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Markets Morning - US dollar pressured, stocks and oil up, as Politics drives markets

Market Analysis /
Greg McKenna / 01 Jul 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (Saturday June 30)

Friday’s trade in markets was a maelstrom of political deals, rumours, data flow, and end of quarter positioning, and Chinese market recovery which saw the USD come under heavy selling pressure, sterling surge, stocks find a bid, and oil continue its march higher.

Starting in Asia the news that Europe had agreed an immigration deal, one that looks very much like Australia’s “Pacific Solution”, somehow set the robots hearts aflutter and saw a buying frenzy in the Euro mid-morning my time which then fed on itself as Chinese markets recovered and the Euro ended the week at 1.1683 up a full percent on the previous days close 7am Friday morning my time.     

That the Euro could ignore the 2.1% fall in German retail sales for May, and the lift in US PCE price index to 2.3% yoy (spending did miss at 0.2% though) is a testament to the change in tone the ability of EURUSD to hold 1.15 over the past few weeks has ushered into Forex markets and the USD. Or was it just quarter end?

Given the Citi Eco Surprise Index for the US slipped further below zero Friday, this week and the data flow – global PMI’s, German factory orders, and US non-farm payrolls – will inform markets if the USD’s rally is over or just in hiatus. Whatever Larry Kudlow said about “slow” Fed rate hikes Friday – and the impact it had – Jerome Powell is pretty clear it’s all about the economy.  

In the meantime, it wasn’t just the Euro which ripped higher. The Pound fed of some better than expected GDP revisions with the pound shooting back above 1.32 for a GBPUSD close at 1.3209. Likewise the CAD benefitted from the weaker tone in the USD and also some surprisingly strong PPI data (+1% mom in May, 3.1% yoy) which suggests the hawkish read on governor Poloz’s press conference this week might be the right one. USDCAD fell from a high at 1.3269 to close at 1.3131.

The Kiwi climbed off the mat to finish at 0.6764 while the Aussie closed back above 74 cents at 0.7402. Can we pencil in a run back to 0.7445/50? Probably. USDJPY held a lot firmer than the other pairs (suggesting some qtr end shenanigans in other pairs) and closed at 110.66.

To stocks now, and even though the big three indexes closed in the black Friday they were in the red for the week. Friday saw the S&P 500 rise 0.1% to 2,718 – 25 points off the high of the day and right on its low at the close. DANGER WIL ROBINSON! The Dow closed 0.23% higher at 24,271 and the Nasdaq 100 finished at 7040 up 0.13%.

Globally it was the worst first half for stocks since 2010.

IN Asia and Europe stocks were buoyed by the bounce in China which saw the Shanghai comp rise 2.2%, the CSI rise 2.6% and the FTSE China A 50 lift 1.6%. At the close in Europe this helped the DAX rise 1.1%, the CAC lift 0.9%, and the FTSE in London increase 0.3%.

Naturally, SPI traders exercised their inner bull and added 23 points to Friday’s close after the ASX 200 fell 21 points to close out the financial year at 6,194.

On commodity markets oil was higher again with WTI closing above $74 a barrel for the first time since December 2015. It’s at $74.15, up 1.1%. Brent too was higher at $79.23. Gold was a little higher too ending the week at $1252 and copper is largely unchanged at $2.95.

NB: On Saturday President Trump send a tweet that is likely to rock Oil markets when futures open on Monday morning. Trump said he’d asked and the Saudi King had agreed to increase Aramco production by 2 million bpd.  Iran is not happy.

Monday kicks of the start o a new trading month and with it comes a raft of manufacturing PMI’s across the globe. Over the weekend China’s NBS )official) PMI’s were released roughly in line with expectations with Mfg at 51.5 down 0.4 from last month and 0.1 below expectations. Non-Mfg was in line with expectations at 55.0 and 0.1% higher than last month.

The Caixin private sector PMI is out in China today, as is the AiGroup’s Mfg PMI in Australia, Markit PMI’s across the globe and the big daddy ISM in the US is also out. Japanese Tankan and Euro Area PPI are also out.

Have a great Monday – I’ll be out for Mrs McK’s 50th  

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

International –

  • The tweet I mentioned above could rock more than just oil markets this week. Naturally it’s the signal President Trump is sending that is the key. But after oil rallied something like 13 pre cent in the past couple of weeks short of opening up the SPR  this is the next best thing. Trump is both trying to protect the economy and his constituency from high and rising fuel costs.  But if futures nd then oil markets react the way the president intends we could see implications for energy stocks and thus stocks overall at a time many indexes are looking a little fragile.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Iran isn’t happy though. ZeroHedge reported Sunday Iran’s OPEC governor said that “if Saudi Arabia accepts U.S. President Donald Trump’s request to boost output, that means he is calling on them to walk out from OPEC…We are 15 countries in an agreement. Set aside that they do not have the capacity, there is no way one country could go 2 million b/d above their production allocation unless they are walking out of OPEC”.
  • This pair of charts from ZeroHedge and Sunchartist tell that trail of fragility.  And after the worst quarter for global stocks since 2010 investor allocations to stocks are down a little based on survey data released by Reuters Friday. So we may, besides company buybacks, be already seeing a little buyers strike.
Source: Twitter Screenshot and ZeroHedge
Source: Twitter Screenshot and ZeroHedge
  • Some say the S&P 500 is mapping out a head and shoulders pattern which, if last week’s lows give way open a fall toward 2,600 (via @hmeisler)
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Can the stock market fall if the US economy is still so strong and earnings are expected to deliver around a 20% yoy growth rate when the next round of reports are out soon. The answer of course is that it depends on what’s priced in and the guidance that CEO’s and CFO’s give. Remember the impact of the Caterpillar CFO’s words about Q1 being the highwater market for the economy had for sentiment. He was right of course. Or so it looks right now for global growth.
  • And that brings me to my weekly wrap of the major Citibank Eco Surprise Indexes. The world has been underperforming expectations. Only the Australia data flow has been marginally in the black – likely because no one held lofty expectations for it. But everywhere else, including the United States, is in the red. That means data is printing weaker than expectations. And that’s important because it impacts on valuation metrics and the repricing of same.
  • And as if on cue Friday saw the Atlanta Fed drop the Q2 GDP forecast for the US to 3.8% from 4.5% just two days prior. This week’s data flow is going to be huge.  
Click on me, I'll expand
Click on me, I'll expand


  • If global stocks are precarious. Then the best monthly close in a decade makes the Australian market also at risk. What’s driving the outperformance from a macro index level - ASX200 v S&P 500 - is still problematic.  Clearly you can build the case from the ground up, company by company and sector by sector, otherwise the index wouldn’t be here near 6200. But can the ASX continue to outperform?
Click on me, I'll expand
Click on me, I'll expand
  • The history of the price relationship between the top indexes suggests these periods of out and under performance end up being resolved. The question is whether it’s a fall in the Australian market or a lift in the US. Based on the charts above - where global and US equities are resting at important levels - we’ll know soon if the ASX can continue to levitate at these levels or not.
  • The Aussie dollar is back above 74 cents. None of that move is under its own steam. It’s all US solar weakness. The Aussie is again outperforming copper, base metals, and risk appetite. But while the USD is on the back foot AUD sellers will be cautious. My daily AUDUSD note is out and on the blog so have a look.
  • And just quickly on the Australian economy. This chart of credit demand in Australia - showing its fall- and the one below showing the relationship between credit and economic growth suggests Australia is facing a further slowdown. Steve Keen told me to watch this relationship here and globally quite a few years back. It’s anlittle concerning right now.


Source: Twitter Screenshot
Source: Twitter Screenshot


  • The weakening trend in US data is important for the USD and by extension every pair on which it has some influence. We saw the reaction of GBPUSD to the UK GDP data on Friday night and the impact that had on BoE expectations. Likewise we saw the PPI and raw materials spike in Canada reprice expectations about the BoC and a reread of the hawkish tone of the  governor Poloz’s speech and comments during the week. Both the Pound and Loonie moved sharply as a response to this central bank repricing. That makes the dataflow this week, German factory orders and US non-farms, not to mention the PMI’s – especially the ISM in the US and the Caixin in China -  extremely important for forex traders.
  • If I claim that policy and economic divergence is important for the US dollar and its strength then it’s also important in this trend reversal we are having and which accelerated Friday.
  • And with positioning now net long USD’s – as you can see in the table below – the room for the USD bounce and reversal of the weak holders of these positions. It may have already began. The question is how far it goes.   
Click on me, I'll expand
Click on me, I'll expand
  • I’ll talk about each of the currencies specifically in my daily video but for today’s chart it’s GBPUSD and the bounce back toward the previous support. A bounce off the bottom of the trend channel could continue all the way to 1.3290/1.3310 resistance. Only a break of there would threaten the overall downtrend for the moment.
Click on me, I'll expand
Click on me, I'll expand


  • Oil’s 13%+ pus rally is in for a real test after the President’s tweet over the weekend. If his entreaty to the Saudis to prime the pumps and get them producing again proves correct then it will go a long way to redress the supply disruptions – in Libya and elsewhere - that have undermined the effectiveness of the Saudi/Russia/OPEC deal.  
  • And with WTI at a perfect spot for a reversal we could see a $4 move in WTI back to $70.28 – the 38.2% retracement level of the recent move higher.   
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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