Markets Morning - Traders shrug North Korea summit to focus on the FOMC and Oil

Market Analysis /
13 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.45am Wednesday June 13)

I dropped my kids at swimming training a little before 5.30am this morning and we heard some Negative Nelly former US Ambassador to somewhere (guess during which presidency) giving a monologue on all the things that aren’t in the US/DPRK deal and could go wrong before ending along the lines of ‘this is a positive step anyway’.

So let's leave all the negatives out and just say this is a good step. The risks that exist now seem greatly reduced to where we were six months ago. That in itself is something to be celebrated.  

It didn’t help markets of course because an acceleration to a 6 year high of 2.8% for US CPI and news that Fed chair J Powell wants every meeting to be live took the focus away from any risk reduction a positive outcome in Singapore. Tomorrow morning’s announcement from the Fed is going to be very interesting – even for a fait accompli rate hike.

That focus on the Fed and some more weak data in Germany (ZEW economic sentiment -16.1 from -8.2 last) helped the US dollar make ground across the entire currency universe. EURUSD is down 0.31% to 1.1746, USDJPY is up around the same amount to 110.34 while Sterling is flat after Theresa May’s government defeated the Lords amendments to Brexit – she did have to give some large concessions however.

Of the commodity bloc, indeed of the majors, the Aussie did worst losing half a percent to sit at 0.7571 this morning just 10 points above Friday’s low around 0.7560. The Kiwi lost 0.3% to 70 cents and the CAD was down by the same amount with USDCAD up at 1.3012. CAD remains the most vulnerable of the commodity bloc given the oil and trade outlooks.

To stocks now and European traders were nonplussed last night. While the DAX was roughly flat the FTSE lost 0.43% and the CAC dipped 0.38%. Italian stocks were higher by 0.15% in Milan. In the US the S&P had another small range day before the index closed up 0.17% at 2,786. The Dow was flat at 25,320 and the Nasdaq rose 0.57% to 7,209.

Here at home after a disappointing day yesterday – relative to the indications of SPI traders this time yesterday – it looks like the ASX is going to open on the back foot. June SPI is down 10 points to 6,045. Traders need to watch the miners and in particular the banks which are on, or breaking, some very important technical support. Indeed the SPI’s move Monday looks like a false break and the index is now back on trendline support.

On commodity markets, the Russians seem to be pushing toward an increase in production. But in real terms Brent and, in particular WTI, are not reacting that aggressively to the news. That said Brent is down 1.3% at $75.46 while WTI is flat at $66.10. Gold is down at $1295, copper lost 0.32% to $3.24 a pound.

Elsewhere Bitcoin is holding above the crucial $5,950/6,000 region but has lost another 3% overnight to $6,536. US 10’s are at 2.9645% while the 2’s sit at 2.5448%. The Fed is a risk to these levels tonight.

And that’s the big event of the next 24 hours – the FOMC announcement and then press conference from 4am tomorrow morning. But before that we get Westpac consumer sentiment here in Australia, Kiwi food inflation, UK PPI, RPI, and inflation along with Euro area employment. US PPI is also out before the Fed.

And at 1.20pm today RBA Governor Phil Lowe will be talking about “Productivity, Wages and Prosperity” at the AiGroup.

Have a great day        

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


  • The naysayers are out in force trying to show how they would have done the Summit better, or claiming this is all a victory for North Korea’s KJU. BUNKUM! I’m sick of the naysayers, credit needs to be given where it is due and while this is only the first step in a long process to actually denuclearise the Korean peninsula it’s a move no one else has been able to make so far. I like the way Horizon Investments Greg Valliere framed it in his overnight note (his bolding and capit), “THERE ARE TONS OF DETAILS TO COME, but this morning's "historic document" is a very big deal – transforming global geopolitics and, potentially, the U.S. election climate. We thought the summit would be a stylistic success, but clearly there was more”.
  • Indeed, much more to come. But President Trumps declaration that he’ll end the expensive and provocative war games – conditional on forward progress – is an excellent way to signal good faith. And an excellent way to keep the momentum going. Markets didn’t care too much, but then again markets didn’t react too negatively to the missile launches after a time in the past 12 months or so either. So at least we can say traders are consistent on that front. For the record I agree with Mike “Mish” Shedlock.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • This time tomorrow morning we’ll not only know what the FOMC has done – raised rates 25 basis points – but we’ll have a sense of what they intend to do in the future as well. But we may not need to wait even that short time after the CPI print last night in the US accelerated to a 6 year high. The print of 2.8% in May was an acceleration from April’s 2.5% and was 0.1% higher than economists forecasts of 2.7%. The monthly rate of 0.2% was in line with expectations. But with oil up, wages pressures apparently building, and the US economy bouncing back strongly in Q2  the FOMC is likely to be fairly forthright in their assertation that rates will need to continue to be increased – however gradually. Interestingly the most telling thing that might happen tomorrow morning is if we get confirmation of the Wall Street Journal story that Fed chair J Powell wants to hold a press conference after each meeting to thus make all meetings LIVE. That might change market pricing a little and could be a big boost for the USD.
  • The BAML monthly survey of big money mangers is out and as usual, there is a raft of nuggets to take away from the results. Of note is that Trade Wars are seen as the biggest “tail” risk to the outlook. That’s something IMF boss Christine Lagarde highlighted on the weekend when she said, “The clouds on the horizon that we have signalled about six months ago are getting darker by the day, and, I was going to say, by the weekend”. BUT, the biggest highlight of the BAML survey is one I’ve been subtly – and less subtly – banging n about over recent months. That is the US offers better opportunities (hence my bullish USD stance for that time) and Reuters reports the BAML survey showed that, “ allocation to U.S. stocks rose 16 percentage points over the month to a net 1 percent overweight. Sixty-four percent of respondents thought U.S. companies had the best outlook for profits, the most in 17 years”. That’s the first overweight to US stocks in 15 months – which is just a little after the USD peak last year.
Source: Reuters iPhone App
Source: Reuters iPhone App


  • Housing finance yesterday showed the continued fall in demand for debt. That’s important if you believe – as I do – in the relationship between growth in debt and house prices. I won’t belabour the point. But I will highlight there is still a lot of room for debt demand to reduce further. That’s something CoreLogic’s Cameron Kusher highlighted on Twitter yesterday when he wrote, to accompany the chart below, “the share of new housing finance commitments to investors is falling quite sharply but it remains way above the long-term average, largely due to NSW (50.4% vs avg 37.5%) & Vic (40.7%) vs avg 32.1%)”.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The Australian dollar has done very poorly overnight.  Why it’s underperformed the Kiw and CAD is difficult to tell on any given day. But perhaps as I suggested yesterday in my AUDUSD note it was time for tAUD traders to make up their mind about the outlook. Yesterday’s NAB survey wasn’t as strong as previous. But it was still strong. The Housing finance data though speaks to ongoing consumer retrenchment and lower house prices as I suggest above. So my sense is most traders still have a jaundiced outlook for the Aussie – especially since it failed to take out resistance last week. Levels to watch today are Friday’s lows at 0.7560 and then 0.7595 on the topside.
  • The chart says it all for the SPI. More importantly though for individual stock traders the moves in the commodity and bank stocks look interesting. Of course SPI traders trade an index of stocks which is heavily influenced by these stocks and their movements. It’s a macro trade which needs to understand the ground up influence. Anyway – check out the long term bank stocks, you’ll find them interesting.
  • On the SPI directly it’s back on support. A move below 6,028 would be a bad sign.  So much for the topside it seems – at least for today.
Click on me, I'll expand
Click on me, I'll expand


  • 2.8% CPI with a solid jobs market and expectations that the US economy is going to print well north of 3% for Q2 and beyond is a backdrop to a continuation of Fed tightenings. That much is certain. The argument presently is between another two rate hikes or maybe three with another in December. But the limitations around the timing and magnitude of tightenings – or at least the markets discussion of same has been driven by the fact the Fed chair only has a press conference at the quarterly meetings rendering them the only “LIVE” ones.
  • So news overnight via the WSJ that perhaps J Powel wants to change this up with a BoE and RBNZ style presser after each meeting makes all 8 Fed meetings live. Forex traders took this as a signal of potential hawkishness overnight and bought the USD as a result. I’m not sure that’s right as a take. But I am sure that having every meeting live, and perhaps abandoning the dot plot, gives Powell the freedom to make the adjustments to policy that he needs to make when he needs to make them. The question is whether the US economy will get hot enough for the Powell Fed to follow the Greenspan Fed more than a decade ago and hike at consecutive meeting after consecutive meeting.
  • Either way I remain a USD bull.
  • If, when, the Euro break back down below 1.1720/30 we’ll know the USD is on the move once again. I’ll have more details in my daily video a little later this morning on this and all the other pairs I follow.
Click on me, I'll expand
Click on me, I'll expand


  • I have characterised the Russians previously as production cut tourists. The reason I hold this view is that almost from the start of the deal the heads of Russia’s oil giants, and indeed energy minister Novak, have talked about the exit strategy. So, as we head toward the June 22 meeting it is no surprise that Russia is out with a plan to increase production. Why wouldn’t they? They have productive capacity and the combination of a weak Rouble and high oil prices is like manna from heaven for them.
  • Anyway, news this morning is that Russia is indeed – as I suggested last week – seeking to production levels return to that which existed at October 2016. Bloomberg reports the members to the agreement would, “proportionally share out a 1.8 million barrel-a-day increase to their output limit starting as soon as July”.  But Bloomy also report that a source told them, “the actual boost in supply to the market would be less than that because some states, notably Venezuela, Angola and Mexico, aren’t able to increase”. Bllomberg’s chief energy correspondent Javier Blas tweeted a little after that article was published that, “#Russia and #SaudiArabia are set to discuss #oil policy on Thursday, as teams from the two nations meet in the opening match of the soccer World Cup in Moscow. Vladimir Putin will host Prince Mohammed Bin Salman, while oil Alexander Novak and Khalid Al-Falih will also meet”.
  • It all adds colour to news overnight that the Saudis have told OPEC they have increased production. Worth noting though OPEC’s monthly report highlighted some uncertainty to the outlook for demand going forward.
  • To the charts then and while WTI is hanging incredibly tough, but still below the old uptrend channel, Brent is starting to reverse once more. As you can see in the chart below there looks like there is an overhead resistance line for Brent and that suggests a move back toward last week’s lows around $73.75/80. It that level breaks then I’m looking for a retest of the breakout level around $71.25.
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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