Originally published by AxiTrader
Market Summary
A very interesting night of market moves as the big banks in the US led prices a little lower and warned on the outlook. That’s only knocked the Dow Jones Industrial Average down 21 points, 0.1%, to 21,008 and the S&P 500 1 points (0.05%) to 24011. But it’s interesting that this is what Larry Fink warned about the day before. The question of whether this market is priced to perfection might be answered sooner than many think. Just saying.
The Nasdaq 100 dipped just 5 points, 0.08%, while stocks in Europe were mixed.
Locally the S&P/ASX 200 ended May in a slightly better mood but still down around 200 points from April’s close for a loss of a little less than 3.4% on the month. And it doesn’t look like June is going to get off on a firm footing given overnight moves in metals, ore, the miners, and US financials. At the moment the SPI is down 8 points, (0.14%) to 5,732. 5,680 is still the key level to watch in the physical ASX if the selling kicks off.
5,680 is still the key level to watch in the physical ASX if the selling kicks off.
On forex markets a misprint of the Chicago PMI initially hurt the US dollar which seems to only react to negative stimuli at present. That idea is supported by another miss in EU inflation (1.4% from 1.9% last and 1.5% expected) leaving the Euro bulls undaunted. It’s at 1.1242 this morning while the pound has bounced back sharply from yesterday’s lows and is at 1.2872 as fresh polls suggest Theresa May is either not in as much strife as YouGov suggested yesterday or just as much strife. It's all very confusing but the price action is strong for the pound. The Aussie dollar is coming under pressure again and is sitting on the low of the past 24 hours at 0.7424 off about half a percent.
The Fed's Beige book this morning, and the absence of inflation it seemed to convey, hasn’t exactly helped the US dollar either. But it – and the EU inflation – has kept a bid in bonds. Who's right, bonds or stocks? Take you pick. But the preconditions for a big stock correction seem to be growing.
Oil has collapsed again as the Russian deputy foreign minister warned prices will be lower for longer and traders fret about Libyan output growth again. WTI was down 3% at one point before the monstrous 8.67 million draw in API inventories saw it recover half that loss. But it's back under pressure again now down 2.7% in WTI terms. Gold is higher on the uncertainty at the moment trading at $1270 and looking to move higher. Copper in the US is a little higher but that belies weakness in metals in Chinese markets yesterday and further weakness in iron ore.
Today we get retail sales and CapEx in Australia for April before the raft of global Markit manufacturing PMI’s across Asia and the globe. ADP employment, Challenger job cuts, and jobless claims will all be important tonight as pointers to Friday’s release of non-farm payrolls. And tomorrow morning’s EIZ crude and gasoline inventory data will be important as well.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 2411 -1 (0.05%) (7.36 Sydney - change since previous day)
- Dow 21008 - 21 (0.1%)
- Nasdaq 6,198 -5 (0.08%)
- SPI 200 5,732 -8 (0.14%)
- AUDUSD 0.7424 (-0.44%)
- Gold $1268 (+0.43%)
- WTI Oil $48.32 (-2.7%)
International
- The Fed’s Beige Book showed that most districts in the US experienced moderate growth. But for me the key point is that the BB said “On balance, pricing pressures were little changed from the prior report”. That won’t dissuade the Fed from hiking in June as part of its normalisation process. But with the economic data still on the weaker side of the ledger and with inflation quiet the Fed may well pause in the months ahead until it actually sees wages growth, inflation, and a return to positive data surprises.
- European inflation undershot last night with a print of 1.4% against expectations of 1.5% and down from last month’s 1.9%. That Bundesbank president Jens Weidmann said overnight that the ECB needs to discuss whether it is time to adjust guidance, and the previous days leak of “sources” saying just that simply highlights the battle going on at the ECB presently. Mario Draghi and his doves are on one-side worried about inflation while Weidmann and the hawks worry about too easy policy for too long.
- My sense is the Italian election, or chance of an early one may restrain the hawks a little – for the moment at least. And I strongly believe the ECB knows its way behind the Fed and is in no rush even if the tone and rhetoric changes.
- President Trump is apparently planning to pull the US out of the Paris climate change agreement “sources” say. It’s another opportunity for Europe to go its own way and China to fill the global leadership void. Which is what is happening as these two big economies get closer. Reuters reported this morning Europe and China are planning to announce joint climate plans.
- And speaking of the President he’s still blasting the Russia probe. The legal process and former FBI director Mueller’s investigation must run its course. But while this endures the president's agenda is trapped and with it any stimulus the US economy may get is postpone.
- Canada’s economy surged in Q1 with growth of 3.7% up from the upwardly revised 2.7% for the fourth quarter of 2016. That print, however, was a little lower than the expected outcome of 3.9% forecasters were looking for. Surely the BoC will be looking to its policy settings soon?
- China’s manufacturing PMI yesterday printed 51.2 slightly stronger than the 51.0 expected. Non-manufacturing was up from last month at 54.5. Today’s private sector Caixin will be an important scene-setter.
Australia
- An up day to end the month on the ASX. But overall it was a poor performance in May with the index losing more than 3% from April’s close. Whether it is the increased chance of a slowing domestic economy, pressure on the financial sector from regulators, a renewed downdrift in metals and ore, or just a re-weighting of the risks all these cause for the local market by investors here and abroad it’s clear the ASX has materially underperformed the global stock market rally again.
- The next week of data will be an important pointer to whether or not the ASX can come back and bounce off the 5,680 low this week or whether it needs to go lower to find the real level where buyers will re-enter the market. We have retail sales today which the market expects to print +0.3% after the last couple of months poor results. Then we get the partials for Q1 GDP and the release itself next Wednesday as well as the usual start of month data flow and the RBA board meeting and interest rate decision next Tuesday.
- How the data flows and what the RBA will be important. But so to will be the support at 5680. While it holds I’m not going to get too bearish. But the monthly chart of the ASX 200 does worry me. We saw a very bearish engulfing candle which usually suggests more weakness to come. Here’s the chart.
Forex
- Yesterday the pound came under heavy selling pressure when a YouGov poll suggested Theresa May’s conservatives would go backwards at this month’s election. It fell to 1.2790 but subsequent polls suggesting the government is not in as much strife electorally as YouGov suggested have seen it rally sharply to 1.2877. What’s bothering me about this volatility on the back of the polls and something that feeds the uncertainty and volatility in sterling and the outlook is that the pollsters are trying new methods. Yes we know they missed Brexit, and got the 2015 election wrong. But the YouGov poll yesterday was based on a new process and showed Theresa May would lose seats and the possibility of a hung parliament.
- Last night Panelbase released a poll which showed the Conservatives have a 15 point lead over Labour – 48/33. But this was based on methodology which looked at only voters sure to vote. A new process. Should the poll have been conducted on an all comers basis it would have shown the Conservatives had just a 6 point lead Panelbase said. Trying to get it right is laudable but it adds to volatility and uncertainty. Who do traders believe YouGov’s new process, or Panelbase. I have no idea but clearly the market is happy either way given the solid bounce in Sterling which has the price again wrestling with resistance.
- Elsewhere in forex even with the dip in inflation the Euro is a little less than half a per cent higher at 1.1233. The Beige Book isn’t much of a support for the US dollar given the inflation outlook and traders seem to have already assimilated both the likelihood of a June hike and then the increasing chances of a pause. US 10's and 2's a little lower isn’t helping the dollar either.
- But as uncertainty grows in global markets – yes I know I’m being pre-emptive given where stocks are and what they are not doing – the Aussie dollar has come under pressure again. It’s completely missed out on the US dollar weakness rally we’ve seen in the Euro and pound and has fallen half a percent to take a hammering on the crosses. 0.7400/20 remains key support. Retail sales data today will be very important.
- The Canadian dollar missed out on a rally as well as crude oil prices collapsed. US Dollar (CAD)is at 1.3503 up 0.33% and still respecting this uptrend line.
- And the Chinese authorities have driven overnight rates higher in onshore and offshore markets which has in turn driven the USD/CNY to its lowest level since the US presidential election. I'll write a separate piece this morning.
Commodities
- Saudi oil minister al-Falih said OPEC and non-OPEC countries are committed to bringing global oil inventories down to the industry's five-year average. Trying to bull the market he said that he saw that happening very soon. And of course it might. Inventories are the key to the price of oil now that OPEC has effectively shot its bullets on the supply side – demand is key now. But that hasn’t meant oil traders aren’t still worried about production. Even though the OPEC data for the month of May showed very high compliance of 95% Reuters reported overnight that OPEC output actually rose by 250,000 bpd to 32.22 million as Nigeria and Libya pumped more.
- And while the Russian oil minister agreed that it is working with the Saudis to rebalance the market his colleague, deputy foreign minister Kolychev suggested that the bulls are going to be disappointed. The boys over at Forexlive report this morning that Kolychev aid prices are likely to stay between $40 and $50 a barrel for 5-7 years and that they may even go lower at some point.
- So the wash up this morning is that crude oil prices are down around 3% as we await API data. WTI is at $48.17 while Brent is at $50.29.
- Gold is up and looking good as uncertainty in markets grows and bonds tend to have a bullish (lower rate) bias. It’s up half a percent to $1,269. $1275/78 is the key zone within which significant one year resistance lies and above that the $1290 region is where the trendlne going back to 2011 sits.
- It was an down day for metals in China yesterday with falls across the board and iron ore under pressure again. But copper in the US managed to rally a little up 0.74% to 2.58%. Chinese manufacturing data wasn’t terrible as I’ve highlighted above but the surge in the Yuan suggests authorities are still trying to drive the speculative froth out of the economy. So I’ll be watching the price action in base metals closely again today.
Have a great day's trading.