,000.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • The US economy is still doing quite well it seems while the Ifo in Germany last night saw the chief economist for the group say the boom is now behind the nation. The simplicity of that divergence in economics and what it will render with policy is for me the key medium term theme which while dominate EURUSD trade and by extension will dominate overall trade in most USD pairs. Of course the drivers of the other side of the cross, the Euro, the Aussie, the Pound, the CAD, Kiwi, the Yen and so on are important. But the USD will continue to play an outsized import to each pair.
  • That’s why I’m a little concerned about what J Powell said about investment last week and am watching the dataflow in early July very closely. But this chart I saw in the WSJ’s Daily Shot of US economic optimism does give me an indication that the US expansion is continuing apace. And that means while this USD swoon could continue for a little bit, the overall trend to strength remains intact.
Source: WSJ Daily Shot
Source: WSJ Daily Shot
  • Today’s Forex chart of the day is the USDCAD. I was trolling through my charts yesterday and stumbled on this one. It shows the long term move in USDCAD. Mission was accomplished with the run above my target of 1.3350 last week so 1.3250 as a key and critical level to watch.
Click on me, I'll expand
Click on me, I'll expand

Commodities

  • Just quickly on oil as I’ve run out of time this morning. Two things appear key to me. Any slowdown in the global economy, or perceptions of a slowdown, will hurt expectations of demand growth and thus could – or should – weigh on oil prices. Equally though while the market reacts to OPEC’s increase in production it’s worth noting there is not a lot of ability for OPEC members besides the Saudi’s to increase production. So with infrastructure bottlenecks in the Permian basin also restricting growth in US productive – or at least shipping – capacity there are still plenty of oil bulls.
  • The battle rages and my guess is still that Brent needs to retest the $71.25-50 to $72 region to measure the true level of support, or not as may be the case.   
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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