Originally published by AxiTrader
Market Summary
Goldilocks.
You should give a dollar to your favorite charity for every time you read that in the next day or so – or have already read it over the weekend – with reference to the outsized 313,000 surge in US non-farm payrolls for February was released Friday. That employment growth was strong yet wages ONLY rose 2.6%. That’s the source of the Goldilocks narrative after January’s 2.9% increase in wages proved a one-off.
As a result of the solid jobs growth, without inflation, and with the bond market selloff seemingly constrained by an already very short market, stocks in the US surged higher. The S&P 500 was up 1.74% to 2,787, the Dow rose by a similar amount to 25,335 while the Nasdaq HIT A NEW HIGH and closed up 1.93% at 7,101.
Europe had an okay day, mostly finishing in the black. But it will have some catch up to do when things kick off for the week this afternoon my time given the strength of the US move.
SPI traders didn’t miss the US move however and have added a solid 57 points to Friday’s close on the S&P/ASX 200 at 5,963. With copper, base metals, and oil higher there is a decent chance the physical market has a pop up to and possibly through resistance in the 5,990/6,000 region.
One of the key reasons stocks were able to surge was that they were unrestrained by a bond market itself seemingly constrained by a huge net short position. As a result US 10's closed the week at a benign 2.89%, the 2's were at 2.27% and the curve at 63.
And the wash up for forex traders was that the risk/commodity currencies did best. The Aussie dollar surged with stocks to sit at 0.7850 this morning off a low of 0.7775 Friday. The kiwi too bounced and is at 0.7289, while the Candian dollar is also stronger with USD/CAD at 1.2812 and looking like a top is in place on that one in particular.
Elsewhere on Forex markets the euro looks to be struggling a little and is at 1.2316 with an apparent downside bias as 4 Fed rate hikes in 2018 come into view. But don’t tell stock traders. Sterlling is still in a downtrend but lifted Friday and is at 1.3854 this morning, while the yen lost ground after the BoJ meeting, a rise in risk appetite, and a general reduction in the fear trade. USD/JPY is at 106.60.
On commodities the path of least resistance for copper and oil traders was higher after a couple of days pointing in the other direction and as stocks and risk appetite rose. It’s clear short-term traders of crude oil – in particular – got caught short as WTI shot more than 3% higher to close at $62.04 while Brent rose just a smidge under 3% to close at $65.49. What helped both oil and copper is ebullience about the global economy and the apparent lifting of risks around North Korea and seemingly around tariffs and the potential for a trade war. Copper was up close to 2% at $3.14 a pound.
I don’t want to go all Chicken Little but the narrative of Goldilocks seems a bit premature. President Trump directly tweeted against the EU on tariffs over the weekend, China is still girding for a trade battle, 313,000 jobs fairly guarantees the dot plot will reflect 4 hikes after next week’s Fed meeting, and we have a CPI release for the US this week.
Just a note of caution.
On the day it is very quiet.
And on the week you can grab a great primer from Sam Jacobs over at Business Insider here. For me the key is the NAB business survey tomorrow in Australia and then US CPI data Tuesday night and German inflation the following evening.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Here’s President Trump’s tweet I mentioned directly targeting the EU and here is one of the many stories about what is going on with tariffs from CNN. You’ll note in the story that Australia gets an exemption and even Japan is still under pressure because of the trade deficit.
- Turning to China now and after the nation changed the constitution over the weekend to entrench President Xi as President for Life it is now girding itself for a trade battle with the US. On Sunday Chinese Commerce Minister Zhong Shan said, “There are no winners in a trade war. It will only bring disaster to China and the United States and the world,” adding “nobody wants to fight a trade war, and everyone knows fighting one harms others and does not benefit oneself”. Importantly he said China will resolutely protect its interests if challenged. US soy farmers are a bit rattled at the moment – as this chart of prices collapsing Friday shows.
- TAKEAWAY? The spectre of a trade battle is not over yet.
- When even James Bullard says he’d vote for a March rate hike (metaphorically because he’s not actually a FOMC voter this year) then you know the Fed is serious about raising rates. It’s worth noting he did express concern about 4 hikes this year and the dampening impact that might have on the economy and inflation. On the March vote the FT reports Bullard said, “I know I have been dismissive of fiscal policy effects, but I am willing to hedge my bets a little bit and move a little bit in response to that”. There are many voices at the Fed on both the Dove and Hawk side of the equation. BUT, the reason I raise this is because the absolute strength of the February non farms (not to mention the upgrades to the previous two months numbers) will have the fed worried not to make the same mistake the Fed did before the financial crisis and leave rates too low for too long. We can argue about generals fighting the last war and it is worth noting I do have a lot of sympathy with the view suggesting inflation is structurally lower now. But, the key here is Janet Yellen was tightening, Jerome Powell has a positive outlook on growth and will tighten while the economy looks like it is heating up. IF FOR NO OTHER REASON THAN TO NOT MAKE THE SAME MISTAKE OF HISTORY.
Australia
- Locally the market should roar today. The only handbrake after the US rally dragged copper and oil higher, and after gold bounced from its lows is the performance of iron ore lately. It’s having a shocker and is at 3 month lows as David Scutt as Business Insider has pointed out in his daily iron ore piece today.
- Otherwise the charts are positive. 6,058 and then 6,112 are the next targets. Support is 5,951 – all in SPI terms. On the physical it’s 5,990/6,000. Then 6,050.
Forex
- It was an interesting night Friday, indeed and interesting few days last week as the US dollar fought hard to recover from it’s fall down to 89.40ish in US Dollar Index terms. It’s back at 90.10 now, but that recovery belies the divergence we are seeing in forex pairs tight now. I’ll write more about the Aussie dollar later. But suffice to say there is a chance that the correlations break down again between the majors if US stocks stay bid and this tone of risk appetite continues.
- That’s because whereas a strong US economy and 3-4 hikes is good for the US dollar against the euro and yen the backdrop that speaks to of solid and synchronised global growth is positive for the commodity bloc currencies like the Aussie, kiwi, and CAD. In the latter case that is especially relevant given the carve-out for Canada from the tariffs while NAFTA is being re-negotiated. Of course, that means the CAD, and Canada is not out of the woods. But for the moment the backdrop is supportive of the commodity bloc.
- My colleague Milan will probably do his weekly look at the CFTC positioning data a little later this morning. But just quickly a long market makes the euro a little vulnerable. Likewise, even though the net yen short has been reduced it’s still in the top 20% of shorts for the past 5 years. So again USD/JPY could move higher if stocks retain a bid. There is no guarantee of that with US CPI out this week and US 10’s hovering at 2.89%. But for the moment that is the setup. 107.30 and then 108.30 are the key levels to watch topside. The downtrend has already broken.
Commodities
- It looks like the Saudis and Iranians are taking their battle for primacy in the Middle East inside OPEC. That’s the takeaway from a Wall Street Journal article over the weekend which highlights the difference of opinion over where OPEC and its allies should be targeting crude. It seems the Iranians, fearful of an outsized US shale oil response, are comfortable with prices around $60 a barrel while the Saudi budget needs something closer to $70. Oil Minister Bijan Zanganeh told The Wall Street Journal that, “if the price jumps [to] around $70…it will motivate more production in shale oil in the United States’. That’s not the view of Saudi oil minister Khalid al-Falih who has said many times he’s not worried about getting overwhelmed by shale.
- The Journal also highlighted that discussion on changes to the production cuts could begin as soon as the next June OPEC meeting. “Iran will press for carefully bringing back some of its own production, Mr. Zanganeh said, potentially putting downward pressure on oil prices. The country pumps about 3.8 million barrels a day and could produce about 100,000 barrels a day more. Mr. Zanganeh said OPEC could agree in June to begin easing current production limits in 2019. The Saudis have expressed openness to that idea”.
- Looking at the price action now and I’m going to default to the Double Bollinger band strategy I discussed in my Ask The Trader video from last Friday as a an example of how it works. What you see is that prices over the last week or so have been ratcheting within the “neutral” zone for the past 3 weeks. So while I drew the wedge last week it look like oil is just trapped in a range, without any apparent trend.
Have a great day's trading.