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Markets Morning - US stocks reverse early gains, USD on the march, Rates lower, Oil belts higher

Market Analysis /
Greg McKenna / 28 Jun 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.46 am Thursday, June 28)

The Dow finished 450 points off its highs and the S&P closed 47 points from its peak as the attempt to soothe market fears from the US Administration fell on deaf ears. Or at least ears which now understand this trade battle looks set to be protracted and may materially impact company profits and global growth.   

So at the close, the S&P 500 finished at 2,699, down 23 points for a fall of 0.86%. The Dow was 165 points lower for a 0.68% drop to close at 24,117 while the Nasdaq 100 lost 1.23% to 6,981 and the Russell 2000 dropped 1.54%.

It was different earlier as Europe had a good day in the hope that President Trumps less aggressive stance toward Chinese (sorry foreign the Administration says)  investment -  using beefed up, but established agencies to vet deals -  saw stocks lift even though there was carnage in Asia.

So it’s likely to be an uncomfortable open for Europe’s bourses this afternoon my time unless something changes in Asia given the DAX, CAC, and FTSE 100 all closed 0.1% either side of a 1% gain.

Here at home though the SPI traders are still unwilling to say the local market will come under the pump, having only knocked 9 points off prices overnight. That seems heroic to me. We’ll see though.

On forex markets, it was a story of USD strength with the Greenback up 0.7% in DXY terms and – CRUCIALLY – above the 95.20 level on a close basis at 95.31 now. It still hasn’t taken out 1.15 against the Euro though with EURUSD at 1.1555 this morning down 0.76%. That is the key to everything in many ways. A break of 1.15 and the USD is away. The Pound is down around 0.8% at 1.3118 and against the Yen the dollar is also stronger, but only mildly so, given the funk in markets right now. It’s at 110.21 up 0.15%.

The commodity bloc was mixed with the Canadian dollar doing best given the surge in oil prices. USDCAD is only up 0.35% to 1.3353 even after BoC governor Poloz intermated rates aren’t moving anytime soon and uncertainty has risen. The Aussie fell o a new low for this run at 0.7325 and sits at 0.7339 as I write, down 0.7%. And the Kiwi, the flightless bird that it is, did worst falling 1% to 0.6795. It’s held in okay given the RBNZ this morning held rates and signaled that policy would be for the foreseeable future. The Kiwi’s low, 0.6780, has been my long-held target. If it breaks then its 0.6656 as the new target.

Finally to oil and other commodities.

9.9 million! That’s a big number, even if you say it fast. And it’s the size of the draw in US crude inventories the EIA reported for the last week. Naturally given everything that is going on around Iran and supply disruptions that send oil prices belting higher with WTI gaining 2.6% to $72.36 while Brent was up a more circumspect 1.4% to $77.39.  

That rise and the prospect of inflation down the track still couldn’t lift gold from its slumber. The yellow stuff is down again having lost another half a per cent to $1252 an ounce. $1235/40 here we come. Silver lost 1% and copper is down just 0.22% at $2.99 amid a mixed night for industrial metals. Bitcoin is still clinging above $6,000. But it did lose about 1% to $6,137.   

On bond markets the carnage saw rates go bid and the US 10 year Treasury fell to 2.82%, the 2 dropped to 2.51% and the curve is at 31.80 points. And of course, that FT chart of the global yield curve inverting for the first time since 2007 is getting a lot of airtime.

It’s been an ugly 24 hours folks. China has had a shocker on its stock and for the Yuan and developed markets are only just starting to pay attention. This could be the start of another decent bout of volatility.

So as the Sergeant used to say in Hill Street Blues – be careful out there.

Have a great day.  

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

International

  • Folks, there is a really important shift that last night’s price action points to. That shift, as my old mate and former colleague Richard Franulovich pointed out on Sky Business this morning when he said that even though the Administration has tried this week to walk back from the more aggressive elements of the trade war and Chinese investments in sensitive tech the markets still fell.
  • That is a shift and to me it reflects a combination of a recognition the Administration is nuancing its message but still pursuing its policies and that as a result there are now real concerns about global growth. It’s also a recognition that the Chinese are willing – at least for the moment – to let their stock markets drop and currency weaken in what might be a tactic in the trade war battle to but US markets under pressure. The jury is out on that one. But it’s getting some air time in discussions and so is impact the narrative.
  • To prices now and the chart of the S&P 500 is looking a little ugly. Here’s what Twitter mate Gregor Samsa (@macromon) said on a post with his chart below. “Big reversal in U.S. stocks today. The S&P broke key support trading through the 50 and 100-day moving average and the .50 Fibonacci retracement level to close slightly below 2700.  Next stop is the 200-day moving average at 2689.19 and the swing low at 2689.19.  If these levels don’t hold, look out below, and they are only a chip shot away.“ Yup.   
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Looking at Chinese stocks now and I’ve been baffled at the markets ability to ignore what was happening on the SSEC and CSI indexes. But yesterday’ move in the Yuan and the break in the China A 50 were different. The big move in USDCNY and CNH caught forex traders attention as I noted above. But it’s the move in China A where many global investors exercise their views and place their money in Chinese stocks which was for me a big issue that caught traders eyes. As you can see below the A50 index has broken a trendline going back to 2014.
Click on me, I'll expand
Click on me, I'll expand

 

Australia

  • The Aussie dollar made a new low for this run again overnight and even though it’s a little higher from that low the downside is again beckoning. I say that with reference to the various drivers of the Aussie dollar that are all pointing lower now. Take for example investor risk appetite, the USD strength, the outlook for the Australian and global economies (relative to expectations a few months back), the RBA outlook versus the Fed, the bond spread with the US, the collapse of copper and drift in other important Australian commodities, and you end up with an outlook which is negative for the Aussie dollar.  
  • Price action wise the break of the recent low, after the recent bounce now targets 0.7219 as a 138.2% Fibonacci projection of the most recent down leg. And then of course I have my medium term target in the 0.7125/50 region.
  • How much longer can the levitation of the Australian stock market last if the rest of the world is under the pump. Frankly my rhetorical self continues to marvel at the ability of the market to stay bid even as China collapses, as the US markets went offered last night and as the risks of a real,  protracted, and disruptive trade war grow. There is a growing theme I’m hearing that Australia is best positioned to weather such a storm. But that theory would have to break the rule that says the scariest words in finance are “this time it’s different”. So I’m not convinced.
Source: RBA
Source: RBA
  • Sure the falling Aussie helps a lot both economically and for companies sourcing their income overseas. It certainly aids the economy as well with a sustained 10% fall, where we are heading, adding materially to growth over the following year or two RBA analysis has shown. SO maybe that’s it. But I just don’t buy the notion we can remain elevated while the rest of the markets are under pressure.
  • That means I’m watching prices closely for a break lower here in Australia as well.  The SPI could fall close to 50 points and still hold its uptrend. But if 6,075 breaks we could see a big fall. My sense is we’ll at least test this trendline.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • I remain a USD bull. There are certainly headwinds rising against the US economy in this trade battle. There are certainly headwinds rising in traders and investors minds too with the yield curve continuing to flatten. And last night the Atlanta Fed revised its Q2 GDPNowcast to 4.5% on the back of housing and durable goods data. But if you even knock 1% off that estimate the US is still shooting the lights out relative to other regions and the Fed is still likely to continue its rate hiking course. So I retain a view that the policy and economic divergence theme will continue to drive the USD higher.
  • But for this move to become substantial the EURUSD needs to break down and through 1.1500 on a close basis. Preferably a weekly close. We haven’t seen that yet. Certainly the DXY is now up above the 95.20 level I need to see on a close basis today. But I’d prefer a weekly close above that level as well. 96.06 is now the target for the DXY and if 1.15 breaks in the Euro its 1.1150 to 1.1250.
  • Yesterday I mention I thought the Yuan would fall to around 6.70/80 maybe even 7.00 against the USD. Those levels remain in the ether at the moment but we had another week performance from the Yuan yesterday. At 6.60/62 the USDCNH and USDCNY are back at levels they were at last October before running down below 6.30. It’s been a steep move. And for any other market I’d argue it’s unsustainable in the short term. SO I’ll be interested to see what Chinese authorities do, if anything, after this sharp depreciation. If they say or do something to stabilise the USDCNY cross today that will settle markets more broadly. If not then we could be in for another tough day at the office across markets globally.   

Commodities

  • So much to say but I’m running out of time. The deal to increase supply has not been enough to calm nerves given President Trumps push to get Iran imports down to zero from allies. Through in a monster draw in Crude inventories of close to 10 million barrels, plus disruptions in Libya and continued issues in Venezuela and we have a market which feels very tight right now.
  • SO the bulls have the whip hand as you can see looking at either Brent or WTI charts. Brent looks biased back towards the highs around $80 while WTI has broken back inside the old uptrend channel and looks set to race toward the top around $75.50 is the high watermark of recent prices at $72.87 can be bested on a close basis (last night’s high was $73.03).
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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