Markets Morning - Stocks up again but commodity currencies drop, oil mixed

Market Analysis /
Greg McKenna / 21 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.44 am Thursday, June 21)

After recent weakness global stocks were higher overnight driven by another rally in tech, a lack of fresh trade tension headiness, some M&A news in the US, and the reality that traders have trained themselves to buy the dip because for so long now it’s worked.

So this morning after 3 or 4 down days the S&P 500 is up 0.17% this morning at 2,767. The Dow dipped 0.17% but the Nasdaq 100 fairly soared rising 0.85%.

I understand the lack of fear. We simply haven’t seen more aggressive headlines in the past day and traders and investors are clearly betting this is a negotiating tactic from the White House. But a Symantec report suggesting China is pursuing aggressive trade and technology espionage suggests the US will not back off anytime soon. Equally, we heard from a number of central bankers last night in a candid appraisal of the risks and changing outlook for the US and global economy which may be resulting from the trade tensions.

So a sanguine outlook may end up a little to Panglossian and not cautious enough. To wit, Bridgewater’s Ray Dalio Tweeted overnight that the US is playing Chicken with China right now.

Anyway, as Amos Tversky said, better to be an optimist than a pessimist. But the performance of the Aussie dollar might be a warning. Just saying.    

Across the Atlantic stocks in Europe were tentatively higher with the FTSE up 0.3%, the DAX 0.14%, but the CAC dipped 0.34%.

Here at home the gangbuster rally on the ASX continued with an amazing close of 6,172 as the banks lifted materially. The 70 point rally was stunning, as was this decade high close. Overnight the futures traders are betting we have another good day with the September SPI up 9 points. My technical self says hang on and enjoy the ride. My rhetorical self says, run away fast.

On forex markets, the commodity bloc is under pressure once again. The Australian dollar is down 0.19% to 0.7367. If you heard some of what RBA governor Lowe said last night in Sintra you’d be forgiven for thinking it should be substantially lower. The Kiwi too is down at 0.6861 having fallen 0.55% - good luck the NZ PM who’s on leave now for the birth of her first child, good stuff. The CAD is also a little lower with USDCAD up 0.2% to 1.3312.

Euro is a little lower as well, but only slightly, even though Ewald Nowotny seemed to cheerlead the Euro’s recent fall against the dollar. EURUSD is at 1.1572. USDJPY did better though gaining 0.3% to 100.36 while Sterling was quiet waiting for the BoE tonight – it’s at 1.3174.

The two big oil benchmarks I watch – Brent and WTI – continue to dance to different tunes. A big draw in Crude inventories in the US helped WTI gain 0.68% to $65.34 while Brent was lower as it appears even Iran can be persuaded there should be – or will be at least – an increase in production out of this week’s OPEC and non-OPEC meeting. Brent is down 1.1% to $74.26 as a result.

Copper hasn’t moved, it’s at $3.05 while gold continues to be pressured losing another $6 to $1268. Bitcoin rallied 0.8% to $6,740 - $7,100 looks important.

On bond markets US rates are rising again with the 10 year Treasuries back at 2.94% and the 2’s at 2.57%.

The BoE dominates the data calendar on the day ahead. Treaders will be interested in the outlook and what Mark Carney and his colleagues have got to say about where the economy is right now. This will be important for the Pound which looks biased back below 1.30 against the Greenback. Other than that it’s fairly quiet save for Kiwi GDP which is out very soon.

Have a great day, enjoy the solstice.

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

International

  • The market is, I believe, underestimated what the Trump Administration believes is at stake with this trade battle with China. While the battle is over trade right here and now there is more at stake which suggests Trump and Wilbur Ross won’t back down easily. At the heart of the issue is intellectual property and its theft. IN the intro I hinted at a Symantec report which highlighted Chinese actions. Now, while I haven’t been able to read the full Symantec report Horizon Investments Greg Valliere’s daily email says the Symantec report,  

“ uncovered, according to a summary in today’s Politico, a vast Chinese espionage campaign against U.S. defense contractors and telecommunications companies – stealing U.S. intellectual property – that has expanded into a "malware" network that not only spies on the U.S but seeks to disrupt American companies. The controversial ZTE may be involved.

WE'VE TALKED WITH NUMEROUS U.S. BUSINESS OFFICIALS in the past year who have described to us the new products they have developed that have turned up as counterfeits in China within weeks of introduction on the U.S. market. This goes way beyond bootlegged copies of "Game of Thrones"; it reflects a lawlessness that Washington is determined to confront.

THE WIDESPREAD CHINESE THEFT of intellectual property from the U.S. and other countries has aroused strong bipartisan outrage in Congress. That's why the Trump Administration has support in the China dispute, despite growing anxiety in the U.S. farm belt over soybean exports, and a general concern that Chinese products like cell phones will cost more as tariffs rise.

  • It’s also why the Administration won’t easily back down. We may not have had further worrying headlines for traders to react to last night. But this battle could be protracted.
  • That’s something central bankers seem to have picked up on with Fed chair Jerome Powell saying overnight, “Changes in trade policy could cause us to have to question the outlook… For the first time, we’re hearing about decisions to postpone investment, postpone hiring”. Mario Draghi was a bit worried as well. “It’s not yet time, in a sense, to see what the consequences on monetary policy of all this can be,. There’s no ground to be optimistic on that,” Draghi said. :S
  • Chinese authorities went all out to calm market fears yesterday. The big websites and newspapers essentially said nothing to see, please move along. It didn’t look like it was working early with the SSEC down in early morning trade. By the close though things had turned around and the SSEC was 0.3% higher while the FTSE China A 50 ended down 0.1%. I mention this because it strikes me that China will not let its markets, and thus its population of traders and investors, suffer under the weight of the Trump tariffs and this trade war. So I’d expect further easing when required by the PBOC and official assistance when needed.  
Click on me, I'll expand
Click on me, I'll expand

Australia

  • So what are you going to do about it Phil? That’s my question for RBA governor Lowe who last night sounded very much like it’s time for the RBA to actually change its tune on the outlook for interest rates. While Lowe told the panel he is cheerleading wage rises here in Australia and that the business leaders he talks to recognise higher wages would be good for the economy he also said that they all say “but not in my business”. The reason for the caution is competition he said. Having identified wages as a key to lifting inflation here in Australia that sounds very much like rates aren’t going up anytime soon. Indeed, Lowe also said “inflation might just be a bit lower than we’d like for a while,” adding “that’s difficult for the central bank to accept.
  • And that begs an answer to my question above of cut rates. But – AND THIS IS VERY IMPORTANT FOLKS – he’s not going to cut because he recognises that for the past 20 or 30 years the mechanism to restart growth has been cutting rates to get folks to take on debt. “To try to get back to 2.5 (the middle of the RBA’s inflation band) very quickly , it would be mainly through people borrowing more money, and having higher asset process – I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations,” Lowe said.  And that is his answer to my question. Phil Lowe and the RBA are not going to do anything, no rate hikes, no rate falls, they are clearly going to just wait it out and hope wages rise, that inflation does too, and that consumers come out of their little funk.
  • The Australian dollar is struggling again and that could be a warning to other markets. Of course governor Lowe’s comments last night which showed clearly rates are on hold for a long time may have weighed a little. But I’m discounting that on the basis that the Kiwi and the CAD are also under pressure. What this triumvirate of weakness suggests – along with copper’s big reversal in the past week – is that there is a wholesale rerating of growth being undertaken by global investors. It’s evident in the under performance of metals and mining shares as well – something I highlighted in yesterday’s AUDUD note.
  • So with yesterday’s high just struggling to get above 74 cents to 0.7408, and with the price now back down around 0.7370 it seems to me that the low from a couple of days ago is likely to be tested again. If that level – mid 0.7340’s – then its back below 72 cents for the Aussie.
  • My trading self has been gloating at my rhetorical self.  But my rhetorical self doesn’t care because it knows my trading self is just a momentum junkie and this rally can’t last. Then again though, my rhetorical self thought that yesterday before the ASX’s stonkingly good 70 odd point rally to 6,172. My trading self says that opens up the prospect of the move above 6,300 it talked about in this space a few days back. My rhetorical self has noted – on Sky yesterday with Nadine and Henry for example – that the bid came back into the banks last week when the RBA governor made it clear that rates are on hold for a very long time here in Australia. So if the buyers are back chasing the banks for yield and my trading self suggests there is a little more upside, then the ASX 200 can continue to outperform the S&P 500 for a little bit more – but not too much this historical relationship suggests.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • Austrian central banker Ewald Nowotny seemed to very subtly jawbone the Euro last night. He said that, “What we have seen is that markets are interpreting the developments in such a way that there will be an increasing interest rate differential and that this will have an impact on the exchange rate”. And he’s dead right. It’s a theme readers know I have been banging on about since the Euro was up on it’s highs for the year and data was slipping but no one seemed to care.
  • And it is against this backdrop that the US dollar will continue to make gains against the Euro and other currencies as the United States economy continues to power ahead of other nations and blocs and as the Fed continues to gradually raise rates as J Powell again reiterated last night.
  • From a trading perspective though the DXY needs to break and hold above 95.20 and the Euro needs to fall below 1.15 to kick us to the next level.
  • Sterling traders will be glued to there terminals tonight as we await the Bank of England and what they do and say about the outlook for the economy. They aren’t expected to move rates tonight but the question is whether they’ll be hinting that a hike is still their next play and whether that hike may come as soon as August. With all the Brexit shenanigans hurting confidence and the economy I wonder if the BoE won’t simply holsters it weapons and wait till very late this year or maybe 2019. Rates are certainly low – but not raising them until the dust of Brexit and the trade war settles would risk an own goal.
  • If that’s the message then GBPUSD is, as the charts suggest, biased back below 1.30. That’s a level I’ve been banging on about for some time now. Here’s the chart.
Click on me, I'll expand
Click on me, I'll expand

Commodities

  • We are going to get an increase in global oil production. That seems to be increasingly clear with even the Iranians recognising that there is some wriggle room to both increase production and also the maintenance of the current deal and thus OPEC retaining the appearance of not reacting to President Trump – which is what the Iranians, and likely the Venezuelan’s, want.
  • Overnight Saudi Oil Minister Khalid al Falih said, it is time for OPEC to “change course and respond to the market”. The FT reports this morning the Saudis are thus targeting an increase of up to 800 thousand bpd. Separately Reuters reports that if OPEC’s compliance was to drop back to the original deal level of 100% (the group has over complied and thus cut harder) it would mean adding at least 1 million bpd. Thus it looks like the US and India may get their extra production to keep prices from racing away any further, the Saudis are seen to help out the Americans, and Iran can say this isn’t really a change. The question is Russia now and what its oil companies will or can do. Because they clearly want to continue to increase their own production.
  • To the charts then, and Brent continues to respect this little downtrend it is in. The high last night was just below the upper line of the channel. I’m targeting a move back into the $71.00/50 region.   
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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