Originally published by AxiTrader
Market Summary
What a turn around.
Late yesterday afternoon as the announcement of China’s retaliatory tariffs hit the screens, markets across the globe went into a bit of a funk with stocks under pressure, bonds a little bid, and safe haven currencies catching a bid.
But that all turned around once US trade actually kicked off. Some say a tweet from President Trump that the US is not in a trade war with China turned the tide. Equally though, markets probably did the same simple calculation Commerce Secretary Wilbur Ross did and figured the tariffs amount to only 0.3% of US GDP.
That and the fact the response from China was reconsidered as measured (something Ross told CNBC during the trading day) saw a big turn around in stocks in the US. Indeed the S&P, which closed up 1.15% at 2,644 was more than 70 points off its low at the close. Likewise, we saw good bounces in the Dow, which closed 0.96% higher, and the Nasdaq 100 which finished 1.57% in the green at 6,560.
Europe reversed off its lows but will have some catchup to do when trade commences this afternoon. The DAX closed down 0.37%, the CAC lost 0.2% and the FTSE eked into the green with a 0.05% gain.
Here at home, SPI 200 traders added 24 points overnight to last night’s S&P/ASX 200 close. That suggests a run toward 5,800 for the physical market is possible at some point today and tomorrow. That’s particularly the case as the techs for the S&P suggest a run back to 2,700.
On forex markets the US dollar is still range bound. Euro is at 1.2279, sterling sits at 1.4080, and the yen is sitting at 106.74 in USD/JPY terms after hitting a low of 105.98 overnight during the worst of the equity selloff. That stocks turnaround helped the commodity bloc currencies with the kiwi again the standout. It’s at 0.7308 now while the Aussie is back above 77 cents at 0.7715. The Canadian dollar is sitting around 1.2770 in USD/CAD terms.
On commodities WTI and Brent both bounced back strongly from equity related weakness. They sit at $63.56 and $68.22 respectively. Gold did the opposite hitting a high of $1348 but it’s back at $1332 now while copper is an interesting one back down at $3.01 a pound.
Looking at the day ahead we have trade data here in Australia which could be interesting for the Aussie dollar traders. The market is looking for a surplus of $700 million for February. The Services PMI for Australia is also out this morning.
Offshore there are more services PMI’s across the globe to be released as well as Euro area retail sales and PPI. The RBI announces its decision in India and we also get trade in Canada and the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’ve seen President Trump’s tweet that “we are not in a trade war”, with China cited as a reason for the turn around in stocks overnight. It seems to have been released around the right time. But such is the way of Twitter and investment markets these days that even more than a cursory read of the tweet would have shown that Trump, in fact, doubled down that he’s not done yet.
- But, I say that not to quibble with the market price action just simply highlight that we have seen round one of US tariffs met with a measured response from the Chinese. It will take another round and further escalation of this battle – which is not out of the question but seems unlikely right now – for stocks to get in a funk again on the back of this alone. That’s because this first round has been assimilated and built into prices. Indeed comments from China’s Ambassador that China would prefer to resolve the dispute through negotiations put the ball squarely in President Trump and Wilbur Ross’ court. So we’ll be watching the President’s tweets.
- That is also my way of saying we might get a very nice bounce in US, and thus global, stocks in the days ahead. Of course, the price action supports this given that in the past three days of US trade we have seen some solid bounces from the lows. And the inside day’s indecision Tuesday was resolved boldly to the topside in the S&P 500 with a big outside day reversal higher. It seems reasonable to target 2,695/2,700 in the S&P now. A break of there could see prices running toward 2,780/2,800.
- If I can make one point though. The US economy is doing okay right now. The global economy is doing okay right now as well. And forecasts are for growth to remain relatively robust across the course of 2018 and 2019 in the US and then globally. Some of that non-US growth, especially Europe, may be challenged later this year, but overall the globe is still likely to have its first, perhaps second in 2019 as well, year of synchronised growth. That seems to me to be the balance that keeps buying coming into the market when stocks fall out of bed. The overall price action remains volatile. But unless or until the February low in the S&P 500 gives way I just can’t get too bearish – on anything really. Us 10’s are naturally going to be important in that context as well.
- And just quickly on the data front. EU CPI rose to 1.4% data released overnight showed. But core is stuck at 1%.
Australia
- Yesterday I gave a couple of presentations the Oz economy and how the macro settings feed into and back from consumers and their behavior. There was lots of interesting discussion and I'm hopeful what we saw in retail sales for February yesterday might become a trend given the strength of the jobs market and the increase in the participation rate. But the Feb increase of 0.6% in retail sales, twice what economists had forecast, and the fact all sectors were higher, needs to be backed up with more solid prints in the months ahead before any of us – including the RBA – can start to think maybe Australian households are in better shape than expected. If on the other hand we get a series of lumpy increases and then flat moves in monthly sales it will signal that folks are saving then spending – and that would tell a very different story. The very one the RBA, and many of us, are indeed worried about. Time will tell.
- To stocks now and the ASX 200 should have a good day after SPI traders added another 23 points overnight. I reckon that might prove a little underdone by the time we get to the end of the day. Yesterday on my regular Sky Business cross I said we might see 5,800 in the next couple of days and this morning I’m rather more convinced that could come to pass before we get the non-farm payrolls out of the US tomorrow night. In SPI terms 5,793 is the easy money as the 38.2% retracement level of the most recent leg of the sell off. That’s another 30 odd points above where it is this morning which, if you add in the overnight move, suggests the physical ASX200 could bounce 50 odd points from last nights close. That get prices north of 5,800 again. We’ll see. And all bets are off depending on non-farms tomorrow evening and what it does to US 2’s and 10’s. Anyway, here’s the SPI chart.
- Is it time to buy the Aussie dollar? That’s the question I’m asking myself this morning along with a similar one for the kiwi. I say that because the antipodean pair just won’t go down. Of course they are essentially hostage to the US dollar which hasn’t been much of a beneficiary of the many positives that have accrued to it including growth and interest rate differentials. And of course, when it does the Aussie and Kiwi – along with the other majors – are likely to come in for a belting. Of course that could come as soon as tomorrow night if the data remains strong or if there is a hint of rising wages.
- But right here and right now at 0.7715 the Australian dollar is doing relatively well and has build a base of support in the 0.7640/60 region which would need to break to open up the down side. That’s solid for the moment so a topside probe toward 0.7760/70, perhaps back to the 200 day moving average at 0.7808 may be on the cards. But all this is still possible within the current downtrend.
Forex
- It’s frustrating to be a US dollar bull and watch the indicators that folks were claiming justified the euro surge a few months back turn down yet the euro stays bid and the Dollar stuck consolidating what is still a bearish overall down trend. It’s an example that sentiment trends as much as prices and sentiment toward the US dollar remains fairly negative. It’s also an example of confirmation bias in markets. That’s where folks grab onto indicators that support their view and ignore those that do not. It’s actually this behavioural tendency which empowers the trend in sentiment. We are seeing it in the US dollar at present and we’ve seen it many times in the past and will again in the future for this and other assets.
- Of course I question myself on whether my own research each morning isn’t in fact a data mining operation aimed at supporting my views on the outlook. Mostly I don’t think it is. And with that as back ground I offer you a chart I saw on Zero Hedge from Citibank, I think it’s not labelled. What it shows, what the story was about, was the continued increase in US Libor rates and the Libor/OIS spread. In this context the argument for the US dollar is that the tightening in Libor is in fact a dollar funding issue and that in turn will see the US dollar's value rise. Here’s the chart, we’ll see how things turn out in time.
- Looking across Forex land then at present it’s really just about ranges and on that front we await non-farms tomorrow. The US Dollar Index needs to break up and through 91 to kick on. Euro remains in a 1.2150/1.2550 range, the yen likewise is stuck in a 104.50/107.50 (maybe 108.50) range. It’s to these three indicators of US dollar strength that I look for a guide on other pairs – including the antipodean’s and the Canadian dollar. Tomorrow night, as always, is important.
Commodities
- The API data which showed a draw in inventories was confirmed by EIA data overnight. That, along with the bounce in stocks, helped oil come charging back from the lows with both Brent and WTI neatly off their lows.
- Overall though it looks like prices might be starting to form into a wedge. That’s just another type of range really. So we await the interplay between price action, geopolitical risk, inventory and production data, trade war talk, and stock market moves to see where prices will go in the medium term. Here’s the Brent chart.
Have a great day's trading.