Originally published by AxiTrader
Market Summary (7.36 am Monday April 30)
Friday’s first read of Q1 GDP in the US beat expectations with a 2.3% annualised print while the core PCE deflator rose 2.5% and the employment cost index was up 0.8% - both 0.1% higher than forecast.
On the face of it that was a combination of data which should have seen US 10's rise a little, buoyed the US dollar, and saw stocks under a little pressure from that combination. But instead we saw the US 10-year rate dip and close at 2.96%, the US Dollar Index did likewise struggling into the close and its at 91.53 this morning while the S&P 500 eked out a 3 point rise to 2,669.
Perhaps it’s the proximity of this week’s FOMC meeting, or maybe traders already have this Friday’s non-farm payrolls on their mind. Or, my preference, positions were closed out as we entered the weekend and before what will be a holiday interrupted week in China, Japan, and some parts of Europe.
it stands the relative performance of the US and other economies has started to get the attention it deserves so we’ll see how things, and the heavy week of data flow pan out this week.
Elsewhere on stocks the Dow dipped a tiny 0.05% to close the week at 24,311, the Nasdaq 100 was up 0.1% at 6,656 while in Europe the FTSE, DAX and CAC rose neatly with gains of 1%, 0.64%, and 0.54% respectively. Here at home after Friday’s move SPI traders left prices unchanged at the close Saturday morning.
On forex markets, the US dollar slid into the close in what looked like a bit of profit taking and position closing to end the week. In early Asia this morning it’s sitting at 1.2122 in EUR/USD terms which is well off the Saturday morning low of 1.2055. USD/JPY sits at 109.07, GBP/USD is down at 1.3766 after it was poleaxed by a terribly poor print for Q1 GDP of just 0.1% - it seems the BoE might have got over excited about where the economy is at.
The Aussie and commodity bloc cousins the kiwi and Canadian dollar also edged higher into the close of the week. Indeed the low was during European trade and all three currencies, like the euro, climbed in the last 8 to 10 hours of trade for the week. The Aussie this morning sits at 0.7574 down around 90 points from where it opened last week. The kiwi is at 0.7079 and USD/CAD sits at 1.2830.
On commodity markets WTI and Brent have been trading a very tight range for a few days now as the competing questions about just where the Iranian sanctions deal sits or will sit as traders countdown to the May 12 deadline for a decision by President Trump. Europe is pushing for a status quo it seems while US Secretary of State Mike Pompeo raised concerns about Iran on his tour of the Middle East over the weekend. WTI and Brent ended the week at $68.10 and $74.64 respectively.
Gold was a little higher as the US dollar reversed course and sits at $1321 this morning while copper was absolutely belted losing 5-6 cents Friday to end the week at $3.05. That’s not a good sign for the Aussie, though it’s a bit of a copper catch up really.
On the day today we get Korean industrial production and retails sales, China’s NBS PMI’s, and private sector credit (DEBT) and HIA new home sales in Australia. Retail sales are also out in Germany tonight along with inflation data. In North America its Canadian PPI and the very important personal income and PCE price index data is out.
And this week Chinese stock markets are closed Monday and Tuesday, Germany/France are closed Tuesday, while Japan is closed Monday, Thursday and Friday.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’ve been talking about policy divergence, that data will matter – or at last it should have – for some time now. Last week was the first real sign in many months that fundamentals still matter in forex trade. So, today I just wanted to highlight where the major Citibank Economic Surprise Indexes were at the end of trade Friday. Have a look at difference between Friday and 12 weeks ago and you’ll see the magnitude of the data surprise slippage – except for China and the US. Look at Europe and the UK in particular. Any surprise the pound and euro are breaking down?
- Korea. What a mood change we are seeing on the Korean peninsula right now. Friday’s summit between the leaders of the two nations seems to have set the scene for denuclearisation, a formal end to the war on the peninsula and a material descaling of tensions. Both president Trump and China deserve credit for getting the DPRK to work with President Moon Jae-in of the South. It’s been a good team effort. Nothing is certain yet as President Trump said last week. But great progress has been made.
- And that's helping to change the perception of the Trump Presidency. As readers know I’ve banged on about the impact this dislike, distrust, whatever you want to call it, has had on markets, in particular the US dollar in recent months. But just as the US dollar catches a bid there also seems to be a profound shift happening in sentiment. Sure when I listen to commentators talking about the potential for a Korean deal there are still plenty who can’t quite give president Trump the credit he deserves for getting things (with much Chinese assistance) to where they are now. But there was an article over the weekend by Josh Barro at Business Insider headlined “North Korea developments mean it’s time to think about the upside risks of the Trump presidency”. It’s an important shift, as I tweeted Saturday.
- Iran. That’s the next flash point for geopolitics and while French President Macron is working hard to get the US to not abandon the deal it seems like the US might not be as keen to deal as it seemed when he was at the White House last week. I say that because Secretary of State Pompeo said over the weekend that the US is “deeply concerned” by Iran’s ambition to dominate the Middle East. No doubt the Saudis and Israeli’s are too. Pompeo also said the US is worried about thee “destabilising and malign activities” of Iran. So we’ll see where the president goes with this. Obviously oil traders are on tenterhooks to see what happens and I’m not sure the Elysee Palace saying that President’s Macron and Rouhani spoke Sunday and will work together to preserve the 2015 agreement will have thrilled President Trump.
- The steel and aluminium tariff exemptions are due to expire on May 1 but it seems that’s too soon for the dealmaking so news this morning is that these exemptions may be extended to a date to be fixed.
- Russia might criminalise adherence to US sanctions. That’s an interesting twist in the ongoing battle between the US and Russia. Prime Minister Medvedev said “the implementation of these sanctions by citizens of our country should be an offense”.
Australia
- It’s a big week here in Australia with the release of the RBA’s decision and governors statement along with the SoMP on Friday to give more colour to those views. If ever there is a chance for the RBA to communicate a change in its stance then this is the week. Last week’s CPI seems to imply the bank may upgrade its inflation outlook in absolute terms. But that’s unlikely to see it hint at rate hikes given what’s driving inflation and the troubles that appear to be ailing households. I put together a short power point presentation last week looking at the chance of a credit crunch and impact on consumption and households and I have to say I was left deeply concerned that property may sink much further than many believe and also that absent population growth the domestic consumption based economy may really struggle. Of course it could be another of those times over the past 5-8 years where my worry has been misplaced.
- But we haven’t had a credit crunch over that period and that is what the result of APRA changes and the Royal Commission are likely to render. The trouble is that this is actually the right thing to do. Borrowers should not take on debt they can’t afford. The trouble is we might be in for an uncomfortable period of sub par domestic growth while the impacts wash through.
- In time that will hurt the Australian dollar. At the moment though the Aussie is largely hostage to the ebb and flow of the US dollar and as such the acute pressure it was under last week dissipated into week’s end as the support for the Greenback waned a little. Copper’s capitulation won’t help it today. But realistically the Aussie will wax and wane depending on the data flow that we see out of the US and Europe this week. That’s not uncommon. This US dollar move has been the dominant force in forex markets for the past week or so. Indeed the 30-day correlation between the Australian dollar and DXY is 0.88 while AUD/EUR is 0.86.
- That’s not to say the RBA isn’t going to be important. Not only do we get a statement from the governor tomorrow afternoon we also get a speech from him tomorrow night. Then we get the SOMP as I’ve said above. Will he signal some disquiet on consumers or will governor Lowe and the RBA double down on the positive outlook? There is a certain asymmetry in the current environment where any positivity is likely to garner less reaction than a slippage – should it come – in the outlook. We’ll see. 0.7630/40 isn't out of the question the 4 hour charts suggest.
Forex
- It’s an interesting month end for the US dollar and thus forex markets more broadly with the potential for a big shift should the greenback close at or around these levels. We’d see break in DXY terms of the recent weakness and the monthly charts suggest momentum is building for further US dollar gains.
- Indeed, even though the US dollar slipped into the close it held the break out of the DXY on the week and there is a real likelihood that if the current divergence in data flow continues in the week ahead. It’s such a huge week of data across the globe. All the dollar will need is a continuation of positive flow to maintain its strength. Though it wouldn’t surprise to see a little more strength in the Euro, Aussie and others at some point. Non-farms Friday are going to be huge. As the Easybeats taught us – Monday, I got Friday on my mind.
- First though we have the FOMC meeting. No one really expects the Fed could hike given protocols over recent years. But there is a chance of a more hawkish statement which sets the scene not only for a June meeting but for a possible 4th hike this year given the US economy and its current trajectory.
- Sterling has pretty much completed the full round trip I’ve been banging on about for some time now with a massive fall Friday from around 1.3933 before the weaker than expected GDP data which materially lowered the chances of a BoE rate hike. If 1.3700/11 breaks I’d be targeting 1.3450/60. Here’s the chart.
Commodities
- Not only does Emmanuel Macron’s tree seem to have disappeared from the White House lawn but I’m guessing any residual positivity from last week’s bromance with President Trump might be fading too. I say that when I look at what Mike Pompeo said over the weekend about Iran and then what the Elysee Palace recounted of the Macron Rouhani phone call and the fact they will work together to try to keep the 2015 plan in place. I cant see President Trump being in favour of President Macron playing both sides of the fence or trying to eclipse him.
- That’s likely to keep the geopolitical bid in the oil price right now. Which means Brent and WTI are likely to hold their break out. At least for the moment. I have a signal to sell WTI on a break of $67.05 in at present based on my daily system and the waning momentum at present. We’ll see.
Have a great day's trading.