Home / Blog / Market Analysis / Markets Morning - Stocks surge, USD on the back foot, ECB in play, oil has a ride

Markets Morning - Stocks surge, USD on the back foot, ECB in play, oil has a ride

Market Analysis /
Greg McKenna / 07 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.40 am Thursday, June 7)

I wrote earlier this week that after that non-farms print last Friday I was bullish risk assets. It was as simple as the reality that after all the bad news and headwinds global markets had faced recently they hadn’t cracked and that was a genuine piece of good news.

It’s taken a few days but the S&P 500 finally caught a decent bid over the past 24 hours and has finished the day’s trade in New York 24 points, 0.86%, to the good at 2,772. 2,800 remains my target for the moment. The Dow was also bid, but more so given its makeup and calculation methodology. It’s up 1.4% at 25,146. The Nasdaq 100 was fairly quite in contrast with a workman like 0.6% gain to 7,203.

Europe had an okay day given the clear message from a raft of ECB speakers was it’s on track to end QE and Italian bonds came under some pressure again. The DAX finished up 0.34%, the CAC was flat, the FTSEMIB rose 0.26% and in London the FTSE 100 was 0.33% higher at 7,712.

Locally that offshore positivity has been reflected in another decent rally on the SPI 200 which is up 30 points after yesterday’s rally on the physical of 30 points. So it should be another good day on the ASX today.

Turning to forex now and the ECB comments gave the Euro a lift and knocked the USD a little lower against most pairs. EURUSD is up 0.47% at 1.1770 as it looks inevitably headed toward a 38.2% retracement of the recent selloff at 1.1850/60. The DXY is only down 0.24% to 93.67 as the USD pushed higher against the Yen – USDJPY is at 110.19, up 0.37%. Sterling is higher but lagging at 1.3411.

Of the commodity bloc the Aussie did best with a 0.66% gain after that solid GDP print yesterday. It’s stuck under a confluence of important technical levels (see chart in main body) but is poised to break higher if the USD continues to lose ground. AUDUSD is currently sitting at 0.7664. USDCAD is down a little, but not much,  at 1.2953 while the Kiwi is up 0.16% at 0.7034.

On bond markets the push higher continued with 2’s back at 2.52% and the 10’s at 2.975%. Trade data in the US last night suggested it will be less of a drag on growth but the Atlanta Fed downgraded its Q2 GDP NowCast to 4.5%. ON the other hand Goldman Sachs said they’ve upgrade their expectation to 3.8%. Either way, that’s strong.

To commodities now and it’s been another volatile night. Both Brent and WTI are off their lows but WTI performed worst after the unexpected build in US crude inventories of 2 million barrels against expectations of a 1.8 million draw. So this morning Brent is up 0.44% at $75.71 and WTI is down 0.73% at $65.04. Gold is calm at $1296, but it hasn’t weakened with the Yen which might be a good sign. Copper has busted out big time and is at $3.25 a pound.

On the day today we get the AiGroup’s construction PMI in Australia along with the trade balance for April. Markets are looking for a $1 billion surplus. Tonight its factory orders in Germany, house prices in the UK, GDP for the Euro area, and jobless claims in the US.

Have a great day.   

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


  • I’m glad I wasn’t holding my breath, but the rally did come eventually for the S&P 500. As noted in the introduction and written here earlier this week I was bullish risk assets after the non-farms last Friday. It really was an almost perfect print which speaks to US economic strength. Things like the fact unemployment for the less educated members of the workforce has collapsed is a strong sign that the economic bounty is finally starting to be shared around and those workers will consume a fair chunk of their income so we’ll get a decent multiplier impact. Equally signs in the ISM’s – both manufacturing and services – of wage and price pressures speak to an economy that is getting tight. So bonds are right to be rising again. That makes the Fed meeting this month very interesting. For the moment though I’m targeting 2,800 as my short-term target for the S&P 500. Here’s the cash CFD chart.
Click on me, I'll expand
Click on me, I'll expand
  • The ECB dealt themselves right back into play last night with comments from various speakers adding to the notion QE is still set to end this year. That comes after the recent uptick in inflation and some are speculating the ECB is actually trying to signal to the Italian government it has to tow the line not follow its own path. I’m not sure about that line of thought – too contrived for me. But the power of ECB chief economist Peter Praet’s words last night in conveying the ECB is on track to end QE and that inflation is heading back toward target was that they echoed those by ECB members Weidmann and Knot. Not to mention Praet is often thought of as a dovish pragmatist. “Signals showing the convergence of inflation toward our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2 percent over the medium term,” Praet said. The end game is that interest rate markets are again pricing the chance of an ECB hike in 2019 and the Euro caught a bid.
  • G7, or G6+1 as Taro Aso called it earlier this week, could be very ugly. Reports are that not only is President Trump going to continue to pursue his hard line on trade but also that Justin Trudeau has raised the ire of the White House with his response to US tariffs and more are on the way. As I wrote last week, sometimes a good guy has to fight – otherwise he’s just soft. IF Trudeau is prepared to fight then I’d expect others will too. So strangely while the Chinese are doing their best to de-escalate what the Americans are doing the chance of a conflagration with US allies grows. Strange times folks and watch this space – especially if Europe, and others, thumb their nose at the US Iranian sanctions.  
  • And speaking of trade – Brussels is pushing ahead with retaliation to the recently imposed US tariffs. This could all get very ugly folks. As I’ve suggested and as the Administration has made plain in its actions this push is idealogical. As such it is unlikely to back down which also implies allies, and maybe even the Chinese, either need to roll over and have their belly scratched or fight back. I’m betting on the latter because so far on the South Koreans have folded under Trump’s pressure. But they have other, more important, goals don’t they.  


  • Yesterday’s GDP data was solid. Certainly the lack of real action in the Household consumption sector where growth was largely driven by non-discretionary items is again a notable reason to be worried about the outlook for consumers and households in the quarters ahead. But lets recognise the reality that the 1% print for Q1 GDP which saw the year on year rate hit 3.1% is an outcome worth celebrating. More importantly, that strength, and the continuing strength we are seeing reported in business sector surveys and hiring intentions suggests that the economy is still in fine fettle. For those, like me, who are genuinely worried about the impact of the fall in housing prices, in high debt, and low wages growth this reality should assuage some of our fears. As we’ve seen many times over the past decade the tide of the economy has lifted the boats.
  • The trouble, of course, is that while the economy is growing – so the pie is getting bigger, something business loves – the feeling at an individual household level is something very different. That’s best exemplified in a chart shared by Indeed.com’s Callam Pickering on Twitter yesterday. Callam wrote, “real GDP has increased by 2.5 per cent a year on average over the past decade. Per capita GDP though has been well below 1 per cent a year during this period”.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Folks this is where we get the disconnect between what business sees – bigger pie – and what consumers feel – smaller slice.  It’s because population growth remains a big part of the economic growth story. On balance this data increases the hand of the RBA which says the next move is up – but it wont be for a while
  • The Australian dollar is the best performing Major currency with a 0.66% gain. But it hasn’t been able to kick on the way it might have after the strong GDP data yesterday because it seems trapped at a confluence of resistance which it needs to get up and through if the rally is going to continue.
  • Last night’s high of 0.7673 is now the key – if that breaks we can head toward 0.7724 and if that breaks we are back at 78 cents. Two big questions, and trade today will be important, is a data based sentiment shift underway at the moment and is the US dollar weakness set to continue to allow the Aussie dollar and commodities, a change of fortune? My answer to both is yes – for the moment. But this area looks solid technically so if the Aussie fails up here we’ll see it back toward 0.7620/30.
Click on me, I'll expand
Click on me, I'll expand
  • To the SPI now and after a decent day yesterday with a 30 point rally the ASX is expected to be up again today. SPI traders have market June futures up another 23 points. That’s getting close to a break of resistance and run back to, or above, 6100. But we aren’t there as you can see on the SPI chart below. 6059 is the level to watch on the SPI and it’s 6058 on the physical ASX200. Here’s the SPI chart.
Click on me, I'll expand
Click on me, I'll expand


  • I see this US dollar weakness as a counter-trend move – wave 2 – within an overall rally in the USD which could see it head into the98-100 region in DXY terms, maybe even a little further. The reason for this view is a combination of technical and fundamentals. My sense is that even though the ECB is talking tough – or at least signaling – that QE will end this year the reality is it will be some time before it starts hiking while alternatively, the Fed is at risk of getting behind the curve. I’m not quite as aggressive as Goldman Sachs who believe the Fed will keep raising rates until the Fed Funds rate is above 3%. But I do certainly see the case for that. Indeed the Taylor Rule suggests a Fed Funds rate close to 4% at the moment.
Source: Investing.com
Source: Investing.com
  • That, and building price pressures tells me the Fed is going to continue to push forward with its hiking cycle. And there is a risk that at this month’s meeting – 14 June – they are more aggressive than many folks thing they will be. So while the weekly DXY chart fairly screams pullback. The target is between 92,52 and 93.53.   
  • And the net result of that is the Euro is on target for the run toward 1.1850/60, perhaps 1.1960. That could be the end of wave 2 before the next, large, leg lower for the USD begins. Here’s Euro.
Click on me, I'll expand
Click on me, I'll expand


  • Not only did we get  a surprise build in US crude inventories reported by the EIA last night but we also got data showing production hit a record last week while separately census data showed that US oil exports jumped to a new record of 1.76 million bpd in April. And it is this supply, along with the prospective move by OPEC and its allies to reduce the production cut which is driving prices for WTI lower. They have further downside but for this to open up we’d need to see price fall below last nights low. Technically it looks like just a matter of time. That’s particularly the case given the retest and failure to break of the old uptrend channel. Brent has different benchmark issues which are helping keep it elevated. But it too looks biased lower.
Click on me, I'll expand
Click on me, I'll expand
  • Oh, and if you are still wondering what OPEC will do later this month then look no further than this tweet from the cartel overnight showing a meeting between the Russian energy minister and OPEC Sec Gen. Throw in comments from the Indian petroleum minister that his Saudi counterpart has told him the Kingdom is indeed revisiting its policy of cutting production and it’s just a question of how much the production cut is reduced not if.
Source: Twitter Screenshot
Source: Twitter Screenshot

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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