Originally published by AxiTrader
Market Summary (7.42 am Friday, June 8)
Is the air finally getting a little too thin for tech investors?
It’s just one day's small reversal, so it is far too early to tell, but after leading the market higher again recently, the Nasdaq and tech stocks on the S&P 500 have lead the market a little lower overnight.
We’ll get to that in a sec because the big story for me is the move higher in oil on the back of worries about Venezuelan supply and OPEC’s meeting this month. Indeed, even though Reuters broke a story saying the US Administration asked the Saudis for help the day before President Trump pulled out of the Iran Nuclear deal the focus is on PDVSA, its backlog and the 80 tankers waiting off Venezuela to load 24 million barrels of crude.
So, naturally, prices are higher for crude this morning with WTI up 1.9% to $65.96 while Brent is up 2.6% to $77.30. Copper traders too are worried about supply disruptions given wage negotiations at the Escondido mine in Chile. It’s held firm at $3.25 a pound, up from $3.08 just last Friday. While I’m on commodities gold is still MEH, it’s at $1296.
Back to stocks and the S&P was only marginally lower with a loss of 2 points to 2,770. The Dow actually gained 0.38% as the 4%+ gain at McDonald’s (NYSE:MCD) helped outweigh the tech weakness. The Nasdaq 100 was down 0.8% to 7,150. In Europe there was mild weakness across the board with the DAX, CAC, FTSE, and FTSE MIBdown between 0.1% and 0.2%.
Here at home the net net of all that is SPI traders have dropped 11 points off prices from yesterday afternoon in what looks like an important failure to hold a break. We’ll see if crude’s rise and the Aussie dollar’s fall can assuage the fears and drive the market higher on the day.
Speaking of the Australian dollar, the past two days price action is a great example of why technicals and technical levels are a key part of my toolkit. AUD/USD could not get through the confluence of technical resistance I highlighted yesterday and with the US dollar fighting back the Aussie is down at 0.7619 this morning for a loss of 0.6%. The kiwi is fairly flat at 0.7028 while the Canadian dollar lost 0.3% after BoC governor Poloz highlighted the risks to the economic outlook around trade – USD/CAD is at 1.2984.
Of the other majors the euro and yen did best with gains of 0.22% to 1.1799 and 0.4% with USD/JPY at 109.73. What remarkable about the euro move, in particular, is that even though it’s off the 1.1839 high it’s holding firm even though German factory orders last night were weak. GBP/USD is flat at 1.3421.
It’s worth noting as we end the week a little bit of nervousness about the outcome from the G7 meeting might seep into trade. Already Russian President is having a good time winding up the Europeans saying he told them so and there are rumours floating around President Trump may actually ditch the meeting and sent Mike Pence.
And then of course we have the North Korean summit in Singapore next week, not to mention the Fed.
On the day though Japanese GDP and Chinese trade are the big ones. Tonight its German trade and Canadian employment, the G7 summit, and then we get Chinese inflation data over the weekend.
Have a great day and a great weekend.
Here's What I Picked Up (with a little more detail and a few charts)
International
- JP Morgan's NYSE:JPM) Jamie Dimon and Warren Buffett are both out and about with twin messages at the moment. The first is the short term focus on quarterly earnings and guidance is stupid. Who could disagree? The second is that this US economy looks very strong and is set to continue to look strong. Buffett told CNBC’s Squawk Box, “Right now, there's no question: It's feeling strong. I mean, if we're in the sixth inning, we have our sluggers coming to bat right now”. Dimon said, “if you look at how the table's set, consumers are in very good shape. Their balance sheet, their incomes, wages are going up, their debt levels are low, all the credit written since the Great Recession is pristine, whether it's mortgage credit — other than student lending, which is done by the government….So, it looks pretty good." I agree and that means more rate hikes from the Fed, policy and economic divergence with the rest of the world.
- EMERGING MARKETS CRISIS BREWING. It seems the Fed’s plans to continue reducing its balance sheet along with the prospect of further rate hikes has central bankers in emerging markets on edge. While we know that Turkey and Argentina have been under pressure the move two nights ago by the RBI to raise rates in India by a quarter point to 6.25% is a warning of a larger conflagration.
- It doesn’t sound like much but underlying the move was a growing disquiet in India and other EM central banks about the moves in the US and other advanced economies (AE’s). Indeed the RBI said, “bond yields have risen on reduced foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in AEs”. It echoes the concerns the RBI governor, Urjit Patel, expressed in an op-ed in the FT this week. In that piece Patel called for the Fed to halt its balance sheet reduction – QT – writing that the upheaval in emerging markets was a result of (my bolding), “the coincidence of two significant events: the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts. Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable”. Apparently new Bank Indonesia Governor Perry Warjiyo has also called for a similar halt according to Zerohedge. We’ve been warned
Australia
- Growth in Australia was strong in Q1. Business conditions look strong as well and the employment market continues to chugg along. All good, move along nothing to see here. But I’m still worried about consumers, about falling house prices, about high debt levels, about low wages growth, and the impact all this has on consumption. So, while I don’t want to overegg things I offer you this Tweet on the rate of change of Sydney house prices from Cameron Kusher, Core Logic’s residential research guy. You can quibble with the use of stats – something that’s probably reasonable in this case – but people feel changes not levels. So my response when I retweeted this was, “tell me this won't impact consumption patterns in Sydney”. It will - people will feel less wealthy. And they will fell the actual loss of the 5% or so Sydney property is down at the moment.
- One of the 5 key drivers of the Aussie dollar in my toolkit are technical levels. That’s because in a world where the financialisation and trading of assets dominates real money flows are swamped by trading an investment flows it is important to take heed of big technical levels. And yesterday’s confluence of important levels proved too hard a nut to crack. So all we needed was the mild risk off tone we got last night and the reversal off these levels was the result. Where to next is an interesting question. There is no doubt there will now be more selling ahead of the 0.7665/80 region the next time the Aussie rallies up toward those levels. That’s to respect the resistance offered by the trendline. A break of this region would be decisive. But to get up and through that region now it seems like the USD would need to fall right out of bed. That or we might need to wait until another strong employment report next Thursday June 14. But that comes after the FOMC decision seven and a half hours prior. So we end up in a range for the next week.
- On the day the levels to watch for the AUD/USD are last night’s nadir at 0.7611 and then 0.7594 on the low side. A break would signal the chance of a big dip for the Aussie. Topside its 0.7648/53.
- The theme earlier this week was that crude and the Aussie dollar’s moves were important for the S&P/ASX 200. More important than the lead from offshore it seemed. So if that theme was anything more than convenient curve fitting then the ASX 200 should do better than the SPI traders are suggesting with their 11 point fall this morning. Of course the alternate view is who wants to take a fresh long before a long weekend in most of Australia (population not size as QLD and WA are at their desks). And who wants to take a fresh long before the G7 at the weekend and then North Korean meeting when we get back on Tuesday. So my guess is we’ll have a slight downside bias on the ASX 200 by the close today.
- Looking at the SPI chart it suggests that might be the case as well. I’m targeting a move back into the 6,010/6,020 region.
Forex
- Given relative economic differentials, given the relative outlooks for the US and Japan, Europe, the UK and elsewhere the US dollar should not be week. But there are plenty of folks who seem to thing that the synchronisation of growth that drove the US dollar lower in the back half of 2017 and early 2018 will reassert themselves in the months ahead. Indeed A Reuters survey released yesterday showed 60% of the 60 economists polled said the US dollar's rally will end in the next 6 months. The rest say later. Interestingly though the forecast has followed the market down from 1.27 in the May survey for where EUR/USD will be in a years time to 1.24 this month.
- Naturally that still gives plenty of room for movement in the intervening period. But the ability of the euro to stay strong this week even with the weak data suggests some of the traders and investors who hold this US dollar view are putting their money where their mouth is. To me though this still appears more like a counter trend rally in the euro and US dollar and as such it is worth noting the high in EUR/USD was just 10 points below the 38.2% retracement level of the last leg down to the 1.15ish low recently. But it’s also worth noting the 13 day EMA is starting to turn higher again.
Commodities
- Supply disruptions are roiling copper and oil markets at the moment. It’s an interesting dynamic and the moves have been very sharp for both commodities as traders have been impacted by headlines on what they should have known for ages. That’s worth pondering traders. The Escondida wages negotiations were rolled forward to next month last year and the Venezuelan issues have been known for some time. Yet the reaction to the headlines in both commodities has been aggressive. It’s a reminder of how important headlines are in raising traders consciousness and setting the algos off.
- Indeed I mentioned as an aside the Chile supply disruptions in my Aussie dollar piece yesterday. I figured folks knew about the Escondida set up and last year's 44 day strike. And of course we’ve all known about Venezuela for ages. So why am I banging on about this? Because just like I kept mentioning for weeks before it hit the broader psyche that Europe’s growth was slowing down and the Euro was at risk, it’s a reminder to get my, ours, yours, timeframe right in trading. Headlines matter folks if you are trading short term.
- Anyway, to oil now and it’s not just worry’s about the 80 ships and 24 million barrel backlog of Venezuelan oil that needs to be loaded onto those ships. What’s also driving oil is some fears that the OPEC meeting on June 22 could be a fractious one with the Saudis lined up against others within OPEC. Indeed, there was some focus on the Algerian oil minister saying OPEC is trying to achieve , “a balance between supply and demand to ensure the stability of the oil markets” as a sign of a smaller production increase than the market has anchored on. The next two week’s before the meeting could be very interesting.
- Chart wise WTI stabilised for three days and is now back testing the previous uptrend. Bears, like me, will be nervous. A break and close above $66.20/25 could open up further topside. This is a crucial test of the break – is it false or real?
Have a great day's trading.