Enthusiasm Notably Absent

Originally published by IG Markets

US equities followed up on Tuesday’s critical breakout, but the enthusiasm generated by the technical charge was notably absent.

Wall Street seeks follow through in the technical sense: Technically speaking, the day registered an advance for the S&P 500 and Nasdaq with bullish opening gaps – the fifth in a row. Yet, the lift through the session was notably restrained with volume matching the sense of hesitation reflected in the price. The benchmark US indices are still generally below the mid-point of their 2018 ranges, so there is still ‘open territory’ for bulls to traverse before the hard decisions have to be made on conviction. From the earnings headlines, the 1Q optimism continued with Morgan Stanley (NYSE:MS) reporting a record profit. That said, it seems financial giants are no longer symbolic leaders of the wider market that tech companies seem to represent. There was a notable difference in even the financial sector – much less the S&P 500 – relative to the Nasdaq and Tech sector response to Netflix (NASDAQ:NFLX) reporting.

Mixed messages of Chinese currency manipulation: Chinese officials voiced confusion on the United States stance on trade and the country’s relationship with their own. The US President tweeted Tuesday his view that China and Russia were currency manipulators – a view that contradicted the US Treasury’s own assessment as neither country was on their recently released official list. Treasury Secretary Steve Mnuchin was forced to explain why the differing messages are not contradictory, but the confusion remains. Global leaders already knew that dealing with the United States and its leader was going to be challenging, but the uncertainty only further undermines appetite to jump back in on market-based pullbacks for fear of an unexpected hard turn by the world’s largest economy. Meanwhile, the Chinese Yuan (offshore renminbi, CNH) is still little changed. That is not much of a surprise given the control authorities have in providing stability, but the USD/HKD driving into the upper end of the tolerance band of the HKMA’s peg to the Dollar suggests capital pressure in the region is building.

Canadian dollar drops after BoC holds rates…as expected: Heading into the Bank of Canada rate decision this past session, there was little expectation that the group was prepared to follow up so soon with another hike. From swaps, there was approximately a 20 percent probability of another 25bp hike priced in. So, it should have come as little surprise when the bank held its benchmark rate unchanged at 1.25 percent. And yet, the market response to the expected announcement was a meaningfully sharp decline from the Canadian dollar across the board. Notes by Governor Poloz about trade uncertainties, challenges of competitiveness and excessive consumer debt presented something of a dovish lining to the event, but it was more likely the Loonie’s charge over the past three weeks that really set the bar too high and thereby supplied the leverage for a pullback. Looking back to swaps after the decision, the probability of a hike by next week softened modestly to 44 percent but there is still a 93 percent chance of a hike sometime this year. That is much more than the RBA, RBNZ, ECB and BoJ can claim.

New Zealand dollar may extend drop on soft CPI data: NZD/USD fell for a second consecutive day, hitting the lowest level in a week before first-quarter CPI statistics cross the wires. The headline on-year inflation rate is expected to tick down to 1.1 percent, making the weakest price growth since the three months ending September 2016. A soft result may push back RBNZ rate hike bets, compounding selling pressure. A daily close below near-term trend support at 0.7286 opens the door for a test of range support marked by swing lows since early February in the 0.7154-87 area. As it stands, rate futures are not pricing in an increase of the central bank’s official cash rate until the second half of next year.

Aussie dollar climbs ahead of jobs data: The Australian dollar was one the best performing major currency this past session registering gains against the most liquid, the highest yielding and key havens alike. There was little that data or headlines related to trade would do to help the currency, but ‘getting out of its way’ seems to be just as effective a policy for a currency that has struggled in 2018 and more broadly over the past years. Ahead, we will see the fundamentals strike a little closer to home. Jobs data has a history of generating short-bursts of volatility for the currency, but be cautious of projecting clear trends from this data set. Unless the labour data moves the dial for an RBA policy shift, this will likely find the limited capacity to move markets.

Commodities rise most in 8 months as crude oil soars: Crude oil led the overall commodities space higher. Prices found support early in the day as Iraq delayed an auction of oil field development rights while officials from OPEC and Russia prepared for a meeting that may bring an extension of coordinated output cuts into 2019. That was amplified as EIA inventory flow statistics showed stockpiles shed 1.07 million barrels last week. Economists were expecting a shallow build of 393.6k barrels, though a closely followed private-sector estimate from API published Tuesday foreshadowed the large outflow. The benchmark Bloomberg Commodity Index added 1.62 percent, the largest one-day gain in eight months.

S&P/ASX 200 eyeing jobs data after boost from China RRR cut. Australian shares traded higher yesterday. A positive lead from Wall Street was reinforced as the PBOC unexpectedly cut reserve requirements for a range of Chinese banks by 1 percent, easing recent worries about tightening monetary conditions. The crucial materials sector making up nearly a fifth of the overall index and highly dependent on raw-materials demand from the East Asian giant added 0.8 percent. Local labour-market data is in focus ahead. The jobless rate is seen ticking down to 5.5 percent in March as the economy adds a net 20k jobs. Data flow has increasingly disappointed relative to forecasts in past six weeks, however, hinting that analysts’ economic models may be too rosy and opening the door for a downside surprise.