Crude Bounces As Gold Makes A New High For The Year

Originally published by AxiTrader

Market Summary

Stocks drifted a little lower across the board overnight with the S&P 500 down 7 points to 2429 for a 0.28% loss. The Dow Jones Industrial Average dipped almost 50 points and the Nasdaq 100 was down 0.33% to 6,275. Reports are that there is a little nervousness over the upcoming testimony from former FBI director James Comey on Thursday. But it’s hard to tell.

Stocks in Europe were a little lower with the German market coming back from its day off and promptly catching up with the previous day’s continental falls. The DAX finished down 1% while the CAC lost 0.73% and the FTSE was largely unchanged.

Here at home though after an awful day’s trade on the ASX last night SPI traders are punting on a better day and have marked prices up 15 points. Yesterday’s move has done a lot of technical damage and would have worried a few traders as it seemed to come out of nowhere. So we’ll see if the buyers are in fact keen to re-enter the fray.

On other markets the US dollar is a little weaker as US bonds rally. The euro is up near recent highs, as is the Australian dollar atop 75 cents. But it’s the yen which has rallied – along with gold and bonds – suggesting that there is a growing underlying current of uncertainty in markets at the moment. I guess in this context the small drift lower in US markets is understandable.

Crude bounced from below $47 again even though concerns remain about the Qatar isolation. That’s especially the case given president Trump’s tweet storm on the topic last night. WTI is up 2% at $48.36 (BREAKING: as I sign off we’ve seen another bigger than expected draw in US inventories). Gold made a high of $1296 and remains bid this morning at $1292. Copper and base metals were lower as was iron ore.

On the day it’s Australia’s first quarter GDP release and then later on Chinese reserve data and Japanese GDP which will be of most interest.

Here's What I Picked Up (with a little more detail and a few charts)

• S&P 500 2429 -7 (0.28%) (8.02 Sydney - change since previous day)
• Dow 21136 -48 (0.23%)
• Nasdaq 6,275 -21 (0.33%)
• SPI 200 5,682 +15 (0.265%)
• AUD/USD 0.7509 (+0.33%)
• Gold $1279 (+1.2%)
• WTI Oil $48.19 (+1.2%)

International

• Is June the new May? That’s the question I’m asking myself as stock markets across the globe ended mostly down for the second day in a row. Australia has its own issues right now but the fact that Europe (DAX down 1%) and the US are drifting back a little is interesting in a price action sense. It’s only the second day of losses so I’m not going to over egg it but it is something I’m watch because there is an utter inconsistency between what stocks and bonds are telling us.

• And as I say stocks don’t seem to care – YET – but there is a pretty solid bond market rally going on across global markets right now. US 10-year rates, along with those in many other developed markets, are at the lows for the past six months. German rates are rallying too. What it reflects is that the reflation trade is fading. Inflation’s pulse is waning at the same time it appears that long term bond investors are questioning the outlook for the global economy over the horizon.

• Something worth keeping an eye on in terms of the US economy, employment and the Fed. The JOLTS report last night showed US job openings hit a record high during April to 6 million opportunities in the US economy. But hiring was down hitting a one-year low of 3.5%. That suggests that it’s getting very difficult to hire workers in the US right now. Where’s the wages inflation we’re all wondering. And that’s something that will be occupying the mind of the Fed as it raises rates next week.

• We are coming down to the wire for Thursday’s UK election and it seems that polls remain as divergent as ever. Depending on who you listen to the Theresa May’s Conservatives have either a 1% lead over Labour or a 7 point lead. The most recent poll however shows that May will end up with a 64 seat majority Reuters is reporting.

• Keep keeping an eye on Qatar. President Trump significantly upped the stakes overnight blundering in with a Tweet that seemed both to support the Saudis and forget that there are 8,000 US service men and women at the big US base in Qatar. The president tweeted that “During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar - look!”. He then followed up a couple of hours later with a two-tweet storm saying “So good to see the Saudi Arabia visit with the King and 50 countries already paying off. They said they would take a hard line on funding... extremism, and all reference was pointing to Qatar. Perhaps this will be the beginning of the end to the horror of terrorism!”.

• Like many things about Trump he seems earnest in his pursuit of a better and safer world, he wants more Americans working, he wants the economy growing on a stronger path. But the execution is appalling and lets him down. What’s important about this is that Qatar is a little snookered given it shares the gas field on which its wealth is based with Iran and its hard to know how this will all play out. Which is why I’m writing about it. It could impact oil and gas prices and has already lifted gold. It might also have had some play in the bond market rally of the past few days.

Australia

• Another terrible day on the ASX200 yesterday with the index down 1.52%, 87 points, to 5,667. The falls were across the board and while the big dip in the financial sector and the drop in the miners naturally gets the headlines the fact that the selling was so broad on 19 stocks in the 200 index ended in the black yesterday suggests the drop – as one analyst put it last night – was a result of “some big institution(s) somewhere have decided to sell”.

• Regular readers will know I’ve been singing from that songbook for some time. My sense, watching the price action across the Australian markets – stocks, bond, and Australian dollar – has been that there has been a wholesale downgrading of Australia as an investment destination recently as opportunities in other nations and regions have taken precedence. My hypothesis has been that this re-rating of Australia is why the ASX 200 and clearly broken down and away from the correlation with the S&P 500 in the past month.

• The chart below highlights the break. It’s only for the last year but this correlation has been pretty since the surprise Chinese devaluation of the yuan in August 2015.

• There is naturally going to be a point where investors see value again. I have no idea where that is. For the moment this is a big psychological change. It will be catching people by surprise. Bothering them in a behavioural sense as they struggle to understand why the local market hasn’t participated in what has been a pretty solid global stock market rally. But price action is often as good a guide as any. And on that front the break down and through the 5680 support, recent and range low, opens the way for another fall of between 100 and 300 points.

• And of course the reason for the weakness, the falls in prices, and the underperformance to the global rally seem to me at least sourced in a changed outlook for the Australian economy. Again that’s a song I have been singing for some time. Readers know I strongly believe that the end to the housing price boom, APRA and the RBA’s warnings on housing, new responsible lending laws, and low growth in incomes has, or will, NUDGE Australian toward a focus on the mountain of debt. That will lead to less consumption and a stalling domestic economy.

• And that seems to be something the RBA gave a tacit nod to in governor Lowe’s statement yesterday afternoon when he announced the board had decided to hold rates steady. Firstly it is worth noting that the governor reiterated – nice and high in the statement so we couldn’t miss it – that the bank still says “economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent”. Three percent – I hope he’s right and I’m dead wrong. That will be a good outcome if it’s balanced across the economy and supported by a strong domestic economy.

• But the governor seems to know that may now be at risk. “Slow growth in real wages is restraining growth in household consumption,” the governor said in his statement yesterday. And, if I may, it’s worth repeating what last month’s minutes to the RBA board meeting said – “If households were becoming more focused on paying down debt, this would imply some downside risks to the outlook for household consumption growth. A fall in housing prices could also weigh on consumption growth.” Danger Will Robinson! Housing looks like it might have peaked.

• So to yesterday’s data and today’s release of Q1 GDP. The key is the chance of a very low – perhaps even negative number has grown. That’s because even though the current account deficit was – in historical terms – the best performance since 1979 at just 0.7% of the economy. But because real net exports had a 0.7% dragon growth in the economy – worse than the 0.4% drag economists had forecast – means the Reuters survey suggests that growth of just 0.2% will print for Q1 GDP at 11.30am this morning.

Forex

• US bond rates remain the best indicator for the US dollar at the moment. So their rally has again undermined the US dollar which has lost about 0.25% in US dollar index terms.

• The pound gained again overnight running to a high of 1.2949 before running into that trendline again where buyers backed off a little. The pound is at 1.2912 as I write. The euro is higher again up at 1.1275, the Swiss franc is at 0.9619.

• But it’s the yen which is the big mover after USD/JPY broke down and through the recent range bottom at 110.20 in the past 24 hours. It’s now at 109.44 with a loss of 0.91% and a pretty average looking outlook at the moment.

• The Australian dollar is up again. It traded right to the top of the current short term resistance zone overnight but has backed off a little to 0.7509 this morning. GDP today is going to be an important indicator for the Aussie. There is still room for a surprise given that the partials that have been released so far don’t cover the whole gamit of inputs into the calculation for Q1 GDP. We’ll know at 11.30 am AEST.

• Forex – and other market – traders will also be watching the release of China’s Forex reserves data with interest. My sense is that China has this and capital flow under control. But it’s still an important focal point. And of course while the Yen seems to have caught a bid with gold as bonds rally, geopolitical risks rise and stocks drift in June the release of Q1 GDP, foreign investment and trade will be important signposts for the BoJ and by extension the yen.

Commodities

• For the third day in a row, WTI crude found support in roughly the same zone below $47 suggesting the buyers are lurking once again. WTI bottomed at $46.91 before bouncing sharply to $48.29 for a gain of 1.88% as I write. Brent is also well support with a 1.46% gain to $50.19 a barrel.

• There is still plenty of focus of the Middle East and the spat between Qatar and its neighbours. Initially that saw oil come under pressure before buyers stepped back into the fray. I’m waiting on the API crude data to be released this morning and I still contend that where oil ultimately goes is going to be driven by inventories which are really just a reflection of supply and demand.

• And on that front the EIA upgraded both its supply and demand forecasts for the US. Reuters reports the EIA “forecast that production will grow 680,000 bpd to 10.01 million bpd in 2018. In last month's report, the EIA said it expected a 650,000 bpd year-over-year gain to 9.96 million bpd”. Should the EIA be correct that will take US production to a new record high. 2017 demand is upgraded as well to 9.33 million bpd for a 460,000 gain over 2016. ON the demand side the EIA said “2017 demand would grow 320,000 bpd, up from its previous forecast of 290,000 bpd growth. For 2018, oil demand is expected to increase by 310,000 bpd, up from the previous forecast of 300,000 bpd growth” Reuters reported.

• $48.50/60 is short-term resistance for WTI at the moment.

• Gold has ripped higher again as bond rates fall, the US dollar remains under pressure, and geopolitical tensions shift higher. At $1293 an ounce it’s just a couple of dollars below the overnight high and at a new high for the year. It’s broken the downtrend line from last years Brexit high and it is very close to breaking the downtrend line from the high back in 2011.

• Copper is down a little again this morning but not materially so at $2.5445 a pound. Overall though it has been a poor performance for base metals over the past 24 hours. In fact it’s pretty much a sea of red and iron ore has gone along for the ride.