Originally published by AxiTrader
Welcome to my daily Markets Musings.
Apologies this morning folks – my normal email is down as is my market pricing machine. So short and sweet.
Feedback always welcome
Greg
Market Summary (7.40am Monday April 16)
US stocks finished the week higher but were down on the day Friday as prices drifted into a weekend which was likely to bring some sort of Syrian action.
That’s of course what we saw Saturday my time – Friday evening Washington – with the US, UK, and France raining missile strikes on selected targets of the Assad regime. President Trump declared it “mission accomplished”, Theresa May said there are no plans to strike again and a “message has been sent”. That’s a clear message to the Russians.
The markets – and the three powers involved – will hope the Russians see this as a clinical strike with no need for repercussions. But we’ll just have to wait and see, what, if anything, the Russians do.
To the market then, and forex traders have opened up fairly sanguine so far this morning without too much of a deviation from Friday’s New York close. The Aussie dollar and yen – which might be expected to show the earliest signs of tension in markets - sit at 0.7766 and 107.33 respectively. That's below Friday’s highs as both AUD/USD and USD/JPY slipped into the close as US stocks slid. The eurois at 1.2329 and the pound is at 1.4239.
On stocks now and the release of decent earnings from JPMorgan (NYSE:JPM) and Citi (NYSE:C) couldn’t lift the markets with the S&P 500 down 0.3% to finish at 2,656 while the Dow lost half a percent to finish at 24,360. On the week though the S&P 500 was 2%.
Part of that was the big fall in Michigan consumer sentiment survey from the 14 year high of 101.4 to 97.8 which was well below the 100.5 forecast. The JOLTS survey also showed a dip in jobs.
Here at home it’s likely to be a mixed day. US and SPI200 trade was actually quite indecisive on Friday night. Many forces and an expectation that earnings will rescue US stocks from their funk. But will it.
The reality is it was a positive week but an indecisive day to end it. Can earnings season reinvigorate the bulls? We’ll know this week.
On bond markets the US 2-year is at 2.36% while the 10 is at 2.82%.
To commodities now and geopolitical pressures continued to drive oil prices higher. Brent and WTI both closed higher and both ended the week above range tops which opens the prospect of the $8-10 move I’ve been presaging for a while now. WTI’s close at $67.39 was in fact the highest weekly close since late 2014. Gold lifted back into the mid $1340’s also the beneficiary of a geopolitical bid. It’s at $1345. Copper was largely unchanged and aluminium gave back some of its solid – sanction related – gains.
On the day today it is quiet here at home but tonight US retail sales will be the big event. And of course the price action in stocks, and any Russian reaction to yet more sanctions and the attack on Syria, will also be an important driver of markets.
Tonight’s big earnings announcements are – Bank of America (NYSE:BAC), Netflix (NASDAQ:NFLX), and Charles Schwab (NYSE:SCHW).
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’m not going to pretend I have a clue how this situation in Syria plays out. There are so many large and long-term forces at play here that it makes anything other than a declaration of cautiousness on my part ring hollow. We have the Russians who have been using Syria first as a way to project power once universal but now more limited, we’ve got the Iranians playing their games in the regions, the Saudis too have their own end game, the Israelis don’t want the Iranians anywhere near them – Iranian backed Hezbollah is bad enough. And we have the US, fresh from defeating ISIS keen to leave the theatre but freshly announcing they’ll stay the course overnight.
- I’ve read folks saying this is the start of WWIII which, though hyperbolic, seems a low probability but high impact risk. Though I am minded of the events that saw the great powers a century ago stumble into WWI. And I’ve read plenty saying nothing will happen because everyone has too much to lose from an escalation. Certainly President Trump’s caution and his declaration of the words 'mission accomplished' was a clear sign to President Putin that that was that. So I have no idea, but I’m hopeful.
- That – no escalation of tensions beside belligerence - would then provide a solid backdrop for earnings season to help lift US stocks. But the big question is, can it? I ask that because I sense in the reports I’m reading that there is a residual worry about the outlook for stocks even from the bulls. Take Morgan Stanley (NYSE:MS) for example. ZeroHedge reports that the bank is both simultaneously saying we could see stocks down 20%, that stocks will soon enter a bear market, but not one that sees prices fall 50%, but not yet till we see new highs first. Talk about leaving yourself plenty of wriggle room.
- Anyway, the point of the following chart (S&P500/Gold) is to say we have a secular bull market and the bear market to come will see prices fall only 20/25% before they tend higher again.
- In terms of earnings season though, Nobel Laureate Robert Shiller says earnings won’t rescue the market and avert another correction, CNBC reports. Me? I have no idea. I’m just following the price action and the S&P 500 has to get up and through 2,675/2,700 otherwise it’s mapping out a range. New highs though as MS suggests…not sure we’ll see that before a break lower again.
- Here’s an interesting chart of the 2/10 spread I saw on Twitter over the weekend. It suggests we are nearing a break that might actually start to spook folks about just where the US economy is at the moment. Now there is a rule in charting I use, which says you can’t draw a trendline unless other folks will care about it. But I think this one might qualify if a few more folks become aware of it – which they inevitably will. Why this is important is because the Fed is tightening because it sees a strong economy which does not require accommodation and it wants to get rates back to neutral. But the reaction of the curve, specifically the long end, suggests that bond traders are looking through strength to eventual economic weakness – or at least no real inflation pressures. Here’s the chart via a Twitter Screenshot.
Australia
- The Australian dollar ran to a high of 0.7791 Friday – firmly in the 0.7780/0.7820 resistance zone – before pulling back on a little stock weakness and geopolitical concerns to end the week. It’s opened up relatively well this morning seemingly untroubled by the events in Syria over the weekend. That’s good news. With very little out till Thursday’s employment data here in Australia the outlook for the Aussie will be driven by offshore events. The price action last week was positive. But the downtrend remains intact. The question now is really what happens to stocks and what happens to the US dollar. So, in many ways the AUD/USD rates is as hostage to earnings season as are stocks more broadly. And naturally geopolitics will play it’s roll as a key driver of risk appetite and overall market sentiment.
- Looking at the SPI, and the ASX, the overall price action Friday was one of indecision but also one where the recent uptrend remains intact. 5,855 is topside resistance with support at 5,794.
Forex
- We are in a holding pattern waiting for the next shoe to drop in forex markets. What the price action tells us is that regardless of the fact the US is the only G10 economy that still has a positive number on its CESI. That used to matter in forex – but not at the moment. That the US dollar is not reacting to this, or the clear policy divergence, speaks volumes about sentiment toward the Greenback at the moment. Readers know I think it will snap back at some point. But clearly that shoe has to drop. It hasn’t yet.
Commodities
- Breakout folks, breakout. I’ve been writing about this for a month or two now and suggesting that a break of the recent highs would suggest a setup for a Fibonacci extension of $8 to $10 a barrel. In the case of Brent the target is now $81.00/$81.50 while for WTI its around $74/75 a barrel. Of course the driver here has been the re-emergence of a geopolitical risk bid in oil recently. It started to emerge when it became clear that President Trump could repudiate the Iranian sanctions/nuclear deal next month. But it intensified with the worries about the response to the Chemical attack in Syria last week.
- So we got our break out. Yet the FT cautions oil bulls like me that we might be getting this wrong. Over the weekend it wrote (my bolding and italiscising), “there are reasons to be cautious. Since the first Gulf war in 1991 almost every military confrontation threatening oil supplies might be summarised for traders as “buy the build-up, sell the bombs”. The reason is that markets abhor uncertainty, but once military action begins the outcome, especially of limited missile strikes, tends to become clear rather quickly. If the US-led strikes on Syria now pass without signs of igniting a broader conflagration, traders may be eager to book profits on the recent rally”.
- Yes they might, but unlike those conflicts oil traders weren’t faced with a second and separate battle that may emerge over the Iranian nuclear deal in just a month’s time. Nor were they faced with OPEC, and Russia’s resolve to drive prices higher. Yes shale oil is still adding rigs, and yes the inventory imbalance could clear in the next few months the IEA says. Butu overall, even if this ultimately proves an unsustainable spike a spike a run higher still looks likely when we add the technical picture to the fundamental backdrop.
Have a great day's trading.