Originally published by AxiTrader
Market Summary (6.40 am Thursday May 24)
The Fed minutes were out this morning and the market has taken them as a slightly dovish tilt.
That helped the euro and other currencies fight back against what was still a good night for the US dollar – but’s well off its peak for the past 24 hours. Likewise, the minutes were the catalyst for a recovery in US stocks which – while off their lows – were still in the red a little before 4am this morning when the minutes were released. Bond rates too are lower with the 2-year Treasury at 2.53% and the 10-year Treasury at 2.99%.
What drove the turnarounds were a couple of things.
The Fed’s tolerance for inflation above 2% as “helpful in anchoring longer run inflation” is a clear sign that even though pressures are rising the Fed won’t be too aggressive on any uptick. So 2 or 3 more hikes in 2018 and a continuation of the gradual approach seems to have been reinforced. Equally comments of a revision to “forward guidance” and that there remain a “range of views” on further hikes together with the Fed saying “risks to the economic outlook appeared to be roughly balanced” simply reinforces what we already know.
So for me the dovish read by the market is really just a reflection that the Fed was not overly hawkish. Which is the read I suggested when the Statement was released after the meeting earlier this month. Seriously though, did anyone really expect anything else from a Jerome Powell lead Fed?
Anyway, to the markets now and the half a percent turnaround in US stocks after the minutes left the S&P 500 up 0.3% to 2,733. Still within its 2700-2742/45 range, but looking a little bit healthier. The Dow is up 0.2% at 24,886 while the Nasdaq 100 rose 0.87% to 6,953.
Europe had a shocker though after a raft of weaker than expected PMI data (Euro Are composite PMI 54.1 versus 55 exp) and continuing questions about the impact of the new Italian government on the EU project. The DAX and CAC were down about 1.3% while the FTSE dipped 1.1%. Worth noting inflation in Britain was a little lower than expected with a print of 2.1% for core inflation – down from 2.3% in March and a little lower than market forecasts of a 2.2% increase.
That data, and the fact that the flash US PMI beat expectations (composite 55.7 from 54.9 last and 55 expected) helped the US dollar bounce back from early weakness against the yen which saw USD/JPY fall to 109.56. It’s still 0.78% lower at 110.02 – but off its lows. So too is the euro off it’s lows. Trading in the 1.1670’s before the Fed minutes EUR/USD rallied back above 1.17 at one point but it’s back at 1.1696 at the moment – down 0.7%. Sterling is down just a little less than the euro at 1.3349.
The dollar/commodity bloc did so much better overnight. The Australian dollar is down just 0.2% in what was a solid night despite copper’s fall and the US dollar's march. It’s at 0.7556 this morning. The Canadian dollar and kiwi did okay too with USD/CAD at 1.2840 and 0.6913 respectively.
To commodities now and oil took a hit from both the US dollar rally and an unexpected build in US inventories last night (EIA crude stocks +5.778 million Bbls vs -1.567 expected). But prices bounced back especially for Brent which is up 0.13% to $79.67 while WTI is down 0.65% at $71.74.
Gold is still meh! It’s at $1293 this morning while copper fell 1.84% to $3.06 a pound.
On the day the BoK makes an interest rate decision, Japan releases the Reuters Tankan survey and we get the leading index. Tonight in Germany the Gfk releases consumer confidence while GDP for Q1 is also out. Retail sales in the UK are to be released and then in the US there is more Fed speakers, existing home sales, and the Kansas City Fed manufacturing index.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I just want to make a point about the Fed minutes. THEY WERE NOT DOVISH. They just weren’t more hawkish than the market had already priced. So while I highlighted where the market had read the minutes dovishly in the introduction my sense is the chances of another 3 hikes in 2018 are still very high.
- But something I’m watching closely for forex and US dollar impacts, in particular, has been the slow fall in the CESI for the US. While I’ve been at pains to highlight of the big countries in the Citibank Economic Surprise Index universe only China and the US are positive the reality is the US is slipping back toward zero. At 9.8 this morning it’s back at 7 month lows as Gluskin Sheff’s David Rosenberg pointed out on Twitter. For context the CESI for the EU is -98.8 while it’s -46.3 for Japan and -52.8 for the UK. Anyway, this trend is still important and something to watch.
- President Trump’s erratic behaviour as he searches for a win, but remains fearful of a loss over North Korea continues. Indeed this morning the Wall Street Journal reports that just a day or so after news broke China was reducing tariffs on imported cars (which make up less than 5% of all sales I heard on Bloomy yesterday) the administration is apparently going to wack a 25% tariff on imported vehicles. Is this the big news for autoworkers he tweeted about overnight? The idea fits given his tweet included a sentence saying “After many decades of losing your jobs to other countries, you have waited long enough!” What can I say? The mid-terms are looming large in the President’s thinking and almost everything he does in the next six months is likely to be aimed at his base. That’s politics. But it will impact markets as well.
- NAFTA, Iran, Car Tariffs, ZTE……..oh and the possibility of more tax cuts later this year have also been floated.
- The Italian worries continued overnight with the EU telling Italy to cut its debt and warning of “spillovers” if the new government does actually prosecute its big spending agenda. I used the word IF on purpose because once in government there is a chance that things change. Time will tell. Something to watch.
- Also worth watching is whether the Turkish government and its central bank’s overnight success in stemming the fall of the Lira with a massive 300 point rate rise overnight proves anything more than ephemeral. As you can see in this tweet from ING Economics Viraj Patel it’s worked so far.
- I talk about Bitcoin most days in my video, but I don’t write about it very often. Anyway I’ve been highlighting lately that it is rolling over and could face substantial downside. So I offer you this chart and outlook from Peter L Brandt’s Twitter feed early this morning.
Australia
- The Australian dollar was strangely resilient last night. While the euro was getting belted, USD/JPY was bouncing back from its lows, while stocks were at their lowest levels and with copper off more than 1% the AUD/USD was hanging tough. So at 0.7558, down just a little under 0.2% it is, along with the Canadian dollar, the strongest of the G10 currencies in the past 24 hours. Why that is not easily judged given all of the above. Though it is worth noting mining and mineral shares continue their mild outperformance of the overall MSCI global stock market index. That tells me there is residual support for the investment theme which says that commodities are undervalued relative to financial and other assets and as such it is a source of support for miners and – by extension – the Aussie dollar as it approaches recent lows.
- That’s interesting isn’t it. And when you throw in the dovish read by the market of the Fed minutes you end up with an Aussie dollar which has rallied from a low of 0.7523. That level is now support along with the 0.7540/43 level on the day with resistance at 0.7573, 80/83, and then 0.7603.
- The SPI may have found a short term bottom. That’s my working hypothesis this morning if the S&P 500 futures do okay in our time zone today. Certainly it has been a bad week for the market. And certainly, I can see a case for the market to fall back toward the 5,960 level technically in the SPI. But today may be a better day. But the reality is when I look at the SPI chart after the break of the trendline, and given the set up the overarching directional bias does still seem lower right now. Maybe that will change if the S&P 500 can close up and through the 2,742/45 region. So it’s a question of timeframes, a traders approach, and then their risk appetite. We all have to judge it on our own system. But for me here’s how I see the SPI chart presently.
- Oh, and if you haven’t seen it in the press already RBA Governor Phil Lowe gave an interesting speech on China last night. It showed how important China is economically to Australia and in the context of the threat to Australia’s interests in the Global Times editorial this week it also highlighted where the tension between economic and national interests meet. Anyway, it’s worth a read and you can find a link to the speech which has plenty of graphs worth looking at here. And speaking of graphs this one really highlights the importance of China in terms of exports and imports in the decade.
Forex
- The US dollar hit the highest level in months overnight as the combination of weaker than expected data in Europe, concerns about Italy and then the prospect the Fed minutes would reinforce the US tightening cycle all combined to give the Greenback a bid. In US Dollar Index terms the dollar rose to 94.18 before dipping a little in the post FOMC minute environment. It still hasn’t hit my 95.20 target. But what’s interesting about overnight move is that the 94.20/25 region is the 38.2% retracement level of the fall in the US dollar which took it from around 104 down to this years lows a little above 88. So in the usual terms I’d say the easy money – the garden variety retracement – has been made.
- And maybe the fact the Fed wasn’t more hawkish than the market expected could be important for the dollar. Certainly the commodity bloc benefitted. But the question is whether the euro can start to consolidate around these levels or whether the break of 1.17 is a signal for a move into the 1.15’s maybe even 1.14’s. It’s a question of time frame I think. Like the rally in oil which has stalled for the past few days to a week much is already priced into the US dollar and the euro. Poor data is fresh news for Europe and the euro over recent weeks but the question is whether the market has now assimilated the continuation of weaker data in Europe and better data in the US. If that is the case then the euro can indeed consolidate. And if that is the case so too will the yen, commodity bloc, and maybe even Sterling.
- In no small part what happens in emerging markets, and whether the Lira’s fall can be arrested, whether other EM pairs can find their feet or whether the rout has further to fall is important as well.
- In chart of the day terms USD/JPY might be one to watch for a potential US dollar turn. The trendline has broken. A normal pullback of 38.2% would suggest a move back to 108.78.
Commodities
- The chat is still that OPEC will do something at its June meeting in reaction to the looming prospect of a fall in crude production and exports from both Iran and Venezuela as the year progresses. And it may be the case that OPEC does need to do something if a tweet I saw float past yesterday on US vehicle miles travelled is any guide. According to data from the St Louis Fed this measure has contracted for the first time since 2014. At some level that has to worry OPEC, although we are moving into the US driving season now.
- And indeed it is the case that OPEC is looking to react to the Iranian and Venezuelan situations according to “sources” cited by Reuters overnight. One source told Reuters that “all options are on the table” while another said “we are still studying the different scenarios” of which “one of the options” is to increase supply at the June meeting. One thing about OPEC since it starting talking about the production cut a couple of years back an since it instated that production cut s that as a group they have been fairly honest and upfront about their goals. And while there has been some drifting in recent months in terms of finding a new benchmark as a reason NOT to increase production now that inventory levels have adjusted the fact that India is feeling pressure from high prices, that the US and President Trump will be uncomfortable with current prices at the pump, that the growth in demand emanating from US driving looks to have waned, all combine to suggest some sort of response from OPEC is warranted. Iran and Venezuela just give the cartel cover.
- Looking at prices news that China has told its big state giants to “buy Amercican” when it comes to oil and grains didn’t help WTI which was blindsided by that build in inventories mentioned in the introduction. That WTI is down though while Brent is up can probably be laid at the feet of the build while a belligerent Iran and news the US may soon recognise Israel’s occupation of Golan keeps a bid in Brent. Like Brent though WTI is showing signs of topping, or at least a pause, in the previously inexorable push higher in prices.
Have a great day's trading.