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Markets Morning - The Fed exercises its Risk Case, stocks rise, the USD loses a little traction

Market Analysis /
Greg McKenna / 19 Jul 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

Market Summary (8.36 am Thursday, July 19)

Jerome Powell was again upbeat on the outlook for the US economy on the second day of his testimony on Capitol Hill. But the focus overnight as on the concerns of the Trade war and the impact that may have on companies investment plans. He stuck to the base case, but the risk case got a decent airing and was reinforced by the Beige book which showed all 12 Fed districts are seeing varying – but real  - concerns about the impact of the trade war on companies.

To a certain extent that, along with a big miss in building permits (-2.2%) and housing starts (-12.3%) in June helped knock the US dollar back from it’s highs in what has been an otherwise mildly positive day of strength for the Greenback. Oh, but it could have been so much stronger. GBPUSD fell to 1.3009 on lower than expected inflation data (Core CPI 1.9% v 2.2% exp) but its back at 1.3069 for a loss of just 0.34%. Rumours this morning the EU is mulling an Article 50 extension for the UK could help it further.

Euro was down at ~1.1601 at one point last night but it’s back at 1.1638 now for a loss of just 0.2%. USDJPY is unchanged at 112.85 after peaking at 113.13 overnight when the USD was at its best.

The commodity bloc is doing better however with a bounce in copper (+0.5% to $2.75 a pound) and oil (+1% for both WTI and Brent) among other commodities, plus the continued rally in metals and mining shares fuelling a little strength. The AUDUSD, which fell to around 0.7342 has bounced half a cent to sit at 0.7399, up 0.18% since 7am yesterday. It’s  as if the Chinese Yuan isn’t still falling and the headwinds have abated. Granted, the USDCNH and CNY are off their highs – but this AUD rally is more than just a USD move folks. Likewise, the Kiwi bounced from its lows and is at 0.6795, up 0.2% while the CAD has gained the same percentage with USDCAD at 1.3164.

On stocks earnings and the Fed’s base case of continued economic strength seem to be the main driver. Morgan Stanley’s solid beat helped financials to top spot on the S&P 500 which ended the session up 0.2% to 2,815 – less than 60 points from the record high now. The Dow was 0.32% higher at 25,199 while the Nasdaq fell 0.19% to 7,390. Alphabet – Google’s parent – was among the biggest losers after the company coped a massive fine from the EU.

European stocks were higher with the DAX gaining another 0.82%, the CAC was 0.46% to the good, while the FTSE rose 0.65%. That all washes up to a good lead for the ASX with SPI traders adding another 10 points to yesterday’s rally overnight. Worth noting for our time zone today – although no one seems to be bothered – is that Chinese stocks gave up the ghost yesterday afternoon and couldn’t hang onto gains. The Yuan is still falling also.

To commodities and oil was lower even though the EIA reported a massive 5.8 million barrel build in inventories and a fresh record for US production. Key here was that traders found some good news in the gasoline stats. SO this morning WTI is up 1.18% at $68.88 while Brent is up 1.12% at $72.97. Gold is unchanged around $1221 after falling to $1221 when the USD was at its peak.

US 10’s are at 2.88% with the 2’s at 2.615% which means the curve is around 26 points (rounded). Bitcoin hit a high around $7575ish but has pulled back from there in the past 4 hours and is at $7,267 for a loss of around 0.8% overnight.

And in other news, President Trump appears to have walked back the walk back of his comments in Helsinki, arry Kudlow had a direct pop at Chinese President Xi as the roadblock to a trade deal between the US and China (NO I’M NOT KIDDING) and the Brexit mess endures with Boris telling Parliament the deal can still be saved.

On the day today, the big release is Australian employment for June. The Reuters poll says the market is looking for an increase of 17,000 jobs and an unemployment rate of 5.4%. Australian data has improved a little recently. This is very important for the Aussie dollar and interest rate markets still grappling with exactly where households and consumers are at.

Retail sales in the UK will be important for forex traders and other than that it’s just jobless claims and the Philly Fed manufacturing index in the US.

Have a great day

Macro Stuff that affects everyone and everything – either today or eventually

  • The Beige book release this morning was an important window into the type of concerns that Jay Powell has been telling us the Fed is starting to see. Each of the 12 Fed districts reported varying degrees of disquiet among manufacturers but every single one did report that businesses are worried about the outlook. “Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies,” the BB said. It also highlighted that labour markets remain tight, skilled workers are getting more scarce, and wages growth remains moderate.
  • In this “risk case” theme Jay Powell was pretty straightforward on the risks from the trade policy uncertainty though he tried to stay out of the political debate. “Lots and lots of individual companies have been harmed by this. We don’t see it in the aggregate numbers yet because it is a $20 trillion dollar economy and these things take time to show up,” he said. Going a little further he added “we hear many many stories of companies that are concerned and are now beginning to make investment decisions, or not make them, because of this.” He also said that a more protectionist economy leads to weaker long-term growth and “if that is where this goes, we don’t know where it would lead”. He’s telling us the Fed will pause I reckon if things get dire – as well they probably should if the economy slows materially. But he also said that the near term gain of these policies could be worth it for a long run gain.   
  • And while the “risk case’ has had a good airing overnight, and while the Citi Eco Surprise Index for the US has slipped into negative territory again, Kansas city Fed president Esther George said yesterday in our time that the US economy is still firing on all cylinders and policy needs to get back to neutral. “At a time of full employment with price stability, policy should be a neutral influence on economic activity,” she said meaning further rate rises. She did add however that, “there is considerable uncertainty about exactly how far or fast we need to go”.  
  • Seriously. What is Larry Kudlow smoking these days? We’ve heard many times that the Chinese state media has been urged to not make this trade battle personal by naming President Trump. And the President himself has said he and Xi have a  good relationship. In the past couple of days the rhetoric from China’s Commerce Department has increased but when Kudlow says that “So far as we know, President Xi, at the moment, does not want to make a deal” and then added “I think Xi is holding the game up. I think Liu He and others would like to move but haven’t. We are waiting for him (Xi). The ball is in his court,’ you have to wonder what the Chinese response might be to this direct attack on this President for life.
  • On this trade dispute, China’s foreign ministry said yesterday the US led trade war has become the biggest “confidence killer” for the world economy. “The U.S. trade war is not just with China but with the rest of the world. By regarding the rest of the world as adversaries, the U.S. has dragged the entire global economy into a place of danger,” a spokesman said. Separately the Commerce Ministry said it would soon take further action on the tariffs.  
  • And also on trade the US seems to be moving – or at least the President is – toward a bi-lateral deal with Mexico. Though the Mexican’s said that would be like starting NAFTA from scratch. We’ll see. But Canada won’t be overly happy I wouldn’t have thought.
  • In Brexit news the mess in the UK government hasn’t gone unnoticed in Brussels – how could it – with Cityam reporting this morning, “An extension to next year's Article 50 deadline is being discussed in the backrooms of Brussels, as MEPs and officials from member states weigh up plans to avoid a cliff-edge Brexit”. And speaking of Brexit, Boris Johnson told the Parliament It’s not too late to save Brexit. Tellingly he appeared to back May but said the current plan left the UK in a kind of limbo. Reuters reports Johnson said the current plan would deliver “Brexit in name only” and put the UK in a state of “economic vassalage”. He said, “It is absolute nonsense to imagine, as I fear some of my colleagues do, that we can somehow afford to make a botched treaty now, and then break and reset the bone later on”.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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