Home / Blog / Market Analysis / Markets Mornings - Commodities and Comm Bloc currencies lift along with stocks on the trade truce and new US sanctions

Markets Mornings - Commodities and Comm Bloc currencies lift along with stocks on the trade truce and new US sanctions

Market Analysis /
Greg McKenna / 22 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome

Greg

Market Summary (7.46 am May 22 2018)

Commodities and commodity currencies have celebrated like its 1999 in the past 24 hours but the S&P 500 has finished a little more circumspect. Unable to push through last week’s peak or hold the best of the overnight highs the 500 index rose a solid 0.7%, 20 points, but it could have been more.

Part of that inability to hold the best of the gains is some skepticism about the detail, or lack thereof, in this deal with China. Mark Zandi, Moody’s US chief economist, called it “face saving” and a “lose lose” because “they’re not going to come to terms on anything – at least not in the near term”.

And for all of Treasury Secretary Mnuchin’s cheerleading a few words in a Presidential Tweet suggests Zandi might be right. Those words, “potential deal with China” and the fact there are no details on intellectual property, mean that we have a truce not a deal.

Indeed, trade negotiator Lighthizer said the Chinese intellectual property issues are far more critical than the trade gap.

But the fact that there is little chance of a deterioration in relations right now is all that forex and commodity traders needed to hear. As a result copper is up 1.15% to $3.09 a pound. That’s, naturally, helped lift the Australian dollar with AUDUSD gaining 0.98% to 0.7585 while AUDJPY is 1.2% higher at 84.22. Likewise the Kiwi and CAD are stronger as well with gains of 0.45% and 0.65%.

Of the other majors, the Euro was pummelled on talk of a  parallel currency in Italy – you’ll hear a little more about mini-BoTs I’m sure. But the sellers ran into a wall around 1.1716 and the single currency is back at 1.1793. GBP broke down as well on worries about UK politics, elections and a 2nd Scottish referendum. It’s at 1.3430, down 0.3%. USDJPY is mildly higher given the risk on tone. But at 111.02 it’s a little more than 30 points off the high.

Back to stocks now and the Dow had a cracking night rising more than 1%, 298 points, to 25,013. But, remember this is not a capitalisation weighted index – its driven by the stock/s with the highest share price. So to that end it’s important to note Boeing, the Dow’s highest priced stock, was also the biggest mover.

The Nasdaq 100 was up 0.6% while the FTSE in London rose 1%. It was Whit day in Germany so the DAX was closed but Italian stocks and bonds came under intense selling pressure. Some comments from ECB governing council member Nowotny about nervousness around the policy of the new government highlights what markets are thinking right now.

The washup for the local market though is not as you might expect at first blush. At least not based on what SPI traders have done overnight. At 6080 the SPI is down another 13 points after a poor close yesterday on the ASX 200 physical at 6,084. So we’ll see what the day brings.

In other commodity news fresh sanctions on Venezuela after the weekend election – including on bond buying – and a belligerent speech from US Secretary of State Pompeo on Iran turned traders from some mild selling back to the buy side. The result is WTI is up 1.6% and Brent has risen 1.17% to $71.42 and 79.45 respectively. Gold is calm at $1292.

US 2’s are a little higher at 2.57% and the 10’s are sitting at 3.05% just a point lower than Friday’s close. The US Treasury issued around $100 billion of 3 and 6 month bills overnight while Fed speakers continued to suggest rates are still on track for 2, perhaps 3, more hikes this year.

On the day ahead it’s fairly quiet. More Fed speeches, a swag of BoE speakers and then the CBI industrial trends index before the Richmond Fed manufacturing index tonight in the US. Quiet.

Have a good day.

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

International

  • So what’s a mini-BoT? It seems a mini-BoT - Italian small euro-denominated, non-interest-bearing Treasury bills - is a vehicle by which the new Italian government may be able to circumvent EU restrictions, issue debt to pay bills and increase spending, and in doing so create a kind of parallel currency to the Euro for Italy. The worry is the new government could issue this paper to fund to fund its proposed tax cuts and substantial spending plans which add up to more than $100 billion in costs.  
  • It’s a real threat to the Euro and the EU system. And although the government did say we should all relax and wait to see what they do, forex traders reacted with concern. But it’s bond and stock traders where the real trouble lay. As Holger Zschaepitz noted on Twitter the bowout between Italian and German bond spreads has indeed been “a brutal move”.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The China deal is a furphy. Mark Zandi from Moody’s is right. This is a deal to stop escalation and to try to get some space to deal with North Korea and have a proper discussion around intellectual property. Yes Wilbur Ross is going to China next week. Yes China has said it will buy more imports. But both sides have stressed this is not a government to government deal and the Chinese – in particular – have again stressed that companies who want to do business in China need to create products that Chinese consumers want to buy. So while the easy wins on agriculture and petroleum will help the broader topic of US/China trade and the deficit will remain for a time. But for the moment the good news is there is no escalation. That’s what we have to deal with as traders right now.
  • But from a price action point of view the SPX needs to break and hold the 2,742/45 region to kick on. It looks like the break of the trendline has been tested. And a break up and through here would suggest a decent move higher. For the moment though the rally is stalled. So maybe it wasn’t just trade tensions which saw the S&P 500 fall half a percent last week.
Click on me, I'll expand
Click on me, I'll expand
  • And to this end check out this cracking look at the chart I saw float past on Twitter that TopDown Charts posted. The key here Callum Thomas says is “Margin debt growth is decelerating - watch out if it starts contracting”. Just like Australian housing. Without fresh debt prices stop rising. Remember what Tom Demark says. Tops aren’t formed when sellers step in, it’s when buyers disappear. I am not predicting a crash, just something to watch folks.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Also worth watching, if you aren’t already, is the train wreck in emerging markets. Last week Carmen Reinhart – of the famous Reinhart and Rogoff combo – hit the alarm bell over EM countries due to the leverage and levels of USD funding they have build up. They are in trouble now – and it’s not just Turkey and Argentina. Here’s another TopDown chart of the move in Sovereign CDS for EM nations.  And here is a link to Callum’s full blog on the topic.  
Source: Twitter Screenshot
Source: Twitter Screenshot

Australia

  • The Australian dollar is doing what the Australian dollar does when risk goes on – yes I hate the term too, but it explains things easily – and commodity prices rise. So it is higher this morning at 0.7580 which is a gain of a little more than 1% from the lows of yesterday around 7504/5. That the Aussie rallied is no great surprise given the lift in copper. As readers know that’s my coincident indicator for the Aussie on a directional basis and it has again moved largely in lock step with the AUDUSD since Shanghai futures opened yesterday morning. Further gains in US trade also helped the Aussie. On the daily and 4 hour charts the Aussie looks like this rally might have legs. Here in the low 0.7580’s is a little bit of resistance with the 23.6% Fibo retracement of the fall from just above 81 cents to just above 74 cents. There is another 1 cents of clear air on this timeframe – since January – before the Aussie hits the 38.2% retracement of that move. Closer to hand though, and on the day next resistance is at 0.7609/12 (50% of the fall from 78cents) and then 0.7660 which is the 61.8% of the last leg lower. Where sentiment and commodity prices go so will the Aussie at the moment.
  • Sellers are likely to be lurking overhead though. Support sits at 0.7560 on the day then 0.7535.
  • Stocks in Australia outperformed their US counterparts for week’s. But they are now struggling to make headway up and through this 6,100/6,150 region where the high of the past decade sits. The close of the physical yesterday at 6,084 was an ominous sign for the local market. But unless the ASX 200 breaks below 6,060 – yesterday’s low was around 6,070 – the situation does not become dire. If it does however 5,985, the 38.2% retracement level of the recent rally comes into the frame.
  • It’s a similar situation for the SPI which had an inside day and looks to have a downside bias back toward Friday’s low at 6,066 and the important support at 6,058. If that breaks then, like the ASX, a drop of around 100 points could ensue.
Click on me, I'll expand
Click on me, I'll expand

Forex

  • This Italian situation is interesting. Can the government, would the government, really issue these mini-BoT’s in order to fulfil its election promises but also threaten EU solidarity? It’s an interesting question. But one where perhaps we can look to President Trump’s assiduous prosecution of his own election promises. So it is a risk.
  • More importantly for forex traders though is the wall that sellers ran into when Euro entered the 1.1700/20 region overnight. That’s been my target as it represented the 38.2% retracement of the big rally we saw in the Euro recently. As such the easy, garden variety, move lower in the Euro has been made. The question is how high will the bounce go before the downdraft – which still seems in place – reasserts itself.
  • In no small way that depends on data flow, Fed comments, and sentiment. But it’s worth noting that the CFTC data showed a stubborn cabal of Euro longs. Perhaps there is an option down near 1.17 which is being protected. But if it does break then it could be a game changer for the Euro outlook. And with it the US dollar.
  • Here’s the EURUSD chart – 1.1550/1.1600 looks possible now.  1.1820/25 and 1.1855/70 is resistance short term.
Click on me, I'll expand
Click on me, I'll expand

Commodities

  • Just when it looked like oil might be due a pullback out cam the US with more chat on Iran and fresh sanctions on Venezuela. That makes sense I guess given that the aggressive approach of the US administration seems to have been achieving success in many of its other battles. Anyway, the news is the US has taken aim not only at the Iranians but their sponsorship of terror across the Middle East. The Secretary of State has threatened Iran with the “strongest sanctions in history” if it doesn’t change the course and conduct of its policy with regard to “uranium enrichment” and its forces in Syria. The Iranians of course have said who is the US to decide for it or world who can do what and when.
  • That was enough to put the bid back in oil but then the announcement of President Trump signing an order banning the purchase of Venezuelan debt – so the regime can’t plunder the state by issuing debt and then stealing the proceeds – also sent prices higher. That was even though there were not fresh oil sanctions. It comes in the wake of the fresh election victory of President Maduro, one the US sees as fraudulent and the oil markets expectation seems to be fresh oil sanctions will soon follow the debt ban.
  • From a price action perspective Brent has had a nice bounce off a low of $78.08 overnight but still looks to be topping. I’m wrong for the moment if last week’s high gets taken out – yes I know, obviously.  
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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