Originally published by AxiTrader
Market Summary
I confess to be utterly surprised by the strength of the rally on the ASX and in Asia yesterday given the lead from the US markets Friday. That rally extended into early European trade but after one or two disappointing earnings reports and without US markets to buoy the bulls the rally faded into the close.
So at the end of trade the FTSE was down 0.64%, the DAX had lost half a percent and the CAC around the same amount.
The corollary of that was substantial give back by SPI traders of all of the rally we saw on the ASX yesterday with the 38 point rally being wiped away by thee 36 point fall in the SPI overnight. I must say back to the status quo as we wait for the US tonight makes more sense to me than the surge yesterday. But lets see what the bulls have in store for us today.
On forex markets it has been fairly quiet with relatively tight ranges though the US dollar was under a little pressure again yesterday before the sellers re-entered the market. The debate over the outlook continues and the week ahead of Treasury issuance and US dollar price action is likely to be crucial in determining whether we see a hiatus in the selling or another wholesale collapse and under the weight of a lack of confidence in the fiscal outlook.
Anyway, as I write the euro is largely unchaged at 1.2409, the pound is sitting at 1.4010 and only the USDJPY has moved in manner worth noting having gained 0.25% to 106.57 – despite some decent data out of Japan yesterday. For the commodity bloc it’s our high beta cousins across the Tasman with the biggest move. The New Zealand dollar is sitting at 0.7370 down about a quarter of a percent. The Aussie is largely unchanged at 0.7912 and the Canadian dollar has barely budged with USDCAD 1.2556.
On commodity markets oil retained the bid it caught in Asia yesterday and it’s up 1.33% in WTI terms and 1.57% for Brent – they are at $62.50 and $65.82 respectively. Gold, like forex, is largely unchanged $1346 and copper has lost about 1% as it continues to chart it’s own course – it’s at $3.21 a pound.
On the day ahead we have the release of the RBA Board meeting minutes here at home and then tonight is German PPI, and ZEW economic survey along with a 2 year Schlatz auction. There is plenty of US Treasury debt to be auctioned as well with $150 billion of short bills tonight and $28 billion of 2 year notes on the block. Tonight we also see a ZEW survey for the Euro Area along with consumer confidence for the region.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Blackrock (NYSE:BLK), one of the world’s biggest money managers, has upgraded its outlook for US stocks and as a result decreased its relative bet on Europe. “As we have more information from companies as they incorporate more impact from the tax cuts and stimulus, we have reached a place where we are quite confident based on the fundamental backdrop,” said Kate Moore, BlackRock’s chief equity strategist. She added that, “we are not seeing any deterioration in the prospects in Europe,” Ms Moore said. “It’s just a relative call where the stimulus in the US and tax cuts is providing a level of earnings growth much higher than we are expecting in Europe”. I wonder if others will think that and if there might be a stirring of Dollar bulls as a result. Most folks seem to think the US budget will cruel the dollar – see below.
- Markit reported yesterday that UK households are getting a bit gloomier on their finances. The household finance index fell to 42.2 – a seven month low. Showing the anticipatory impact of interest rates from the BoE’s communications 60% of respondents said they expected rates to rise within 6 months. Inflation has hurt British households and now mark Carney wants to hike because of inflation – UK consumers seem a little fragile to me for this. It’s the old double whammy of central banking of days of old.
- But okay data out of Japan yesterday. The release of trade data showed a faster than anticipated growth in exports of 12.2% year on year in January. Global growth is lifting a lot of boats at the moment. But despite this Japanese industry reported a dip in the Reuters tankan survey, not the official one, which fell to 29 in February from January’s 11 year high of 35. Cited among the causes for the deterioration was the stronger Yen recently. Still solid though. And while I’m in Japan news is the government is pushing back its hope to balance the budget by 2 years to 2027.
- We really do need to keep an eye on Syria. The face-off between the US and Russia in the country has intensified after the recent spat that saw a large number of Russian nationals killed during a probe across the demarcation line in the country. Overnight Russian foreign minister Sergei Lavrov told the US “not to play with fire” in Syria. He also said, “the U.S. should stop playing very dangerous games which could lead to the dismemberment of the Syrian state”. Also in the country, Turkey has threatened Syrian troops saying if they want to come and decimate the Kurds that’s fine but if they come to support them Turkey will deal with them. Indeed, the Turkish foreign minister said, “if it (Syrian Army) comes in to defend the YPG, then nothing and nobody can stop us or Turkish soldiers”. The US, Russia, Turkey, Iran, Isareal, Syria itself, and the Kurds. What could go wrong?
- And, there is a kerkuffle in Latvia. The US has accused one of its banks of money laundering for the North Koreans and last night the central bank governor was arrested.
- And on bonds. As you know, yesterday I suggested we watch the 10’s and that maybe we were in for a rally. So you won’t be surprised that I wholeheartedly agree with these two tweets from David Rosenberg, Glushkin Sheff’s chief economist and strategist.
Australia
- The price action giveth and the price action taketh away. That’s the tale of the past 12-15 hours in SPI trade after yesterday’s advance had been wiped away as traders mirrored the weakness on European markets. Yesterday afternoon I tweeted, “Well, I for one did not see that rally in the ASX200 coming today...very solid close technically for the physical market and the SPI is now through the 61.8% retracement level of the big fall a week or so ago”.
- But this morning I’d have to change that to say something like, I didn’t see yesterday’s rally in the ASX or SPI coming but the rejection overnight of the break in the SPI above the 61.8% retracement level reinforces the 5,892/5,922 region as significant resistance for the market. Likewise, after last night’s fall the chance of the ASX200 physical slipping back under the 5,916 Fibo level of the big selloff is high today. We’ll wait for the US for the next shoe to drop. But unless or until the SPI trades back above, and holds, 5,922 the consolidation is ongoing.
- The RBA board minutes are out today. There should not be any surprises given the multiple occasions on which the Board, the governor, and his staff have been able to put their view this month. Traders will still be watching however. And a rogue headline could move the Aussie dollar a little. For the moment though while it holds 0.7885/90 it looks okay but a break could see a swift 50 point loss.
Forex
- The FT asked a few strategists whether the US dollar's slide would continue. There doesn’t seem to be a consensus. Personally my favourite comment is from Ulrich Leuchtmann at Commerzbank (DE:CBKG) who said he does not buy the “ridiculous fundamental explanations for the dollar weakness”. He’s got a point. There has certainly been a lot of ex-poste curve fitting to show relationships that are driving the US dollar.
Source: FT (Unicredit (MI:CRDI)) and Business Insider (Macquarie)
- The most recent one is the US deficit will kill the dollar meme. Yesterday Business Insider reported Macquarie has warned that “a big bear market is coming for the US dollar” while overnight the FT ran a story that included a chart from Unicredit which shows the same idea. And that, of course, is the big story we heard over recent week’s as to why the US dollar should fall. It’s a reasonable one. But no major exchange rate is the result of a single factor model. But Hans Redeker of Morgan Stanley (NYSE:MS), also in that FT article, puts it nicely when he explains why he’s bearish the US dollar. “Because the dollar is the global reserve currency and its capital markets are ample, it should trade inversely to demand for capital, which in turn is a function of risk sentiment. Demand for capital globally is rising due to strong capital spending demand, fiscal policy becoming more expansionary and private demand staying strong. We expect the strong growth momentum to continue. As a result, this robust demand for capital should continue, if not strengthen, leading to further dollar weakness” he wrote.
- Time will tell. And As I’ve written often recently the US dollar is in a very strong down trend and even if it holds 88 in US Dollar Index terms of 1.26/27 in euro terms its way too early to say the worst is over for it yet.
Commodities
- Yesterday I suggested that for the moment the price action suggests there are still buyers lurking on any dips. And it seems in thin trade yesterday, and in the absence of the US last night, the buyers pushed their luck and the price higher. Brent Crude has, as a result, cruised through the 38.2% retracement level of the fall and at $65.61 is just 30 cents or so shy of the 50% level at $65.82. If that breaks then $66.84 is the 61.8% level of the move. Unless the 61.8% move is taken out a retest of the lows, and possible break, still seems high.
- The move seems to have had its genesis in news that OPEC is trying to form a supergroup which will soon include Russia. It's all a way of OPEC forestalling the inevitable Russian pumping of oil which they have floated various times will increase materially once the current production deal eventually ends. Helps prices in the short term but it does tell you a lot about OPEC's feear of US, and Canadian, oil.
- Copper has an interesting range it is trading in at the moment. Interesting for two reasons. First it’s largely unhinged to and uncorrelated from many other markets which have been so dominated by the US dollar moves over the past couple of months. And second because the parameters of the range are wide and crucial for the out look. A break of $3.30/35 could see a run toward $3.70. Equally though, a break of $2.90 could see a run into the mid $2.60’s. Interesting times. McKenna Mantra number tow (closely associated with the original though) “Trade the Range unless, or until, it breaks.
Have a great day's trading.