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Markets Morning - Traders step back from the brink, but risk assets still offered

Market Analysis /
Greg McKenna / 20 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.39 am Wednesday June 20)

It’s somewhat difficult for me to say exactly why the funk markets were in during European trade has abated. So I won’t try and fit a narrative to the price action. But, if I was going to have a guess it would be that like Pavlov’s dogs market are conditioned. In traders case it’s to buy the dip because let's face it, the world didn’t end. It’s just a trade war between the US and almost everyone else on the planet.

To wit, I forgot to mention yesterday the Indians are retaliating, overnight the Russians are doing likewise, and of course the Chinese have said they respond if the US goes live fire with President Trump’s latest threat of another $200 billion.

The chances of that seem high if you listen to Trump trade adviser Peter Navarro overnight (more on that in the full note). So the probability of further escalation remains elevated. The US will not back down and countries - as the Canadian Foreign Minister Chrystia Freeland said last night – have no choice but to respond.

Anyway, to the markets and the S&P 500 has lost about 0.4% as the slide continues. Sure the close at 2,762 is well off the low of 2,743 (for the third day in a row) but the price action continues to drift. In that vane the sell off of the Dow continued as it lost another 1.15% to close at 24,700 while the Nasdaq 100 fell 0.32% to close at 7,218.

The moves in the CAC and the DAX were more like the Dow with losses of  1.1% and 1.22% respectively while in the UK the FTSE was only down 0.36%. Asia yesterday, China in particular, had a very bad day. The Shanghai Composite lost 3.82%, the Hang Seng lost 2.78%, the Nikkei dropped 1.77%, the Kospi was 1.52% lower and the STI in Singapore was off 0.68%.

We’ll likely see some bounce back today given US traders sutured the bleeding. That’s a bet SPI traders have taken with the September contract up 40 points after the very solid performance of the ASX 200 yesterday which was only down 2 points for a very strong close at 6,102.

To forex then, and the USD is stronger but not yet strong. Yes, it’s up around 6% in the past couple of months. But, with the DXY at 95.04, the USD has once again failed to close above the 95.20 level which is needed to ignite the next wave of technical buying. The corollary, of course, is the Euro still holds above 1.15. It’s at 1.1582 this morning off a low around 1.1530.

Likewise, the forex risk trades of USDJPY and the AUDUSD are off their lows as well as tension – at least in markets – has eased. USDJPY is back above 110 at 110.05 off a low around 109.54 while the Aussie is trading 0.7379 after bouncing off trendline support in the mid 0.7340’s. The Yen lost a little less than half a percent the Aussie a little more. The Kiwi is down as well at 0.6896, off 0.66% while the CAD lost a similar amount with USDCAD at 1.3278.

On commodity markets, the big news is not that oil fell another 1% as traders worry their customers will go into a cave and not buy given the uncertainty the trade war causes and the threat to global growth and thus demand. No the big story in oil is that the Iranians appear to be ready to throw the toys out of the cot and has rejected any compromise at this week’s meeting. The Saudis are still said to be peddling a 300-600 thousand bpd increase. Anyway WTI is at $65.08, down 1.15% while Brent is at $75.09 down 0.33%.

In other commodities copper’s capitulation from recent range highs near $3.30 continued overnight as it lost another 1.4% to $3.06. Gold is still irrelevant to most traders and is languishing at $1275. Bitcoin is at $6,727. A little stronger but not as strong as I thought it might have traded given everything that’s gone one.

It’s another fairly quiet day on the data front, but we naturally have to watch out for trade war rhetoric and stories. The Reuters Tankan for Japan and the BoJ minutes are out along with German and EuroArea PPI data. In the US it’s existing home sales. We also get a speech each from Fed chair Jerome Powell and ECB president Draghi.

Have a great day

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

International

  • You know all about the trade war. You know that while many try to gild the lily on what the US Administration is trying to do, an suggest this is just a negotiating tactic that I believe this is in the DNA of this White House, of President Trump, Commerce Secretary Ross, Peter Navarro and others. So I’ll just leave you with three things this morning.
    • This comment from Navarro overnight.  “The fundamental reality is that talk is cheap. The president has taken action on behalf of the American people and it's a necessary defense of the crown jewels of American technology and intellectual property against Chinese theft.” The President can walk back from that. But it highlights the US side is going to continue to push hard.  That means we may see more days like yesterday. BUT, certainly that uncertainty is growing and that will impact markets and growth.  
    • This tweet from me yesterday
      Source: Twitter Screenshot
      Source: Twitter Screenshot
    • This tweet from Mohamed El- Erian which makes the point I’ve been making about the USD in the trade war world. That is, STRONGER.
      Source: Twitter Screenshot
      Source: Twitter Screenshot
  • Elsewhere quickly
    • It looks like China’s central bank might cut the RRR rate again. After injecting a fair chunk of liquidity to aid the market yesterday as it went into a funk the central bank also released a paper saying the reserve requirement ratios could be cut to ease bank burdens – and free up money for the system of course.
    • Global equity funds appear on track for their biggest outflow since September 2016. Via Reuters Trim Tabs reports we’ve seen $6.8 billion pulled out so far.
    • Irish central bank governor Philip Lane said it would take a big shock to reverse the decision to end QE. But overnight colleagues like ECB president Draghi said that QE could be restarted if it was necessary.
    • Canadian business is right behind Justin Trudeau’s fight with the US over tariffs. Dow Jones reported that the Canadian Chamber of Commerce said the US tariffs “leave our country no choice but to respond in a fashion designed to encourage the withdrawal of steel and aluminium tariffs at the earliest possible opportunity”.   Most nations feel the same.
    • Germany and France have agreed to create a Eurozone budget from 20121.   

Australia

  • The Aussie was pretty resilient for most of the day yesterday. At least until Europe entered the fray and it was belted lower and started pacing with the fall in USDJPY. That moves highlighted two things. First was that investors still see the Aussie as a good sell in a risk off environment, especially one where China – and Chinese growth – is at the heart of it. The Second is one specifically about the trade war which goes to my recent theme about the narrative changing around the Aussie dollar. Indeed last night there was a lot of Twitter chat and analyst comment that the countries exposed to trade wars are ones whose growth depends on foreign trade. We can quibble about the structure of the Australian economy and where growth comes from but the perception is that in this environment Australia and the Aussie dollar will suffer. That means when we throw in changed outlooks for the RBA and the rising uncertainty around it’s policy path, concerns about low wages, debt, the banking system, and consumption that we are likely to see the Aussie dollar continue to be offered on any rally.
  • Now that we’ve seen a day close below 74 cents the 0.7125/50 region is my target. For the shorter term minded it is worth noting the AUDUSD did bounce from the bottom of the current downtrend channel overnight.  So it might bounce a little back to 74 cents, perhaps even 0.7406 or yesterday’s high at 0.7425. 
  • Goodness me, what strength this ASX 200 has right now. Leaving my rhetorical self out of this it looks like the physical ASX200 has a triple top around the 6150 region. That, as Tony Sycamore of TechFX Traders tweeted means traders should “Beware the potential triple top forming 6150 area”. But when I shared Tony’s chart on Twitter yesterday Nick Radge, @thechartist on Twitter, said it looked like a Cup and Handle to him. The wash up is this is an important inflection point for the local market.  If we see a break of the high my target above 6,300 will come into play. But it has to break first. Here’s Tony’s chart.
Source: Twitter Screenshot
Source: Twitter Screenshot

 

Forex

  • The US is at the centre of this trade battle with almost everyone on the planet at the moment. But as I have written myself and as Mohamed El-Erian’s tweet above shows it is not certain the knee jerk reaction of traders to support the Euro is the right one. Policy and economic differences will matter in the end for forex markets and forex traders. As such the USD should continue to strengthen.
  • But again today I find myself writing that 1.15 has to break for the EURUSD and 95.20 likewise needs to go in DXY terms. They remain the key levels to watch for me. While they hold the chance of one more counter trend bounce remains intact.

Commodities

  • The OPEC meeting is going to be interesting. We’ve got the Iranians looking like they don’t want to play ball with any increase. With comments from the oil minister reiterating that OPEC’s policy should not be set by the White House. Oil minister Zanganeh said that the mooted Saudi plan for an increase of 300-600 thousand bpd is “not needed now” according to Bloomberg. Indeed he said he doesn’t think there will be an agreement at this meeting. Yet the Russian oil minister Novak begs to differ with Reuters reporting he said, “Oil demand usually grows at the steepest pace in the third quarter ... We could face a deficit if we don’t take measures…In our view, this could lead to market overheating”.
  • Obviously the Saudi deal being shopped is a long way from the 1.5 million bpd lift the Russians are said to be looking for. The Saudis still have Aramco to list and clearly still want to hold OPEC together, so they are looking for a compromise. That said though Reuters also reports that an OPEC source said the 1.5 million figure was an ambit claim to try to get the other members of the agreement to accept the lower increase the Saudis are now shopping.
  • We’ll know later this week. And it does seem like an increase is coming. The question is can such a move be achieved in order to balance the interests of OPEC’s customers like the US and India while still holding the cartel together as a functioning group. On that point its worth noting the US Congress is going after OPEC with the resurrection of the so-called “No Oil Producing and Exporting Cartels Act” which would seek to make OPEC subject to the Sherman anti-trust act.  You can read more here from Bloomberg’s excellent Javier Blas.   
  • To the chart now and today I’m looking at the 12 month view of WTI daily via a chart from Mystery Trader on Twitter who said “#WTI downtrend still intact, #WTIC 13MA & BC both look very bearish but support TL still holding up.  Stoichs could do a W-bottom which means another 2nd leg downward to the $61-62 level”. I’ve circled the current support.
Source: Twitter Screenshot
Source: Twitter Screenshot

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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