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Markets Morning - US dollar firmer as 10's blow higher but stocks say c'est la vie

Market Analysis /
Greg McKenna / 16 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.36 am Wednesday, May 16)

Who’s afraid of higher US bond rates? That’s the questions traders and investors will have to genuinely ask themselves now that the 10 year Treasury has blown up and through range highs to make a new peak at 3.075% this morning. 2 year US rates are sitting at 2.58% another post-GFC high.

Why you ask? Retail sales were steady and strong at 0.3% in April with March’s already robust 0.6% lift increased to a very healthy 0.8% rise. Elsewhere the NY Empire manufacturing index was up 4 points and soon to be NY Fed president John Williams said 3 to 4 hikes this year seem the right course.

Given everything that went on in February and March you’d be forgiven for thinking that stocks might have tanked. Yet instead they have only given back a little of the latest surge higher. Sure the S&P 500’s fall of 0.68% is nothing to sneeze at and certainly the charts suggest to me prices will head lower. But it could have been worse. SO this morning the S&P is off around 19 points at 2,711.

The Dow is down 0.78% at 24,700 and the Nasdaq100 is at 6,888, off 1.09%. European stocks were mixed with London and Paris up a little while the DAX in Frankfurt was down just a smidge.

The wash up is that SPI traders – like their counterparts in the US and Europe - haven’t panicked yet only lopping 3 points off yesterday’s close. But they, and their cousins on the physical ASX, might worry a little today given yesterday’s poor showing by the bulls and the weak close back below 6100 on the ASX 200. We’ll see I guess.

Forex traders were less sanguine than their stock players. Certainly, the moves in forex are usually smaller than stocks but often more instructive. So it appears the hiatus in the US dollar’s rally has ended with the solid US data and moribund German/EU flow overnight. German GDP undershot expectations with a 0.3% print for Q1 which lowered the yoy rate to 2.3%.  Not terrible but a clear loss of momentum.

So Euro is down 0.68% at 1.1842 and the DXY is up by a similar amount at 93.23 – about 2 big figures from my 95.20 target. The Yen is weaker as well losing around 0.6% with USDJPY trading at 110.31 (about to break out) while Sterling is at 1.3511 down 0.32%. It outperformed after the employment data was a little better than expected and given it’s been trading in a tight range.

Of the commodity bloc the Kiwi has again done worst – though it was a close run thing – losing 0.8% overnight to sit at 0.6860. The Aussie is substantially lower too, off 0.7% at 0.7470. It’s heading much lower – they both are – it seems. That’s particularly the case given it was hard to miss the RBA apparent disquiet on the outlook in the last paragraph of yesterday’s Minutes. The CAD fared better thanks to oil with USDCAD up just 0.4% to 1.2863.

Bitcoin is down again as well at $8,522, off 3.29%. It looks biased quite a bit lower.

To commodities now and the big story is that Gold has busted lower, down and through the bottom of the range. It’s trading at $1292 – off 1.51%. Copper too is lower. It fell 1.19% to $3.04 a pound. ON oil markets it was quieter than lately with Brent marginally lower at $78.32 while WTI rose 0.3% to $71.16.

In other news, North Korea may not be the slam dunk President Trump hopes for. The DPRK has this morning pulled out of high-level talks with the South over a military drill being conducted with the USA. The State Department says they are still working on the assumption the June 12 confab is on.

And on the day today we get South Korean employment data, Japanese GDP, IP, and capacity utilisation. We also get the release of a very crucial wage price index here in Australia. Without wage rises we’ll all be rooned the RBA keeps telling us.

In Europe German inflation will be of great interest as will other inflation data for the EU including the actual Euro Area rate for April.  Building permits, housing starts, and industrial production in the US will also be watched closely.

Have a great day.     

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

International

  • It’s not just US bonds, its bonds globally, that are rising and that are pressuring emerging and other markets.  Indeed the Bloomberg Barclays global bond index is at it’s highest level since 2014 and looks set to keep rising as the Fed pursues rate hikes and QT. Here’s a chart from Bloomberg (apologies for the dodgy colours).
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Anf the 3-month Treasury rate is back at the S&P 500 dividend yiled. So the cautious investor, the one not worried by capital gain but concerned about capital preservation, but the one who also needs income now has a choice. They can chase the safety of Treasuries and eschew the danger of capital destruction for stocks at these lofty levels. There are many versions of this chart going around – but here’s one from Bloomberg – via Twitter – showing the relationship.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Keep an eye on North Korea.  While the South and the US are used to playing these international games the DPRK and it’s leader KJU are neophytes excited by the prospect of getting a seat at the top table. So it seems they won’t understand that its situation normal until its not. Thus the DPRK cancelled talks with the South because of the military exercises. No doubt back channels are being exhausted explaining what’s going on. But while success seems to be the most likely outcome nothing is certain from this Trump-KJU meeting.
  • China. The outlook is really positive, after a period of real difficulty. That’s the message I got after watching a RealVIsion video on the subject last night. I’m a RealVision subscriber because Australia is a long way away from the heart of the action in global financial markets and I don’t have access to some of the great minds in Europe and the USA. I subscribe to a few other things for the same reason. Anyway, I took a screenshot of the key takeaways which I don’t thing Raoul and the team would mind me sharing – as long as I recommend you have a look at the site and think about a sub.
Source: RealVIsion Screenshot
Source: RealVIsion Screenshot
  • And on the China-US trade discussions. While the US Ambassador to China has said the parties are still far apart and there is work to do Economic advisor Larry Kudlow said overnight that the “Bromance” – yes he used the word – between Presidents Trump and Xi just might get a deal done. It seems to be working for ZTE so we’ll see. We are also still waiting on NAFTA. Canadian PM Trudeau was optimistic overnight.

Australia

  • Did the RBA score an own goal yesterday with the inclusion of the phrase, “it would be appropriate to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence,” in the last paragraph of the Minutes to the most recent board meeting. I think they have. Or, as David Scutt, my former colleague at Business Insider, put it succinctly in an article titled “The RBA looks like it's running out of ideas, and hope appears to be the plan”. YUP!
  • Now, it is worth noting I have the utmost respect for the RBA and their amazing track record. But just like when they came to see me as part of their liaison when I was treasurer at Newcastle Perm and I sensed they had the wrong end of the stick so I feel they may again be on the wrong track with their hope for households and the consumer outlook. I wrote a series of tweets in a thread on Twitter explaining why I believe it will take more than wages rises to lift the consumer mood – you can read the first one and follow on from there.  For thos disinclined to do that the essence is – n plain language – borrowers are screwed because they borrowed what the bank told them they could afford and then realised they really couldn’t. So they had less left over at the end of each week and month. Thus they are frugalists now.
  • Anyway, at risk of blathering on, the key takeaway for my readers is that if house prices keep falling as I think they will then the chances of a rate cut grow materially. The growth in employment remains the single best salve for what ails households. But the lift in the participation rate overall and for households to me screams households desperate to make ends meet. Something to watch because it will inform interest rate markets which in turn will inform the Aussie dollar as well.
  • Speaking of which, the Battler is now almost a cent below the double top high of Friday and Monday. It’s trading at 0.7470 and is at risk of breaking down if this USD run combines with a more jaundiced view of the domestic outlook – as it might. Naturally today’s wage price index is going to be a big event for Aussie dollar traders against this backdrop and given the emphasis that the RBA has put on wages growth as a precondition for household and consumer recovery. Equally the fact the Federal Budget looks for a reacceleration in wages growth puts further pressure on this number as a key determinant of both the economic and fiscal outlook. For a great primer on the WPI today you should read Scutty’s piece over at Business Insider.
  • Looking at the price action then for the AUDUSD support is now at the recent lows around 0.7410/15. While that holds this is just a retest of support. If it breaks the next target is 0.7330 and then 0.7135.      
  • As I wrote above, SPI traders aren’t too fazed knocking only 6 points off yesterday’s close. The risk however is that we have been seeing a topping pattern in the SPI, and the physical which has been unable to take out and hold above decade highs. As such, if that is the case, we could see some buyers withdraw from the market which could undermine the outlook. 6,058 in SPI terms remains the key level to watch. The equivalent level in the physical ASX200 is the 6050/60 zone. IF either or both these areas give way a substantial pullback could result.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • So for all those who said the US dollar move was just position squaring we now have some fundamental news that supports it. So we might get a new narrative from the ex-posters. Look, I know I’m being harsh, and I know I’m tempting fate, but the reality is that those of us who write each day in the manner I do and who are in the business of trying to get quoted and shared and shared are under pressure to say something interesting every day. It leads to fitting the narrative to the price action. And it is very hard to avoid it. So I’m not actually trying to say I’m right they’re wrong. Rather I’m trying to point out things are not always as they seem.
  • And, as I’ve pointed out – when getting on my high horse this week – there are still plenty of longs in the Euro that can be squared up if we see a break of the recent lows. Indeed as you can see in this weekly chart of the DXY if we do see the break of recent highs, lows for the Euro, that opens up a run toward my target of 95.15/20. And if that breaks, watch the heck out – we’ll be talking about 97, 98 and maybe even 100.
Source: Investing.com
Source: Investing.com
  • The reason for dollar strength is clear. If you cut through everything myself and others have written over the past 6-12 months one key narrative emerges. When global growth in synchronised the USD suffers as focus turns to the other side of any USD pairs. But, as we might be seeing now, when the USA is the bastion on economic strength, when the rest of the world is struggling once more, when global growth isn’t synchronised in the manner that many thought, the focus turns back to the USD and it is rising as a result. NB: Global growth is not looking terrible. It’s just that it’s not living up to expectations.

Commodities

  • I talk about oil every day and I don’t have much to add this morning other than the API inventory data in the US fits with what looks to me is a topping pattern – or at least a decent pause – for oil prices at the moment. The candle on Brent is awful and certainly suggests a pause in its ascent. My sense is much is baked into the cake. There are now almost universal calls for oil to head higher. Some even say we’ll hit $100 a barrel. I don’t know. All I do know is that last night’s candle looks ominous and the high of $79.42 for Brent is in the “$8-10” target zone I put on Brent after the break of $71.25. So we might finally have found a reason to pause. Or at least lift a few longs for those that have them.
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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