Originally published by AxiTrader
Market Summary
A flat finish on Wall Street this morning after falls in Europe as polls show that the far left candidate Jean-Luc Melenchon is on the rise. That’s impacted French-German bond spreads, kept a lid on the Euro and put a little bid tone into the yen and gold – both of which recovered from a little weakness.
Locally though SPI traders are betting yesterday’s monster 50 point rally on the ASX 200 won’t give back much ground with prices only being marked down 3 points from yesterday afternoon.
Elsewhere the big story is oil and it’s continued rise. Geo-politics, a continued move toward an extended production freeze, the closure of a Libyan filed, and of course the price action itself all contributed to further strong gains. That’s underpinned energy stocks across the globe.
On forex markets it was a quieter night. The Aussie found a little support, euro didn’t like the French polls, but the yen did and sterling rallied after it found support at my fast moving average as traders await important inflation data tonight.
Copper collapsed to support and gold bounced back from the lows in a sign uncertainty is still a little elevated.
The day ahead is an exciting one for economic wonks in Australia with the release of the NAB’s business survey. Chinese loans and money supply data is also worth noting before the UK inflation, ZEW survey in Germany, and I’ll be watching the NFIB survey in the US as well.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 +2 (0.1%) 2357 (7.18 am Sydney)
- Dow Jones Industrial Average +2 (0.01%) 20658
- Nasdaq 100 +3 (0.05%) 5,880
- SPI 200 -2 (0.03%) 5,899
- AUD/USD 0.7502 +0.14%
- Gold $1254 -0.0%
- WTI Oil $53.14 +1.72%
International
- It seems only a weak earnings season has any chance of knocking over US stocks any time soon. Sure the rally has well and truly stalled, and sure I’ve been warning that the data pulse is fading, but investors and traders just don’t want to give up on the rally. They continue to buy these shallow dips even if prices are respecting this little downtrend the S&P 500 CFD is in right now.
- That means this week’s kick of earnings – and the banks especially Thursday night Australian time – are the start of a very important period for stocks and risk assets globally. Earnings revisions appear to have been less recently than in previous quarters and the market is looking for an average of more than 9% year on year growth (some say more than 10%). But a large part of that is likely to be concentrated in energy firms so we’ll see how the overall market takes it.
- But for now we have an overall down to sideways market as US stocks consolidate their gains. So it’s worth noting that in markets we have two types of consolidation. One is price, where there is a reversal – often to the 38.2% retracement level at a minimum, and the other is time, where prices move sideways for a time. So far US stocks have declined to fulfil my expectation of a price consolidation and are mapping out a time consolidation. Earnings season is likely to determine if this has been the pause that refreshes or prices need to continue to drift.
- On the US economy though yesterday St Louis Fed president James Bullard reiterated his and his bank's belief the US economy is still mired in a low growth low inflation paradigm meaning rates don’t need to increase as much as his colleagues believe. BUT he did join the chorus calling for a reduction in the size of the Fed’s massive $4.5 trillion balance sheet. This is going to be a huge move for markets and a potentially big hurdle for stocks and other risk assets.
- And also on the US economy US president Trump is meeting with the CEO’s of 20 big US firms tonight to discuss tax and infrastructure reform. Clearly he is still moving forward on his plans and once he gets buy-in from business he’s likely to have his minions push his plans on Capitol Hill. I’m convinced he’ll get something done eventually. It’s just the scope and timing that’s uncertain. Just look at the big Toyota announcement of a $13 billion investment to retool a factory in Kentucky as evidence that business still has faith in president Trump’s ability to change the economic, regulatory, and tax landscape.
- Speaking of uncertainty the IMF is less uncertain and more upbeat on the global economy over the course of 2017 and 2018. Naturally there are risks the IMF is still worried about but the fact that IMF boss Christine Lagarde said on Monday the primary one was “complacency” suggests things really have improved. No wonder you can’t kill stocks with a stick at the moment.
- The French election really feels like it’s tightening up with the emergence of the far left candidate Jean-Luc Melenchon emerging from the pack and making it a race in four. He’s still trailing Macron and Le Pen in first round votes but we are getting close to margin of error differences which means he might surprise. German and French bond spreads hit the wides again as a result of recognition this is a possibility. Worth noting Goldman Sachs (NYSE:GS) told clients to take some cover in the bond market – shorts – to cover this possibility or that of a Le Pen victory.
- South Korea and China have agreed to work together on North Korea AND Chinese traders have been told to send back North Korean coal. These are both concrete steps and suggest that the Trump/Xi summit really did go as well as it appeared on the surface.
- Speaking of China, the banking regulator in Beijing has issued new guidelines on risk controls for lenders as the nation recognises and tries to fight the risks in its economy from the credit boom. Note when you read credit boom you should hear in your head DEBT BOMB.
Australia
- The rally in oil seemed to help those companies exposed to the sector yesterday. That and some unexpected support for financial sector drove the S&P/ASX 200 to its highest level in 2 years. I’m not on this rally but technically there is still headroom on this rally all the way to that 2015 high around 6000.
- SPI 200 traders are a little more circumspect overnight with the index down around 5 points. The ASX is now outperforming the S&P 500 as it did earlier this year. That rally/outperformance proved unsustainable. The question is where will this rally pull up? In many ways the answer lies with US markets. As noted above US stocks have paused and are awaiting earnings data. Where US stocks go so too will Australia.
- Looking to the economy and today sees the release of what I consider the most important piece of Australian economic data each month. I’ll be looking closely at Business conditions, confidence and then diving into the detail of the sub-indexes on trading conditions, profitability, and employment. If business is still reporting solid numbers for these metrics – as they have been recently – then that suggests near term risks to the economy are muted. Longer term it’s consumers and their confidence I’ll be watching next. That’s out tomorrow.
Forex
- The US dollar consolidated its gains over the past 24 hours and is sitting just above 101 in US Dollar Index terms. There hasn’t been a lot of big moves in the majors although it is worth noting that the Australian dollar has found some support with a low at 0.7472 before recovering a little to sit just below 75 cents this morning.
- USD/JPY has an ugly candle stick and a rejection of a rally toward 111.60 but overall it still looks like it is building a base for a move higher. 109.90/110.10 is the region prices have to hold otherwise this outlook is negated.
- Euro is struggling as traders focus on the French election and the elevation of Melenchon into the now crowded pack of front runners. But sterling had a good night up 0.26% and back above 1.24 as traders eye PPI and CPI data to be released tonight in the UK.
Commodities
- In my video yesterday morning I said the price action in crude – WTI is the one I watch most – suggested a move back into the $53 dollar region and perhaps we’d see a run up towards the $55 range top. I noted the comments from Russian energy minister Novak over the weekend (something I forgot to put in yesterday’s report) and of course the geopolitics of the Syria strike.
- So it’s no surprise oil got a further lift last night. WTI is up 1.72% to $53.14 while Brent is up 1.38% to $56. Now naturally comments from the Kuwaiti oil minister – again – on a production cut extension and the closure of a Libyan oil field, only just reopened last week, are the fundamental reasons for the move. But the price action continues to suggest we could see a test toward range tops. Here’s the chart:
- Gold was lower early but bounced back to finish at $1254 this morning largely unchanged. Copper has dipped back to $2.60 for a fall of 1.44% in line with falls in Shanghai.
Have a great day's trading.