Originally published by AxiTrader
Market Summary
US, European, and UK stocks were a little lower overnight as traders returned from the Memorial and Bank holidays.
The S&P 500 dippped 3 points, 0.12% to 2412, the Dow Jones Industrial Average dropped 0.24% and the Nasdaq 100 was 0.11% lower. Stocks in London and Frankfurt fell 0.25% while the CAC 40 in Paris dropped half a percent. Italian stocks rose, but so too did Italian bonds as traders grapple with the possibility of an early election.
The SPI here in Australia is off 5 points after yesterday’s solid bounce off support. Worth noting however are APRA chair Wayne Byer’s comments on big bank capital before a Senate Committee overnight
All that said it’s bonds that I’m most interested in as rates rally with inflation again looking to have undershot expectations. Bond markets are telling a very different story to US and many global stock markets. It is unlikely to dissuade the Fed from a June hike but it is an emerging theme which could drive broader markets.
Something to watch and certainly something forex traders will be watching as we head into a very important period in early June of data flow and central bank meetings – including the ECB and Fed. Overnight, however, we saw the US dollar weaker as traders reversed its strength from Asia yesterday when the euro and pound were hit with multiple bad news stories.
They have recovered its poise after "sources" said the ECB might be more upbeat at the June meeting while Sterling is again under pressure as polls show Theresa May looks set to miss out on a clear majority in the Commons. British Pound (USD) is of half a percent in the last half hour to 1.2792. and are up on the day.
The Australian dollar which again found support in the 0.7400/20 region. It’s in the mid 0.7460’s as I write.
Elsewhere gold is a little lower, oil dipped on concerns of a Libyan production ramp and a Goldman Sachs (NYSE:GS) price target downgrade. Copper is hanging tough as we await Chinese PMI data today.
And speaking of data we get private sector credit today in Australia, German retail sales and unemployment tonight before EU wide jobs and inflation data. In the US it’s the Chicago PMI, Fed’s Beige Book, and US oil inventory data.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 2413 -3 (0.12%) (7.36 Sydney - change since previous day)
- Dow 21029 - 51 (0.24%)
- Nasdaq 6,210 -7 (0.11%)
- SPI 200 5,718 -4 (0.07%)
- AUDUSD 0.7457 (+0.25%)
- Gold $1262 (-0.31%)
- WTI Oil $49.65 (-0.3%)
International
- Consumer spending in the US rose 0.4% in April while personal income rose 0.4%, wages bounced 0.7%, and the core PCE price index was up 0.2%. Taken together, even though consumer confidence dipped in May, it seems only an appalling May non-farm payrolls when it is released on Friday night could derail the Fed from a June hike. Indeed the CME FedWatch tool inched higher overnight to 88.8% probability of a hike.
- The data last night supports a June rate hike as the Fed looks through the current data dip (Citibank eco surprise index for the US is currently -37.5) and that is certainly something Dallas Fed president Robert Kaplan seemed to support on CNBC. He said he sees two more hikes in 2017 and that the Fed’s balance sheet should be substantially less than its current $4.5 trillion size. He also said the tight labour market will boost inflation and noted a stock market correction would be healthy.
- But his colleague on the FOMC, Fed governor Lael Brainard, introduced a note of caution after the June hike. While she said “It would be reasonable to conclude that further removal of accommodation will likely be appropriate soon” she also highlighted wat Mario Draghi said the previous night – inflation is still important. “The apparent lack of progress in moving core inflation back to 2 percent is a source of concern” she said, adding “if the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess” the outlook for rate hikes.
- US 10-year bonds are at 2.21% this morning. That’s down a little less than 5 points and back near the recent range low. It’s interesting just how divergent the outlook between bonds and stocks appear to be right now. So it is worth watching where US 10’s go and how flat the curve gets as this will tell us much about what bond markets players see as the outlook for the economy and inflation. Short term the key level to watch in the 10-year Treasury is 2.18% the recent low. Here’s the chart of the 10’s. Don’t forget though the level is currently support. Only a break sends the clear signal.
- German bond rates fell again overnight with the 10 year rate dropping to 0.28% the lowest level in more than a month. The fall of 3 points came after Mario Draghi’s warning on inflation found traction in the weaker than expected print of German inflation for May which fell 0.2% taking the year on year rate a little further away from 2% with it’s print of 1.5% against expectations of a 1.6% print. Also fueling this move – and associated moves across Europe save for Italy – was a slight dip in EU economic sentiment which printed 109.2 versus expectations of 110.0. That’s still a very strong number however given the 109.7 print in April was at multi-year highs.
- Larry Fink, the CEO of BlackRock, said overnight that Q2 earnings could disappoint and markets were “probably fully priced at this moment”. As I highlighted above, and as Tom Keene over at Bloomberg says often in the excellent Bloomberg Survellience podcast I listen to each day Fink said “the rates markets are saying something entirely different from equity markets”. HE added “Rates are not going to go up as much as, I think, consensus, which is probably consistent with an equity market that is not going to go as fast as people think either”.
- Are we seeing the start of the overhaul of president Trump’s White House staff?. News overnight that his communication director is going back to his old firm after just 3 months in the job. Who knows, it might mean something or nothing. Not really market moving unless changes impact the cabinet – and that seems remote at the moment.
- And speaking of the president, here’s his less than friendly rebuttal for German chancellor Angela Merkel:
Australia
- It was a much better day for local stocks on the ASX yesterday which found support exactly where they should have. That saw the low of 5779.80, just two tenths of a point below the 5680 level I’ve been watching and writing about. From there the market rallied as the banking sector found support and led shares higher to close at 5,717, up 11 points on the day and 27 points off the low. The big miners also helped as the index finally found some real support.
- Whether the market turned around because of the better than expected building approvals - which signalled that maybe the recent bout of pessimism about the outlook for the economy has gone a little too far, the delay in the big bank tax by 3 months, or simply that the S&P/ASX 200 fell to technical support doesn’t really matter. For me what’s important is that the market found that support where it should have – in the 5680/5700 zone – that’s positive while it holds and reinforces this level as support.
- If it is technical factors then the 5,780/90 region is both the target at the intersection of my fast moving average and the 38.2% retracement of the last period of heavy selling.
- Overnight with the return of UK and US stock market traders the SPI 200 is down marginally but we'll see how things play out today, how the data in China prints, how returning traders treat metals and iron ore, and how the market interprets APRA chairman Wayne Byer's comments last night on bank capital.
- To the data, and it wasn’t terrible yesterday. The building approvals printed a better than expected +4.4% (v 3.0% expected) while March’s awful 13.4% fall was revised up to -10.3%. That’s good news within the reality that the data showed building approvals are down 17.2% year on year. With APRA and the RBA’s focus on housing likely to increase pressure on the sector it is going to be intereting, and important, to see how this plays out over the month’s ahead.
- And speaking of APRA, chair Wayne Byers last night addressed the Senate’s economics committee. In his opening statement, he set out APRA’s goal for Australian banking, debt, and housing. Prudence. Byers said “Our actions – including our most recent intervention to limit the extent of interest-only lending – have been designed to reinforce sound lending standards in authorised deposit-taking institutions (ADIs). It’s important to be clear that our goal has not been to seek to determine house prices. Housing prices are not within the control, nor the mandate, of the prudential regulator. Rather, our role in the current environment is to promote a higher-than-normal degree of prudence – by lenders and, ideally, also borrowers – in both credit decisions and balance sheet strength”.
- Germaine to today’s price action and after the big bank bounce yesterday, Byers also suggested higher mortgage risk weights for the big banks. That means they are likely to need to hold an increased amount of capital to support their vast mortgage books and this in turn could weigh on financials today.
- And on consumer confidence in Australia the ANZ’s weekly survey picked up a little to 112.2, but it is still below the long run average overall. And this is reflected in the outlook for consumers financial conditions which dipped again – particularly for the future. Here’s the chart from the ANZ via Business Insider Australia.
- Also worth noting is that CoreLogic said house prices in both Sydney and Melbourne have fallen this month by 1.3% and 1.8% respectively. And, probably more importantly on the economic front Dun and Bradstreet reported that “Late Payments increased during the early stages of 2017, rising to their highest level since Q3 2014”.
Forex
- It was game of two halves for foreign exchange traders over the past 24 hours. Mario Draghi’s comments about inflation, concerns that Greece wasn’t playing ball on the next bailout, concerns about what an early Italian election might mean, and worries over the closing gap between Theresa May’s conservatives and Labour all contributed to a stronger dollar and a sense of risk aversion in Forex. But even though German inflation data undershot last night the Euro, Sterling, and even the Aussie dollar were all off their lows this morning and the US dollar is weaker.
- It’s an interesting move because German inflation undershot supporting a cautious Draghi, while US data supported a rate hike in June. I’m not convinced I buy the Euro or Sterling recovery just yet regardless of what sources say about the ECB and with the political uncertainty in the run up to the UK and possibly Italian election. But we’ll see as we move through the rest of the week and toward non-farms on Friday.
- Looking specifically at levels the Euro found support exactly where it should have overnight in the 1.1000/10 region. That was both a Fibonacci level and the top of the previous uptrend channel. So the bounce is a neat technical move. Euro is back at 1.1188 this morning. My system’s position was pared sharply on the move to support.
- 1.2900 is still the key overhead resistance in Sterling but it seems in a fundamental sense traders are less worried about the UK election. The Yen is also stronger back at 110.77 this morning while the Aussie dollar bounced off a 0.7417 low to move 0.34% higher to 0.7462 this morning.
Commodities
- Libyan and shale oil production seems to have occupied the mind of traders overnight. That’s consistent with my sense that this is all about inventories and the associated supply overhang in crude oil markets at the moment. OPEC has shot its bullets for the moment so traders must focus on supply and demand and how they are tracking.
- On Libya – which is not part of the OPEC production cut - Reuters reported production is back up to 784,000 barrels a day with expectations it will rise a little further to 800,000. And on Shale oil, Goldman Sachs marginally downgraded price targets for this year. Analysts at the bank said “We believe we are in a lower for longer environment until there is greater evidence shale deliverability is surprising to the downside or OPEC runs out of spare capacity”. Even that comment says its about production, supply, and inventories…interesting demand doesn’t get as much of a run in commentary as it deserves. And Goldman’s forecasts? CNBC reports “the investment bank now points to an average of $55.39 per barrel for Brent from its previous estimate of $56.76 a barrel. It also lowered its expectations for WTI to $52.92 per barrel from $54.80”.
- The net impact is that oil is marginally lower with WTI off 0.34% to $49.63 and Brent of 0.84% to $51.85.
- Gold is a few dollars lower this morning at $1262 as rates dip a little in the U.S., the U.K., and Germany as inflation data prints a little weaker and Fed governor Brainard joined Mario Draghi in warning about the impact of lower than expected inflation on policy normalisation. A fall below $1,259 might kick prices into a lower range.
- Copper is largely unmoved at $2.56 a pound. But that might change today after the release of Chinese manufacturing (and non-manufacturing) PMI data. China is easily the world’s biggest importer of copper so how the economy is tracking is of import to traders and prices. Equally though after the strikes earlier this year Chilean copper production is getting back on track. Data released last night showed that production is now down only 1.8% year on year which is a solid recovery from recent lows when it was 18% or so.
- Interestingly Reuters reported this morning that recruiters are saying they are having trouble finding engineers and associated staff for the Chilean copper industry as production ramps up.
Have a great day's trading.