Originally published by IG Markets
The markets began the week with a cautiously optimistic disposition as a lull in scheduled event risk allowed markets to ponder a macro backdrop that is proving friendlier than many feared.
The new US tariff regime seems more benign than it might have been. It may still invite retaliation, but exceptions for NAFTA countries and allies like Australia are welcome. February’s US jobs data also calmed concerns about an imminent inflationary spike. It showed an unexpectedly steep drop in the pace of wage inflation, hinting that January’s spike to a nine-year high might have been a one-off. That cooled speculation about a more aggressive Fed rate hike cycle. The sudden possibility of a breakthrough in the world’s relationship with North Korea emerged as an unexpected bonus. An unexpectedly strong US CPI print might sour the mood anew, however.
US inflation pickup threatens market sentiment: The headline year-on-year CPI growth rate is expected to edge up to 2.2 percent in February, a print well within the range prevailing since September. PMI survey data suggests the outcome may be more dramatic, however showing the fastest service-sector price growth in five months. Inflation looked even more eye-catching on the manufacturing side, with factory-gate price growth at its fastest in four years. If this proves to precede a meaningful upside surprise on the CPI print, worries about the Fed tightening more aggressively than markets have accounted for are likely to return. That bodes ill for the full range of so-called ‘risky’ assets including stocks, cycle-sensitive commodities and higher-yielding currencies.
Wall Street rally loses steam: US shares touched a six-week high but the benchmark S&P 500 index tellingly retreated from intraday peaks. It is trading close to flat into the closing bell, seemingly telegraphing that skittish investors are unwilling to commit to a firmly “risk-on” bias before US CPI crosses the wires. The blue-chip Dow Jones Industrial Average index fell while the tech-oriented Nasdaq pushed higher, perhaps reflecting lingering tariff-linked risk for the former and easing Fed-related worries for the credit-sensitive issues prominent in the latter.
AUD/USD upturn may struggle for follow-through: Dissipating concerns about a steepening of the Fed rate hike path bolstered the US dollar's immediate competitors for the top spot on the higher-yielding side of the G10 FX spectrum. AUD/USD now looks poised to break chart resistance guiding them lower since late January, opening the door for a move to challenge one-month highs near the 0.80 figure. Follow-through might not materialize if US CPI tops forecasts, however. A turn lower from here sees critical support in the 0.7700-50 area.
ASX 200: PM Malcolm Turnbull’s recent visit and suggested ‘bromance’ with US President, Donald Trump looks to be paying dividends. News broke over the weekend that many sought, yet fewer were granted an exemption from US steel (25%) and aluminium (10%) tariffs.
Australia was on the short list of exempted countries, which added to the optimism following the US payroll data to help ASX shares rise for the fourth straight day to 5996.1 or +0.55% to the highest level since February 28. Other supportive economic data to cross the wires was a report from the Australian Financial Review citing economic models suggested the Trans-Pacific Trade deal signed last week could boost real GDP by A$18 billion by 2030 with exports increasing by A$30 billion over the same time frame.
Commodities: The energy industry looked to a reversal of recent selling pressure on Friday as WTI and Brent had their most substantial gains since July. A developing risk for Crude oil buyers is recent data that Asia is importing aggressively from the west, which is likely cutting into OPEC’s market share and may force OPEC’s hand to end production curbs early. Either way, whether you look at industrial metals or energy, you can see that supply-side management has rarely been in sharper focus for investor confidence.
Concerning rebar inventories in China: Iron Ore traded to the unwelcome $60 handle on Monday based on fears that China continues to be drowning in steel stockpiles. Per Shanghai Steelhome, China rebar inventory is at the highest levels since 2013, and have risen to 9,636,200 tons from ~3,000,000 tons at the beginning of the year.
Such supply pressures also raise questions about how China and the European Union, whom US President appears to be targeting with recently signed Trade tariffs will retaliate and what will happen when other suppliers come back online in China as state-requested winter curbs come to a close. While China is coming out of the Winter season, tariff retaliation could limit how much the stockpiles are drained from western buyers.
Japanese yen: Traders of the Japanese yen have quite the dilemma on their hands. On the positive, the talks between North Korea’s Kim and US President Trump said to have a meeting that may result in North Korean nuclear disarmament lifted spirits.
On the other negative hand, reports recently surfaced, and implied volatility in the options market reflects the reports potential outcomes, that Finance Minister Taro Aso and Prime Minister Shinzo Abe may have a scandal on their hands. Should this lead to resignation(s), traders are anticipating USD/JPY moving below 100.
The focus has been on whether the Finance Minister alongside the Prime Minister and his wife’s names were scrubbed on documents connecting the high profile officials to the potentially influenced sale of public land to school that is connected to the Abe’s. Last year, Abe told Parliament he would resign if any link emerges connecting himself or his wife to the land deal. The negative development would derail the continuation of Abenomics and economic confidence in Japan.