Originally published by AxiTrader
Market Summary
Stocks were mixed in the US on Friday as the Nasdaq slipped 0.06% but the S&P 500 and the Dow managed to rise 0.15% and 0.29% respectively. It wasn’t the strongest close of the quarter ever and the Nasdaq still looks to be pointing lower.
In no small part it seems last week’s stock market moves in the US, and around the globe, are a reaction to rising long bond rates and the threat of more hawkish central bank policy. It’s still too early for the ECB and BoJ in particular to remove stimulus. But the market is getting a sense the punch bowl is about to be taken away.
On forex markets that sense saw a massive readjustment in prices last week with the US dollar coming under heavy selling pressure. That’s driven many pairs to big resistance levels. That means the easy money, the path of least resistance, has been made. Traders now have to really believe in, and have conviction, that the US economy is not on the path the fed has said it is, for further gains to be made.
This week’s data flow will be super important on that front.
Oil surged again as Baker Hughes reported the first drop in US rigs in 25 weeks, gold is drifting, while copper and base metals remains well supported.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US 10-year Treasury rates rose sharply last week ending June ending June at 2.30%. That’s a sharp 18 points higher than the low last week as traders across the globe recalibrate their expectations for central bank policies in developed markets. In percentage terms the reaction of German 10-year bunds to Mario Draghi’s implied hawkishness was the big move of the week with 10-year bunds finishing at 0.47% from just 0.25% on the 26th. French, Italian, British, and Australian long bond rates were all sharply higher as well.
- Of course the chat is that central banks are worried about frothy stock markets and are co-ordinating their comments in order to knock the top off recent strength. I don’t buy that for a second. Just a day after Draghi’s speech was taken hawkishly by bond and forex traders we heard from “sources” that traders had got ahead of themselves while Draghi’s deputy Vito Constancio highlighted the many caveats within Draghi’s speech. But chat of co-ordination persists. Rather I think the co-ordination of language reflects a co-ordination of the recognition that the global economy is pointing higher and the time for emergency policies in individual jurisdictions has ended. It just so happens that recognition has pretty much occurred all at the same time.
- What’s interesting about the past week’s moves in bonds and forex is that the only central bank that didn’t get credit is the Fed. That’s because the data flow is still very poor relative to expectations. Indeed, the Citibank economic surprise index at -72.6 is only marginally off 6-year lows. But this holiday-shortened week in the US is a big one for data. Non-farm payrolls on Friday is naturally the big release but the ISM PMI along with the PMI’s in Europe will be important as are factory orders and the IBD/TIPP releases in the US.
- By the end of this week traders will have a better feel for whether or not the Fed is correct and the slowdown apparent in the data really is transitory. And that means this is a huge week for the dollar, and likely stocks as well.
- And speaking of stocks here is the latest update on the Nasdaq 100. We didn’t see a bounce back in prices Friday to reverse what is looking like an emerging downtrend. Price would need to get back above 5725/35 to reverse this outlook. Unless it does a “garden variety” retracement to the 38.2% level of the Trumponomics rally is on the cards. That level is 5,387. Here’s the chart:
- The Qatar deadline ends during our trading day today. Not that anyone really thought the nation would acquiesce to the demand of the Saudis and other neighbours. We need to keep an eye on this. But it is worth noting that Reuters reports President Trump has spoken to his Turkish counterpart about the issue. Both nations have significant operations in the country and are likely the best weapon Qatar has to forestall any escalation in tensions.
- While in the Middle East it is worth noting that for the first time since the GFC the Saudi economy went backwards yoy for the 12 months ended March 2017.
- President Trump is at it again. Over the weekend he’s both defended his tweets as a “modern presidential” and also shared a video which depicts him wrestling a fellow with a faux CNN logo as a head. The key thing for traders and investors to know is that the president is unaffected by all the criticism. He just bats on regardless. I’ll leave the hand wringing to others. But behaviourally this is important. Yes it damages his brand – which is where I think he does the most damage to his agenda. But it also highlights that those in his administration charged with overhauling Obamacare, getting tax cuts done, and building infrastructure will remain empowered to continue working toward that goal. It’s summer recess for congress this week, but when they get back we’ll see if they can get the Senate health care bill over the line. If that happens the narrative could change. We’ll see.
Australia
- 96.6 points, 1.66%. That’s was the awful day Friday that traders and investors experienced to end what was an otherwise reasonably healthy performance on the S&P/ASX 200 for the financial year. I had thought that there might be a little EOFY window dressing to prop the market up a little. But that was not to be as buyers stepped aside and prices all but collapsed.
- The close at 5,721 in the physical ASX Friday is expected to be followed by a better performance today if the SPI traders are to be believed. They’ve marked prices up 21 points from Friday afternoon’s close. We’ll see.
- Looking at a chart of the ASX 200 physical and you see a classic exhibition of what Mandlebrot taught us – volatility begets volatility. Is it over yet? Will the SPI traders be right and usher in a better day today. The chances are high given the recent aggressive flip flopping. But it’s also likely when you look at the performance of energy, basic materials, and industrials in the US. Financials were flat. So net on net – sure we can have a better day.
- But the SPI chart shows a market in a sustained downtrend. Last Thursday’s rally and then reversal was retracement from a failed break at the top of the channel. That said while the 5,598 low holds I could make an argument we are seeing a bottoming process. Too soon to tell conclusively though. Here’s the chart:
- And it’s a big week of data here in Australia. Building permits, monthly inflation, and ANZ job ads kick off the calendar today. Tomorrow we hear the latest thoughts from RBA governor Lowe after what is expected to be another meeting where the RBA leaves rates at 1.5% in Australia. That lack of action on the interest rate front doesn’t necessarily mean the meeting is a non-event however. The RBA has been relatively upbeat about the outlook for the Australian economy when compared with many market-based forecasters. With the shift in his central bank colleagues across the globe to a more hawkish stance governor Lowe may reiterate that outlook for Australia. But, and it’s a big but, with the Australian dollar up near the highs for the year he’ll likely also highlight that a stronger Aussie could complicate Australia’s economic transition.
Forex
- The US dollar remains under pressure as we enter a big week of data which could either see the start of a reversal or the continuation of the dollar’s recent weakness. While traders have clearly given credence to the hawkish tone of global central bankers lately, the Fed has not received the same reaction. That is because US data has been so much weaker than expected for the best part of two months now. As highlighted above the Citibank economic surprise index is only just above the 6 year low. So the data needs to turn to give traders some confidence that the fed is right about the outlook for growth. Bond rates rising, and the steepening of the US 2-10 bond curves by about 12 points in the last week suggest they might be.
- And of course it’s not just about US data is it. The first two weeks of the month are always the big data flow period for the globe as well. So we’ll see how data tracks in these other jurisdictions. I’d also expect the ECB to do it’s best to try to unwind some of the Euro’s strength with comments and sources in the next couple of weeks.
- Euro, at 1.1419 this morning is showing some signs of fatigue. It is overextended on the charts and has so far respected overhead resistance. It’s time for a pullback. Here’s the chart:
- GBP is back above 1.30 and closing in on the big resistance level at 1.3050/60. It’s amazing how many US dollar pairs are at or very near big levels when we come to such a big week. As readers know I always respect important levels unless or until they break. I’ll be following the same protocol with sterling, euro and Canadian dollar.
- Speaking of Canada, its dollar celebrated the 150th anniversary of the nation by trading down and a little through the 1.2960 support region I’ve been watching. Oil’s price rise doesn’t hurt, neither does the continued strength in Canadian data. But it’s at 1.2975 this morning.
- Rounding out thee currencies which traded stringer and then reversed Friday the Aussie is sitting at 0.7674 this morning after trading up to trendline resistance above 77 cents in the wake of the stronger than anticipated Chinese PMI’s Friday. The coincidence of all these levels in all these currencies tells us this is as much about the US dollar as anything else. But if the AUD/USD data flow prints positively this week it could do well on the crosses.
Commodities
- Crude oil’s phenomenal rally continued Friday with WTI closing the week up and through the 38.2% retracement level I was targeting at $45.78 with a close at $46.04. Brent finished the week at $48.77. Crude rallied despite news that OPEC’s production rose to a 2017 high in June according to a Reuters survey. At 32.72 million bpd production was 280,000 barrels higher than the previous month. To put that in context that is nearly a quarter of the 1.2 million barrels OPEC agreed to cut. The increase is driven by not cut participants Nigeria and Libya. That latter is now producing above 1 million bpd.
- That oil could rally so hard with this news perhaps is better explained by the release of the US oil rig count. Bakers Hughes said that after the record run of new rigs being added each week numbers fell by 2 to 756. It’s the first crack in the resolve of US shale oil to continue to ramp up production regardless of the big fall in price. Last week Continental Resources CEO Harold Hamm warned his fellow oil execs to back off telling CNBC “While this period of adjustment is going on, drillers don't want to drill themselves into oblivion. Back up, and be prudent and use some discipline”. It seems someone might be listening.
- So oil’s rally continues. It’s been a big surge in a short space of time – recall the low around $42 a barrel for WTI on roll day back on June 21. This 9.52% rally looks like it might still have some legs on my charts. My system is riding a relatively small 25% exposure at these levels. Here’s the chart:
- Gold is still struggling as bond rates surged last week. At $1241 an ounce it’s not far above the recent low of $1235 after the big gold trade. On Friday talking to Tom Keene and David Guru on Bloomberg Surveillance Dennis Gartman told the pair that the big sell order in gold was not a fat finger trade but rather he believed was Venezuela selling gold in order to buy oil to mix with its “asphalt” and make it usable. Interesting theory but plausible. For the moment traders will be watchinig the 200 day moving average, which comes in around $1,235.48 today.
- Copper has another good day Friday to end a very positive week for it and the base metals complex. A weaker US dollar hasn’t hurt the commodity complex. But equally the message from central bankers that it is time for emergency stimulus to be withdrawn is also an implicit admission that the global economy is doing okay once more. That combination has been positive. Copper is starting to look a little stretched here though. $2.75 should cap any rally right now.