Gold And The Yen Catch A Bid As Geopolitical Risk Rises

Originally published by AxiTrader

Market Summary

Gold, bonds, the Japanese yen and the CBOE Volatility Index are all pointing to a an elevated level of caution in global markets as geopolitical tensions rise over Syria, Russia, and North Korea.

But US stocks recovered much of their losses by the close of play with the Dow Jones Industrial Average finishing down just 7 points after being down around 120 points at one stage. Likewise the S&P 500 recovered to finish down just 4 points at 2353.

Yet even with that backdrop the SPI 200 this morning is pointing to a 14 point rise when the local market opens. It seems nothing can derail the recent strength on the ASX.

On forex markets as noted the Yen has rallied with USD/JPY now down around 109.65 and the US dollar has lost a little ground in the current environment. Euro is back above 1.06, just, Sterling is back near 1.2490, and the Aussie has had an outside day but is barely changed at 0.7495.

Gold’s leap is 17 dollars from where it was yesterday after and it sits at $1272 this morning. Oil is a little higher as well but copper is largely unmoved.

Today is a big day in Asia as we get Chinese inflation data – we are still waiting on new loans and M2 data. In Australia we get Westpac consumer sentiment, the BoC makes its interest rate decision tonight.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 -3 (0.15%) 2353 (7.17 am Sydney)
• Dow Jones Industrial Average -6 (0.03%) 20651
• Nasdaq 100 -14 (0.24%) 5,866
• SPI 200 +18 (0.3%) 5,936
• AUD/USD 0.7500 +0.0%
• Gold $1274 1.58%
• WTI Oil $53.40 +0.6%

International

• The meeting between US treasury secretary Rex Tillerson and his Russian counterpart is likely to go very differently than either thought just a week ago. If you recall a few weeks back Tillerson was going to skip a NATO meeting to visit Russia. How quickly things change. And as Vladimir Putin says he knows there is going to be fake chemical attacks and a US strike on Damascus this is clearly the most important US/Russian meeting in years.

• Tillerson is taking the West’s demands that Russia abandon Assad and Syria to the meeting. It’s going to be an interesting meeting.

• And of course we have Korea as a potential flash point. There are regular periods when Pyongyang tests its weapons and we are coming into one of those windows now. That’s likely why the US has sent the Carl Vinson carrier group. But the worry is the rhetoric is heating up between the US and North Korea. State news in the Hermit kingdom has threatened a nuclear strike on the US. And president Trump responded in the manner he knows best – with a tweet.

• So even though stocks are off the worst of their lows in the US overnight it is worth noting that even though the physical market seems a bit nonplussed options traders – like gold and yen buyers – are paying a bit more attention. The CBOE Volatility Index is up another 8%+ this morning after a 9% rise yesterday. Certainly these are because the actual number – 15.21 – is so small. But the reality is there is a sense of risk aversion rising in markets.

• That’s something I want to address directly. Geo-political tensions are not Brexit and are not the unexpected election of president Trump. So I’m not convinced stock traders are using the right playbook with their enduring sanguine outlook. My sense is that gold and forex traders have it right and are paying a little more attention to the real risks the Russia/US face and the troubles on the Korean Peninsula pose. That said is the yen the right safe haven? USD/JPY fell 1.1% while the USD/CHF only rose 0.1%. For all the failings of the SNB the Swissie might be the right forex pair for money to flow to for a safe haven trade.

• On the data front US Job openings rose to a seven month high with the JOLTS survey showing an increase of 118,000 to 5.7 million jobs in the US. Again showing the US jobs market remains strong and a large number of jobs are going unfilled.

• San Francisco Fed president John Williams again reiterated that the Fed should be hiking “3 or 4 times” this year and that the Fed should also be looking at its balance sheet reduction strategy. “We need to further raise our benchmark interest rate and bring it back to a normal level over this year and next year, and we should also begin to normalize our balance sheet toward the end of this year”.

• In Germany the ZEW survey surged to 19.5 from 12.8 in March. Reuters reported ZEW President Achim Wambach said in a statement investors were encouraged by the German economy's robust first quarter, adding: "The financial market experts expect this positive development to continue."

• And while we are in Europe things are getting interesting in France. I noted yesterday the rise of the far left candidate Jean-Luc Melenchon into the crowded field of front runners. With polls showing around a third of voters are undecided there is a non-negligible chance that France ends up with a Le Pen/Melenchon second round presidential election. That would be a disaster scenario for markets.

Australia

• You can’t kill this ASX rally with a stick it seems. After yesterday’s 16 point rally, which granted was off the highs for the day, SPI 200 traders this morning have marked prices up another 14 points to 5933.

• Naturally again today there will be the usual below the surface winners and losers and the move in gold and energy’s continued strength is likely to see those sectors doing well. But it’s an interesting take on things given stocks in the US are a little weaker and most of Europe fell.

• But hey, I have no feel for this rally in Australian stocks right now.

• On the data front though – OH THE DATA – the NAB business survey was a cracker yesterday with conditions hitting the highest level since the GFC of +14. That suggests that the Australian economy, or at least Australian business is in extremely good health as we head toward the second half of 2017. That confidence is languishing at just 6 to conditions 14 gives some pause. But with overall trading conditions reporting at 22, profitability at 13 and employment at a relatively strong 5 the overall outlook for the economy.

• Importantly NAB chief economist Alan Oster said March’s result reflects that “conditions have improved almost across the board to levels that suggest a strong economy in the near-term. That includes WA, which has been looking better of late and suggests the worst of the mining downturn may be behind us”.

Forex

• The US dollar is a little weaker on the back of geopolitics and as bonds rally. In index terms the US Dollar Index has slipped below the little uptrend line from the late March low and is at 100.73 this morning. That’s helped the Euro pop back above 1.06 while the Pound is up again after inflation data was on song and the technical outlook brightened.

• The key mover of course is the yen which is sitting at 109.65 – a gain of 1.16% - as the yen plays it usual role of safe haven currency. AS I noted before given North Korea is also a potential flash point the Swissie may end up playing some catch up to the yen’s move in the days ahead. But looking specifically at USD/JPY charts the break of the 110.10/109.90 region I’ve been referencing suggests a move toward the 200-day moving average at 108.60 and the next Fibo support at 107.86.

• Looking closer to home the Aussie has had an interesting day. With a higher high than the day before (0.7515) and a lower low (0.7473) the Aussie is marginally lower daya on day at 0.7495. It’s still ominously poised and risk off is never usually good for the Aussie. At present, it’s lost substantial ground against the yen and a little against the pound and others. The question of what’s next I’ll address in this morning’s AUD specific piece.

Commodities

• A little bit of bullish news for oil from OPEC. Reuters reported this morning that sources told them OPEC compliance is in March is up to 104% of planned production cuts. We’ll get the official numbers tonight. Separately there are reports that the Saudis now want an extension to the production cuts.

• The EIA has revised up both US shale oil supply and US demand for oil over the course of the next two years. US production is expected to rise to 9.9 million barrels a day in 2018 after averaging 9.22 million this year. That 680,000 increase for 2018 is 160,000 bpd higher than last month’s forecast, while 2017 was increased 20,000 bpd. On the demand side the EIA increased 2017 demand by 250,000 from its previous increase of 210,000 but in 2018 the EIA downgraded demand growth from 380,000 bpd to an increase of 340,000.

• Gold is higher on the geopolitical tensions with a rise of $18 or 1.44% to $1271. That’s unsurprising really given the safe haven status. As I tweeted yesterday when it was sitting at $1255 it looked a scoop. Resistance from the 2016 high around $1380 comes in around $1291 at the moment.

• Copper is largely unchanged on the day ar $2.60.

Have a great day's trading.