Originally published by AxiTrader
Market Summary
European stocks were lower and US stock traders continue to be nonplussed about the Trump team's tax plan with the S&P 500 and Dow Jones Industrial Average either side of flat and the Nasdaq 100 up about 0.4%.
But the ECB, oil, and NAFTA are the big stories overnight.
Mario Draghi and his colleagues left rates on hold as expected and he, and they, did note the improvement in the EU economy. But that improved outlook was more than offset by Draghi's concerns about the outlook for inflation which has left the Euro lower and the market read on the ECB as having been more dovish than expected.
And while expectations are still for a possible change in ECB rhetoric next month the moves and outlook for oil may restrain him if inflation still looks “transitory” as the ECB has said in the past.
Last night oil fell heavily again before bouncing as traders grapple with the competing messages of the OPEC Secretary General effectively said the production cut will be extended meeting the reality of the restart of a big Libyan oil field and the continued expansion of US shale oil. WTI is this morning down 0.79% at $49.23.
On NAFTA we heard in our time zone yesterday that president Trump was not going to withdraw from NAFTA after all. But he told reporters overnight he'd intended to but took calls from the Mexican president and Canadian prime minister who he likes. So they are going to renegotiate.
On Forex markets the dovish ECB has the euro (1.0869) a little lower this morning. The yen (USD/JPY 111.21) remains pressured and the Aussie dollar (0.7470) afternoon rally yesterday faded again overnight and it remains pressured. The CAD and Mexican peso recovered in the NAFTA news, sterling (1.2907) is stronger again and the Swedish krona was poll axed by its central bank.
Watch out for the RBA to try to do the same next week.
Gold is down a few dollars, copper and base metals are off and the selling of Australia's miners yesterday accelerated in London last night.
But on balance, SPI Traders aren't fussed with prices down 4 points this morning. But the stellar results from Alphabet Inc (NASDAQ:GOOGL) and Amazon.com Inc (NASDAQ:AMZN) may help the tone in Asia today.
Tonight's US GDP release is going to be huge.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 +1 (0.05%) 2389 (7.17 Sydney - change since previous day)
- Dow +6 (0.03%) 20981
- Nasdaq +24 (0.37%) 6,048
- SPI 200 +4 (0.07%) 5,905
- AUD/USD 0.7463 -0.14%
- Gold $1264 -0.4%
- WTI Oil $49.24 0.0%
International
- Mario Draghi and his governing council acknowledged the recovery in the EU last night but very much like the Fed did a few years back when talking about the US economy Draghi and his colleagues emphasised that the inflation outlook remains subdued. This is important because while I believe we will see considerably changed rhetoric from the ECB in the months ahead it doesn’t mean they will rush to act on rates.
- Draghi said – “Incoming data since our meeting in March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished." But he added "at the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upwards trend."
- We need to think of the ECB as where the Fed was back in late 2014 and 2015. Cautiously optimistic but reluctant to derail a nascent recovery until it is established. So we’ll see more cautious language even if the German state CPI data will be making the Bundesbank and its leaders Jens Weidmann titchy.
- The art of the deal? Is that what the trump team was doing yesterday backgrounding journos that NAFTA was about to be scotched by the president? I have no way of knowing, and president Trump said he took calls from his Canadian and Mexican counterparts. But he did tweet – of course – that if he can’t get a fair deal the US is out.
- Speaking of deals the EU27 signalled again overnight that they are united as they ready for Brexit negotiations after the UK general election. Michel Barnier the EU’s chief negotiator said “We are united, we have a clear line and we are ready".
- And in geopolitics China says it is open to talks on North Korea. This was in response to a conciliatory tone from US secretary of state Rex Tillerson who said yesterday “The United States seeks stability and the peaceful denuclearisation of the Korean peninsula. We remain open to negotiations towards that goal. However, we remain prepared to defend ourselves and our allies”.
- In response a Chinese government spokesman said “We have noted these expressions, and have noted the message conveyed in these expressions hoping to resolve the Korean nuclear issue peacefully through dialogue and consultation. We believe this message is positive and should be affirmed.”
Australia
- The banks had better have a good day today of the ASX200 in index terms is toast. I say that because after a poor day yesterday BHP Billiton Ltd (AX:BHP) was down 4.78% in London trade with Rio Tinto Ltd (AX:RIO) down 2.35%. Both loses were worse than what we saw in Australia and will be a natural weight on stocks as we kick off trading today.
- But as the price action showed yesterday there is still plenty of support for the local market. In no small part that comes from the solid performance in US stocks and the relationship between the S&P 500 and the S&P/ASX 200.
- As the chart below shows the ASX’s underperformance has been erased – as it has been many times over the past couple of years – and the local market is now moving in line with the S&P.
- On the data front today we get private sector credit and PPI data. I’ll be interested in the later to see if there is any emergence of pricing pressure below the surface of consumer prices. But as the CPI showed this week the aggregate demand to support price increases seems to be lacking at the moment.
- It’s going to be an interesting RBA meeting and governors statement next week. My sense is the governor should take the opportunity to push the door ajar for another rate cut and in so doing knock the AUD/USD a little lower. As I wrote in my AUD/USD piece yesterday it is already sinking under its own weight and a nudge form the RBA could deliver a stimulus to the economy without goosing house prices.
Forex
- The euro has exactly filled the gap from Monday’s trade yet. But the price action of the past tweo days trade suggests that it is only a matter of time before it does. Mario Draghi’s apparent dovishness last night certainly helped the bear case. But that could be scotched by the release of US Q1 GDP tonight.
- This chart from earlier this week – which I shared on Twitter - shows the difficulty of forecasting the outcome given the big divergence between soft and hard data over recent months. But even this very preliminary guesstimate of GDP should flow from hard data so there’s every chance the Atlanta Fed’s view could be the one that prevails when the data is released tonight.
- The market is looking for 1.3% annualised for the first quarter.
- Elsewhere Sterling looks good and is breaking higher. It’s at 1.2908 this morning up around half a per cent and close to a break of the recent high. I’m bullish medium term but we need to see the high break first. I’ll update the technical later this morning.
- The Aussie, kiwi and CAD are all fairly unchanged this morning. But that masks some volatility over the past 24 hours. In the Aussie’s case prices fell all the way to 0.7441 before recovering to the 0.7470 region. The short term charts suggest that a base in in for this run and a move back toweard the 0.7490ish high could be on the cards.
Commodities
- Lots of comments from the CEO of Saudi ARAMCO yesterday afternoon about the market moving in the direction they thought, about the recovery in Shale oil being part of expectations, while he added that currently US shale was concentrating on “sweet spots” implying costs will rise. Naturally he has an IPO to shop so he’s going to be upbeat. But the EIA did warn this week that the oil market faces a potential supply deficit in 2020 because of the lack of investment last year. We’ll see.
- Closer at hand prices collapsed at one point last night with WTI dropping to $48.20 before the solid bounce lifted it back to $49.16. The big news was the restart of the 300,000 bpd Libyan oil field and a continued focus on the uplift in US production. Reuters reported that the3re has been a 10% increase since the middle of 2016. That pretty much offsets the non-OPEC part of the production freeze.
- Anyway the battle rages and oil market watches still say they expect the rebalancing to continue in H2 2017.
- Gold’s low last night of $1261 was above the previous night’s low of $1259 as prices consolidate the recent pullback from the $1295 high and trendline resistance. As I noted yesterday on a technical basis prices need to fall below the $1259 level now to kick things off again.
- Copper is back at $2.58 as base metals backed off a little again in the past 24 hours.
Have a great day's trading.