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Markets Morning - Trumps Tweet saps non-farms impact on the dollar, stocks and bonds higher

Market Analysis /
Greg McKenna / 04 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.38 am Monday June 4)

About an hour before the release we knew it was going to be a decent non-farm payrolls print Friday. That’s because President Trump tweeted he was looking forward to the release.

Bond and currency markets reacted pretty swiftly pricing in a solid result. Which is exactly what we saw with 223,000 jobs in May, upgrades to previous numbers, an unemployment rate of 3.8%, and hourly earnings up 0.3%.

It’s enough to keep the Fed on track for a hike this month and again in September, while the odds of a December hike were repriced higher as well.

For markets the washup was mixed. Bonds were higher with the 2’s at 2.47% and the 10’s at 2.895%. If not for Italy, earlier in the week, we may have seen the 10’s back at, perhaps above, 3%.

The USD’s move was a classic buy the rumour redux. The Greenback gained ground but even stellar numbers such as we saw couldn’t see it sustain those gains. For example the AUDUSD fell to 0.751/14 before finishing the week at 0.7565. It’s at 0.7563 this morning. Likewise the Euro recovered weakness – despite worries about Deutsche bank, Germany’s biggest bank – and is at 1.1661 this morning. GBPUSD did relatively better and sits at1.3345 while USDJPY is at 109.43 after a high on Friday night of 109.73. The Kiwi is at 0.6975 while the Canadian dollar sits at 1.2952 in USDCAD terms.

Stocks were sharply higher though in the US. After breaking the bottom of the range on the Italian woes during the week the S&P 500 is back near the top of the range after closing at 2,734 up 1.08% Friday. The Dow was 0.9% higher at 24,635 while the Nasdaq 100 gained 1.7% to 7083.

There are plenty of reasons to be bullish US stocks given this economy and where rates are right now. Tariffs and trade are headwinds though. But a break of 2,742/45 in the S&P could get things moving higher.

Trade, and Deutsche Bank, is an issue for continental European stocks however. Certainly they regained much of their losses from the night before with the DAX up 0.95%, the CAC up 1.24%, and the FTSE rising 0.3%. But with Angela Merkel meeting ECB boss Mario Draghi tonight you know the banking issue may be bigger then markets currently appreciate (see the Lehman/Deutsche chart in the main body of today’s note).

Here at home it should be a better day after the ASX200 finished at 5,990 on Friday. June and September SPI 200 futures were up 34 points apiece after the performance offshore. Worth noting for the local market is that Basic Materials and Industrials were second and third best performers on the S&P Friday, while financials came in 5th with a 0.98% gain.

On commodity markets the continued move toward the June meeting and possible increases in production weighed on oil prices with Brent and WTI under pressure closing at $76.79 and $65.81 respectively. Worth noting the Brent/WTI spread continues to blow out. That’s a trend that could continue now WTI has dropped below the previous support/breakout zone.

Gold fell as the USD rallied a little, stocks went bid and bonds offered. It’s at $1292 this morning and looking dangerously wobbly. Copper was a little higher at $3.09 supporting the Aussie dollar’s gains. Bitcoins recovery off the trendline/wedge support continues. It’s at $7,697 this morning.

Also worth noting is that the US received a solid rebuke from its G7 partners at the central bank/finance ministers confab - which precedes the leaders summit this week – over trade. I think the US has underappreciated Justin Trudeau’s back bone, sometimes a nice guy has to fight. Also worth noting the US China trade talks may have gone somewhere, but only if the US does not impose tariffs the Chinese said.

On the day ahead it is a fairly quiet start globally to a very busy week of economic data releases. Here at home though we get some more partials before Wednesday’s Q1 GDP release. Today sees the prints for business inventories, company gross profits, and the highlight of the day is retail sales for April. Have consumers really gone into their shell? That’s going to be important for notions of what the RBA might say tomorrow and thus where the Aussie dollar and interest rates might head today.

Euro area PPI and US factory orders are the other highlights.

Have a good day.

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

International

  • I won’t say too much about the jobs data in the US Friday except that there was virtually nothing for the doomsayers to complain about.  Indeed I like the take of Economist Justin Wolfers who said in a tweet Friday night, “The economy keeps on keeping on. A 9-year recovery continues, and it's now in a pretty good place”. Yes it is. I’m sure you have or can read lots about the specificity of the jobs data. But I want to share my little table of economic surprises – it is Monday afterall. YOU can see the US and China remain the only regions still printing better than expected data. That should have implications for forex, central bank, and interest rate differentials.
Click on me, I'll expand
Click on me, I'll expand
  • Hands up if you really think the Canadian Prime Minister thinks the new US tariffs are really just a family quarrel? That’s something the Larry Kudlow said on Fox over the weekend and it echoes a comment from Commerce Secretary Wilbur Ross last week. I alluded to my view Friday when I likened Justin Trudeau to Peter Finch’s character in Network. Trudeau was impassioned when he talked about the disrespect of Canadian armed service members by the Administration claiming national security as a reason to slap tariffs on Canadian Steel and Aluminium and the rebuke from the G7 finance and central bankers meeting being held in Canada was in keeping with the disquiet the United States “allies” are feeling right now.  Indeed Canada’s finance minister Bill Morneau said in a statement, “unfortunately the actions of the United States this week risk undermining the very values that traditionally have bound us together”.
  • And if you think that this is all just a negotiating tactic and something that is visceral to the President and his administration then just read this piece from Trade negotiator Peter Navarro in USA Today last week. In the piece he’s cheering a new plant being built and the jobs it will create in Ashland Kentucky. Don’t get me wrong, I’m not judging a government keen to look after its own constituency. That’s their job after all. But, I would urge readers to keep this article in mind if they think this is all just a negotiating position. To return to my Poker analogy last week – the US Administrations seems to believe it has the big hand because it has the US consumer as a carrot and a stick to get what it wants from other nations. But Europe and China together are bigger markets than the US. So the incentive for others at the table to fold may not be as strong as Wilbur Ross and his President think.
  • The best chance we have to avoid a real, fullblown, trade war, might actually be from inside the US and any impact on workers and US companies. Time will tell how it plays out.
  • Here’s a quick look at the S&P 500. You can see how close we are to a break. Top of the wedge and just a little under the range top. I have more faith in the range top as the indicator of note. But you can see how a move – especially a close – above 2,745 would be important.
  • I must say it’s easy to be bullish US stocks and the Greenback right now. That’s troubling.
Click on me, I'll expand
Click on me, I'll expand
  •  Sometimes I’m a bit naïve. Over the weekend I saw that there was a meeting planned between Angela Merkel and ECB president Mario Draghi and didn’t really think anything of it. But then I saw the tweet below which has an analogue chart of the Lehman share prices and that of Deutsche Bank which is under intense pressure all over the globe right now. Friday saw news it’s caught up in the action over the ANZ issue back in 2015, last week we heard the Fed has been worried about the bank for a while, and Business Insider reports the CEO said he’s sick of all the bad news. But this chart might be the reason Angela Merkel is worried. DB is the biggest bank in Germany and thus – in the worst possible outcome -  it could end up as the German government’s problem. But I’m pretty sure EU rules don’t allow it to help out – so watch this space folks. Anyway, here’s the tweet that caught my eye this morning.

 

Source: Twitter Screenshot
Source: Twitter Screenshot

 

  • Also worth noting is that Irelan has apparently given the UK 2 week’s to sort its stuff out over the border between the Republic and Northern Ireland. Otherwise Brexit negotiations will become very messy and drawn out.

Australia

  • It’s a big week of Aussie data but regardless of the expected stellar print for Q1 GDP that the pundits are forecasting for me the big event is the release of April retail sales today. That’s because amidst a surging business sector, and what looks like mathematically strong GDP growth, there is s till a big risk in the household sector from high debt levels, low wages growth, and falling house prices. Naturally that’s mitigated by the sheer volume of jobs created. But if we want to look forward at something that may change the way the RBA talks about the outlook and what its guidance is on rates then retail sales are going to be a big part of that. So I’ll be watching closely at 11.30am this morning. The market expects a rise of 0.2%. Of course company profits and inventories are important as well.
  • It is going to be an interesting day for the local market and it should be a good day. That’s if the SPI traders are right having marked prices up 34 points to close the week. We’ll see. If the June SPI can get through 6,037/40 and the ASX can take out 6,025.32 then the market could be away.  Here’s the cash CFD chart.

 

Click on me, I'll expand
Click on me, I'll expand

 

  • The Australian dollar showed very solid resilience on the back of the turn in the USD on Friday night. Had the President not tweeted his news an hour before the release and had the market not already have moved I wonder if the Greenback might have held its gains a little better. But as the USD slid and as stocks, and commodities, rose so too did the Aussie get a lift. It’s still below the top of the recent range which comes in around 0.7605/10 and a break would be necessary to see it kick into a higher range and run toward 77 cents. Today’s data is going to be very important in that regard.

Forex

  • Slowly, very slowly, Euro longs are slipping from view. That’s the message we get from the latest CFTC data on large speculative positions released Friday night for positions as at last Tuesday. At 93,037 though the fact the Euro longs persisted is interesting from a decision rule point of view. I struggle to see how they are staying in the market given the Euro fell to just above 1.15 on Tuesday. But they are.  We are seeing the market a little shorter Aussie and Yen but the buyers are inching back to buy the Pound – go figure, I know. The CAD shorts were lowered as well which is interesting all things considered.

 

Click on me, I'll expand
Click on me, I'll expand

 

  • How we look and where we go in forex now is the big question. The Euro is trapped below the 23.6 retracement level at 1.1730 and this is the big level it must best to kick on. While below it the chances of a retest toward 1.15 are high. That’s the way the data, issues at Deutsche Bank, relative economic prints, and Central Bank policy divergence are pointing. Any bounce would be purely technical in nature.

 

Click on me, I'll expand
Click on me, I'll expand

 

Commodities

  • We heard more from the Russians that they are ready to start pump priming although data does suggest they might already being producing above their agreed limit. This makes for an interesting meeting later this month. But it also highlights the notion I’ve shared that the Russians were always just production cut tourists keen to get off the bus as soon as possible. It seems that even though they continue to say they are committed to the stability of the oil market that time has come.
  • And that will continue to put downward pressure on oil prices in the week/s ahead. Why it’s exerting more pressure right now on WTI than Brent is explained in the logistics, infrastructure, production, and consumption of the two benchmarks. The spread is blowing out as a result and crucially WTI has broken down and through the break out level.  As I highlighted Friday that suggests a run toward $61.

 

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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