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A Big Sigh Of Relief

Published 11/04/2018, 09:27 am
Updated 06/07/2021, 05:05 pm
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Originally published by AxiTrader

Market Summary (7.47am Wednesday April 11)

The collective sigh of relief across global markets was palpable yesterday as China’s President Xi began his address and it became clear he was going to use his speech at the Boao forum to deescalate tensions with the US.

That he didn’t appear to offer anything fresh is quibbling. The point is he didn’t ratchet the handle on rhetoric in what’s still likely to be an ongoing battle between the globes two biggest economies and their political systems.

President Trump saw the speech for what it was and tweeted he was “Very thankful for President Xi of China’s kind words on tariffs and automobile barriers...also, his enlightenment on intellectual property and technology transfers. We will make great progress together!”.

So this morning we had had some good gains on European equities and solid gains on US markets. But those gains aren’t materially more than Asia anticipated in the immediate aftermath of the speech yesterday. At the close the S&P 500 is up 1.675% to 2,656, the Dow is 1.79% higher at 24,408, and the Nasdaq 100 is 2.22% higher (thanks Facebook (NASDAQ:FB) which rose 4.5% as CEO Mark Zuckerberg testified).

What’s interesting about these moves is that we’ve now seen the S&P 500 move more than 1% on 8 days in the past 2 weeks. That’s something that I don’t believe has happened before and all that inside a 5% range. Volatility is volatility even if its upside.

Anyway, bringing it home and the fact that a fair chunk of the moves happened in Asia yesterday seems to have left SPI trader unable to push higher overnight. Indeed even though gold, base metals, iron ore, and oil are all higher, even though only utilities went backwards last night in the US SPI traders have added just 2 points to where prices were last night.

On forex markets the US dollar's inability to take succour from anything is writ large again this morning with the US Dollar Index down at 89.62. The euro shot higher after ECB governing council member Ewald Nowotny mentioned a rate change. So, even after a stinging rebuke from an ECB spokesman that Nowotny’s views were his own not the governing council’s EUR/USD is up 0.3% to 1.2354.

Elsewhere USD/JPY is actually higher as the safe haven of the yen seems less necessary today. It’s at 107.16 up 0.37%. The pound is higher as well, up 0.3% to 1.4172. On the commodity bloc the Aussie roared higher along with the kiwi, Canadian dollar, commodities and risk assets in the wake of President Xi’s address yesterday. AUD/USD is up 0.84% to 0.7762 with lots of resistance between 0.7780/0.7820. The kiwi is up a similar amount at 0.7366 and the Canadian dollar also gain near 0.8% with USD/CAD falling to 1.2603.

Turning to commodity markets now and Brent traded up to a new high for the year overnight. It’s up 3.6% to $71.12. WTI is up a similar amount at $65.70. On base metals markets the Russian sanctions seem to have had a direct impact on aluminium (LME said overnight it can’t take Rusal product into inventory) and Ali’s surge of 4.75% overnight seems to have also dragged the complex higher. Copper is up 1.94% as a result to $3.13. Gold is also higher – something that makes no sense given the yen move save for the weaker US dollar. XAU/USD is at $1340 this morning.

In other news US PPI for March printed 3% headline yoy and 2.7% core. But US rates markets weren’t fazed with US 10's at 2.80%, 2's at 2.30%. Also worth noting as Russia and the US face off again in Syria while Russian stocks and the rouble are getting absolutely belted as a result of the latest round of US sanctions.

On the day ahead it’s Westpac Consumer Sentiment here in Australia, Japanese PPI and Machinery Orders as well as Chines inflation data. RBA Governor Lowe is speaking at lunchtime and then we get a big release in the US with march CPI due this evening. This is the data point where the telco’s price falls are expected to wash out which means the market is looking for a lift in headline inflation to 2.4% and core to 2.2%.

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

International

  • Did President Xi actually concede anything? That’s a question that many folks are asking and writing about in the period since his speech yesterday. The answer appears to be no. And certainly, there was an air of disingenuousness about some of the things Xi said about free trade and when he said “states must refrain from seeking dominance” given past practice and what’s going on in the South China Sea. But the key for traders and investors is that Xi did not use to up the ante. Indeed while his comments appear to echo those made previously about opening up the economy and on tariffs it was a clear he is open to negotiations. Indeed what was also clear is that like State Media recently Xi was offering its vast and growing consumer and middle class as a salve to concerns about what it's policies might render.
  • Thankfully also President Trump took Xi’s lead and has responded in kind as I highlighted in the introduction. So where does that leave us? The glass half full version is that China and the US will work out a deal which both find acceptable and we’ll move on, the Fed can worry about a strengthening economy and companies around the globe can look forward to doing business more openly in China. The glass half empty version is that China has to come a long way across the line to satisfy the Administration and thus there is more wood to chop. My take? This isn’t over yet. But while negotiations are taking place this battle will recede from the headlines a little easing pressure on stocks and risk assets.
  • And on this tack, something I forgot to add in yesterday morning’s piece was an article on LinkedIn (NYSE:LNKD) by Ray Dalio where he worries about real wars as well as trade ones and throws in a little of Thucydides himself.
  • But that doesn’t mean it’s all rosy for stocks in the US, and thus around the globe. I say8 that because my sense is that even though Facebook CEO Mark Zuckerberg seems to have gotten through this first round of testimony without taking any serious blows it is, and has been, my base case that more regulation is coming for this sector. That’s something I’ve been banging on about for a while now.

Chart
Source: CNBC

  • And speaking of the outlook for stocks here’s an interesting piece of analysis from the folks at Almanac Trader I picked up in a tweet from Jesse Felder who wrote in accompaniment of the chart “Down February/Down March: Historically a Rather Bearish Outcome”. Indeed.

Table
Source: Twitter Screenshot

  • I had an interesting conversation with a reader yesterday in which he chided me for what I wrote about my perception that a disdain for President Trump is impacting markets. It was great to get his note because often I write in a vacuum and I’d encourage anyone who thinks I’m talking bullocks – or simply wants to put their own view - to drop me a line. Anytime.
  • Anyway, here’s part of what I wrote back. narratives trend in the same way as fundamentals do. We’ve seen it many times over the years whether in Nikkei, euro, Aussie, 90’s Nasdaq stocks, or Bitcoin more recently. Feedback I have heard from strategists who talk directly to European money managers is that the dislike for Trump has in fact coloured their investment decisions. That makes perfect sense. Why invest in something or buy something you don’t like or believe in? Please don’t mistake what I write for judgement of those who hold that position. That’s not what it is. My point, now and recently, is that everything is in a range – that reflects the balance of probabilities at the moment. But I’m writing what I’m writing to reflect that if the trade dispute is settled, if EU data keeps tanking, there is likely to be a reckoning because relative expected return considerations will change through time….”. Thanks for the interaction JB.

Australia

  • The Australian dollar has shot higher in the past 24 hours buoyed by a combination of relief that President Xi didn’t ratchet up the rhetoric on trade, instead making room for a deal, and the solid rally in stocks and commodities which has resulted from that release of market tension. As I noted in the elevator section you could feel the sigh of relief all the way in One Mile yesterday as President Xi struck the same tone he did earlier this year in Davos.
  • As a result he Aussie is now firmly in the top half of the current downtrend and looks set to run toward overhead resistance in the 0.7780/0.7720 zone where the 100 and 200-day moving averages sit along with the top of the current downtrend. With little data out to move the Aussie, save second tier Westpac Consumer Sentiment, it seems price action across Asia is the key. Already the move in copper supports this higher Aussie so we’ll see where it goes from here.

Chart

  • 0.7780 seems like the big hurdle on the day given it is both the 38.2% retracement of the recent down trend as well as the 100 day moving average (0.7781). Above that the 200 day moving average is at 0.7810 and the downtrend is at 0.7818 along with the 50% retracement level.
  • SPI traders weren’t able to go on with it last night. At least in the last hour or so they have managed to pull the 8 point fall in June to a 2 point rally. But the question is whether that in itself is underdone. The physical ASX 200 finished at 5,857. But the 200 day moving average up at 5,899 must surely come into the frame. Certainly the previous lows around 5,875 should for the physical ASX200 and then we’ll see if it can run to or perhaps through 5900. Importantly the S&P 500 is effectively dancing on the spot. The question there is whther it’s building a base from which to roar or has sellers consistently happy to offer supply on bounces. Earnings season is about to start and great things are expected. That’s a risk for the US, and global markets, like the ASX 200.
  • Looking at the SPI itself 5,855 is the next level of resistance as the 50% retracement of the last move and then above that it’s 5,896. Here’s the chart.

Chart

  • The NAB business survey was interesting yesterday. What’s interesting is that something we’ll have to watch is after peaking over the last few months where exactly are business conditions going to settle? Globally my sense is we’ve passed the sweet spot for growth in terms of hard and soft indicators and we’ll just have to see how things play out going forward here in Australia. It’s far too soon to think about a slowdown because these numbers on any other month (except coming after last month’s amazing prints) this would still be a great result. Anyway here’s the key data and the chart of conditions and Confidence
  • As I tweeted at the time of the release, “Definitely weaker than last month and forecast for this month but @NAB business survey still pretty strong when you lift the bonnet and see trading, profitability, and employment...Is this a tentative sign we've past #ausbiz best though?”. We’ll see I guess.

Chart

Forex

  • The ranges are holding across many forex markets. In the euro it’s 1.2150/1.2550. For the USD/JPY its 104.50/107.50 or 108.50. Sterling likewise is below the recent highs still and the Kiwi is firmly in the range as it moves from the recent test of the lows toward the top. USD/CAD is a different story, it looks like it’s broken lower, and the Aussie is lifting off recent lows again within an overall downtrend.
  • So what does that tell us? Not much quite frankly. But what we do know from last nights reaction in the EUR/USD to the comment by Ewald Nowotny on ECB rates is that this is a very one sided market. Whether it is just headline chasing Algo’s or physical traders for many, many months now there has been a slant on how bullish Euro news is treated compared to bullish US dollar news. Now this is not to judge. It is simply to point out the market we are in. We have seen these types of reaction functions many times in the past. Usually, they pass and investment and economic fundamentals win out once again over the trend in sentiment. But we haven’t seen that yet. So we trade the range unless or until they break. And which side they break, if that breaks hold it will give us a clear signal as to where the market’s head is at – particularly when it comes to the US dollar and its recent inability to take a trick.
  • Chart of the day – with apologies to Marc Chandler of BBH who tweeted a similar chart earlier. HOW DID I MISS THIS? Seriously, how did I miss a head and shoulder on the USD/CAD? With hindsight, I can see the uptrend line I’d drawn took my eye away from this obvious pattern. Anyway since breaking the neckline USD/CAD has fallen about 200 points and perhaps has another 100 to go. That’s convenient because it would suggest support at the 61.8% retracement of the recent move higher.

Chart

Commodities

  • So many moving parts in oil right now. We have the Syrian face off between the Russians and the US. We have the Saudis still banging the table over Iran, we have Israel conducting operations in Syria, perhaps an imminent US attack, and we have the relaxation of tensions between the US and China allowing oil traders to exercise their worries over geopolitics free of a trade war disrupting the outlook for global growth. Through ini the trimming by the EIA of production growth expectations for the US and we get a pretty bullish backdrop right now.
  • So we’ve had some very sharp rallies overnight in both WTI and Brent. Brent touched a new high for the year and is at risk of breaking higher – substantially so. As I hiave written before a break of the top of the range could see a move of an additional $8-10 a barrel for both Brent and WTI. WTI is still below the recent highs but Brent is moving to the very top. A weekly close above here would be a very bullish sign. Here’s the chart.

Chart

Have a great day's trading.

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