Originally published by AxiTrader
Market Summary
Oil, bonds and the US dollar are the stories of the day as each of these markets reverses recent moves.
Oil’s rally continues with WTI up more than 2% to $47.02, US 10-year bonds are now more than 20 points off last week’s lows at 2.35%, and the US dollar is back from the brink chasing many pairs back from significant levels and making across almost the entire forex board. Euro is at 1.1355, the Aussie is at 0.7650, and the yen has been the worst performer with USD/JPY at 113.36.
On stocks Europe had a good day after German and EU PMI’s retained their recent strength. UK PMI’s disappointed which was a handbrake on the FTSE relative to the continent but that weakness was most acutely felt in the pound. On US markets the Nasdaq continues to fall, the S&P is stuck in a range, and the far narrower Dow is higher again this morning in what is a mixed bag for US stocks.
Naturally the energy sector is the big mover on the S&P but financials and basic materials also had a good day. That suggest that SPI traders might be right this morning about the outlook for the S&P/ASX 200 when it opens. They’ve marked the SPI up 15 points in overnight trade after yesterday’s unexpectedly weak open to the new financial year.
With bonds rising, traders focused on hawkish central banks. Gold has come under heavy selling pressure and fallen to $1221. Copper and base metals are down.
On the data front today we get two big releases in Australia. Retails sales will give us a window into what consumers are really doing, not just what they answer to survey questions, while the RBA board meets for it’s monthly board meeting.
Offshore it’s the 4th of July holiday in the US so it should be fairly quiet on global markets tonight. We get the release of EU PPI and Canadian manufacturing PMI after yesterday’s holiday to celebrate the nations 150th birthday.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US 10-year Treasuries continued their sell off overnight hitting a high of 2.35%. This may seem an overcooked reaction given US data flow has been so poor and particularly off last week’s low of 2.12%. But this 23 point rise off last week’s low at 2.12% simply highlights the convergence of talk from the globes big central banks that the period of emergency monetary policy is at an end. But it’s more than that, isn’t it? Traders wouldn’t care what central bankers said if they didn’t believe they were right. That’s especially the case at the longer end of the curve where all the action has been over the past week in global bond markets.
- We are entering the realms of negative QE - tapering. It will take years to unwind and balance sheets at central banks shrunk. And indeed we are still some way off as the ECB and BoJ are still pumping, their markets and the global economy full of cash. What’s important here is that in the daily coverage in notes like this and in the press the proximity of the immediate moves often dominate the copy, the chatter. I try to look a bit further out. Indeed this note started back in 1988 as a way to get my arms around what’s happening and build a narrative for myself.
- So I want to put the bond market moves in the US, in Germany – where 10-year bunds have almost double to 0.48% in the past week - and across the globe in context. Ben Graham – Warren Buffett’s mentor – once said “in the short run, the market is a voting machine but in the long run, it is a weighing machine”. Bond traders are now weighing the impact of central bankers words recently and they know they mean higher rates. This move, once sustained, will then have to be weighed by stock and currency traders. I’m off to Bali after tomorrow morning’s note. Hopefully traders can wait for me to get back before reacting. Because the set up for a big one is coming.
- ECONOMIC DATA: Germany’s manufacturing PMI rose to 59.6 in June from May’s 59.5. It’s only a marginal increase but Reuters says it’s the highest level in 74 months. It’s also – along with the EU wide Mfg PMI of 57.4 – likely to increase pressure on the ECB when next it meets. In the US the ISM was also strong with a print of 57.8 against the 55.2 the pundits had forecast. In the UK the Markit/CIPS Mfg PMI fell to 54.3 from a downwardly revised 56.3 in May. That’s a three-month low and a big miss to the 56.5 pundits expected. Globally the JPM-Markit Mfg PMI came in at 52.6, unchanged from last month. Markit said however that this result “continues to point to solid, steady gains in global industry at mid-year”.
- And the big news, the really big news, the Citibank economic surprise index for the US gained 9 points overnight to -63.3. Is this the start of the mean reversion we usually see in these indexes? If it is then bond, currency, and stock investors had best pay heed because it will reinforce the Fed is more right than wrong.
- Fitch ratings agency yesterday said that the cooling Chinese housing market is going to weigh on the economy after authorities have continued to tighten credit and retained restrictions on purchases. This slowdown will continue in the next two halves of growth Fitch said. Of course this is exactly what authorities want. They want more balanced and sustainable growth.
- And Fitch’s warning was more than offset by the better than forecast print for June's Caixin Mfg PMI. The print of 50.4 solidly beat expectations of a 49.5 print. But it’s only a marginal move back into the black and it is clear that the other things authorities want, and economic transition, is occurring. So we’ll wait and see what the Caixin services PMI says on Wednesday – the last print was a more solid 52.8.
- Across the Asia region manufacturing stagnated with the Nikkei ASEAN manufacturing PMI printing 50.0 for June. If you are interested in the country specific manufacturing PMI here’s the HIS Markit chart via David Scutt at Business Insider:
- Saudi Arabia and its allies have given Qatar two more days to comply. Naturally such an outcome would be very long odds to get up. But watch this space.
Australia
- Another poor day on the ASX yesterday with a loss of 0.65% and a close at 5684 and pretty much on its lows. All sectors of the market were lower. That’s besides energy which posted a marginal rally as crude oil continued to move higher in Asia after Friday’s solid North American session. It’s the worst close in 8 sessions for the S&P/ASX 200 and left prices below a tentative trend line from the low back on June 8.
- As with Friday night’s move SPI traders have marked prices higher overnight. At 5,664 the SPI is up 29 points from yesterday afternoon as traders bet the sectors which are driving the gains on the S&P 500 – energy, financial, basic materials - will drive prices higher again today. It’s a fair bet even though the physical market closed under the little trendline mentioned above yesterday. Indeed while the SPI is still in a clear downtrend, and the daily candle is a down one, the price action over the last couple of hours has been more positive. Here’s the SPI chart:
- On the data front, yesterday was a mixed bag. Building approvals for May fell 5.6% against expectations of a 1.3% drop. That was driven by a big fall in no housing – so units essentially – fell 12.1% in the month. That leave the overall building approvals down 19.7% yoy and the unit segment off a whopping 31%. This is what the RBA and APRA wanted as they fight the speculative bubble that was building in the housing construction market. So this is no surprise. What’s interesting though is how big the hole is going to be in the economy when the boom is complete.
- But there was positive news too. ANZ job ads rose 2.7% in July which increased the yearly rate of growth to 10.5%. Employment growth can still be the salve for what ails the Australian consumer. Equally it looks like solid business conditions are continuing to persist within the economy. The CBA released a new set of PMI’s for Australia yesterday. In concert with global PMI producer HIS Markit the CBA surveyed 400 companies in the manufacturing and service sectors. Manufacturing printed a strong 56.2 while the services sector PMI was at 57 in June. In some ways the new CBA/Markit PMI will compete with thee AiGroups well established PMI surveys. But like the ISM and Marrkit surveys in the US they can both add colour to the outlook. In that sense it is worth noting the AiGroup Mfg PMI came in at 55.0 in June from May’s 54.8. Not too bad. It is worth noting that both surveys showed new orders looking healthy. That has to be good, surely.
- And before I go – on balance the decision of the SA Libs to block the state based bank tax is a positive for the market. But it doesn’t exactly take political risk off the table. Something to watch.
Forex
- As I noted yesterday the easy money had been made, the path of least resistance walked, when it came to recent moves against the US dollar. So many US dollar pairs were at or near important technical levels as at Friday’s close and pretty much all of them have backed off during the first day’s grade for the quarter. Having pushed to these extremes it is up to traders to really question whether or not they want to buy euro, yen, Aussie and other currencies against the US dollar at those levels. So far the answer is no. And so far the data overnight helped the US dollar. Non-farms Friday – did I mention I’ll be surfing in Bali