Originally published by AxiTrader
Market Summary
A fairly quit night's trade with the US and UK mostly out after China was absent in the Asian session yesterday.
The big news is that Italy may be headed for an early election after Beppe Grillo's 5-Star party signed on for proportional voting. Talk of an early election saw bonds rates in Italy rise while stocks in Milan fell. And while I'm in politics Angela Merkel repeated her comments that Europe needs to look after itself.
More important though might be that ECB president Mario Draghi again reiterated it’s too early to change tack on European monetary policy. He wants to see inflation first it seems.
On Forex markets sterling recovered a little after polls showed Theresa May's conservatives should still win the election. Otherwise, it was quiet with tight ranges across the majors. The Aussie dollar is holding above Friday’s lows.
On commodity markets oil eked out more post-OPEC meeting gains and gold is still strong at $1267 an ounce.
Plenty on the docket today to get markets moving over the next 24 hours.
Building approvals and the weekly ANZ consumer confidence data are out in Australia. Both are important pointers to this possible domestic slowdown. Offshore Japanese retail sales and jobs data is out, inflation in Germany will be closely watched, and then we get the PCE data in the US tonight.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 2416 (7.15 Sydney - change since previous day)
- Dow Jones Industrial Average 21080
- Nasdaq 100 6,210
- SPI 200 5,713 Flat
- AUD/USD 0.7438 Flat
- Gold $1266 Flat
- WTI OIl $49.99 (+0.38%) Thank goodness for a move.
International (it has turned into the European political edition)
- In a market sense the most important event last night was ECB president Mario Draghi reconfirming last week’s comments that it is too early to change tack on European monetary policy. You’ll recall that last week Draghi, his deputy, and the ECB’s chief economist all noted growth had picked up but highlighted inflation is yet to really become entrenched.
- Last night Draghi said “For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation”. That suggests we may not see the changed rhetoric at the ECB’s next meeting on June 8 that many – myself included – expect. Naturally that is a risk for the euro and it’s rally.
- In a similar vein Austrian central bank governor Ewald Nowotny, who also sits on the ECB’s governing council said overnight that the recovery needs to become entrenched to see wages growth. “If the upswing gets more consolidated, I think we can expect higher wage dynamics, which means that also core inflation might get stronger” he said. There’s that inflation rate again folks. I expect the ECB is going to spend some time delineating between the recovery and growth both in the run up to and at the next meeting.
- While I’m in Europe Milanese stocks fell 2.01% last night and Italian 10 year bonds jumped 9 points at one point last night after news broke that the chances of an early election – perhaps timed to coincide with the German election in September – might be on the cards for Italy. The genesis of the notion came from the vote over the weekend by Beppi Grillo’s 5-Star party to agree to new proportional representation reform. That aligns 5-Star with the other 3 big parties and prompted former PM Matteo Renzi to make the call for the election.
- This is important for the EU project. It’s probably not quite the existential threat that the French presidential election and possible Marine Le Pen victory posed but it is another risk for the EU if 5-Star was to become the dominant power in Italy. I won’t pretend to be an Italian political expert. But if the election is called I reckon we might be talking a lot about the outlook.
- And again on European politics German Chancellor Angela Merkel doubled down on her weekend call that Europe needs to chart its own course anew over night. Her more bombastic foreign minister Sigmar Gabriel said overnight “The short-sighted policies of the American government stand against the interests of the European Union. The West has become smaller, at least it has become weaker”.
- And Theresa May is debating Jeremy Corbyn. It’s getting acrimonious with Corbyn be accused of being an IRA sympathiser. Something he denied recently and said he hadn’t met the IRA. Yet this morning pictures of him doing just that are floating through Twitter thanks to Boris Johnson. The polls show May should win, but it suggest it’s not the cake walk many thought.
- Wow…didn’t expect so much on Europe when I started writing this morning. That has to be interesting for the euro at these elevated levels. To this end I wrote a piece yesterday saying there is more to currencies than interest rates but that the German/US bond spread suggests the EUR/USD rally is in trouble.
Australia
- Another tough day at the office for Australia’s stock market traders yesterday with the ASX 200 down another 0.77%, 45 points, to finish the day at 5,707. That’s a lot worse than SPI traders were betting on Saturday morning when they close up 7 points and it’s left the market right on the important 5,680/5,700 support zone I’ve been referencing recently. That the market finished on the low of the day will be equally troubling for the for traders as the underlying structure of support for stocks seems to have been eroded.
- Industrials were the only sector of the market to buck the selling pressure and even then that was driven largely by two big movers. The banks and financial space came under heavy pressure again and it looks like the headwinds facing this sector are really weighing on investors minds which has put some solid downward pressure on prices.
- As I have written for some time it’s my sense that Australia, its companies, and its currency have been rerated by global investors. Whether it is simply because better opportunities to buy in places like Europe are now more tantalising given the existential threat to the EU project has passed, whether its Australia specific, or some combination is hard to tell. But as I wrote yesterday how the data flows between now and next Wednesday’s national accounts for the first quarter will determine if weakness turns into a rout.
- In the short term though traders will be watching this 5,680/5,700 region again. If it breaks, there is potentially another 100 point fall in the offing for SPI and physical traders. Here’s the physical chart again:
- In other – but not unrelated – news S&P highlighted the similarities and differences between AAA rated Canada and Australia yesterday. The credit rating agency said:
“From a ratings perspective, the key strengths of the two sovereigns include their wealthy economies and similar stable and mature political systems. Both enjoy strong monetary flexibility, thanks to actively traded, flexible exchange rates and credible inflation-targeting monetary policy regimes undertaken by operationally independent central banks”.
But S&P highlighted that Australia has more external debt and noted “Australia's external profile is much weaker than Canada's” making it more vulnerable. And that, S&P pointed out “places even greater emphasis on fiscal buffers to offset these risks”. Let’s hope Treasurer Scott Morrison and his department’s forecasts for growth, economic activity, and debt are on the money. I fear they may be a little optimistic.
Forex
- Traders enjoy trading but they won’t usually trade unless there is a reason. And that is exactly what we have seen in foreign exchange markets in the past 24 hours after China, the U.K., and the U.S. were out. The Aussie dollar’s range was just 22 points and it is sitting at 0.7439 this morning. Euro traded a 28 point range and is at 1.1171 while USD/JPY traded from a low of 111.19 to a high at 111.46 – just 27 points. It’s now at 111.31.
- So you get the point that it was fairly quiet last night and during trade yesterday. That said though there were some tentative signs that polls showing Theresa May’s conservatives should still win the election supported the pound. That said GBP/USD would need to break up and through 1.2880/1.2900 for the rally to reignite and abort the technical outlook which suggests a dip toward 1.2680.
- There are plenty of catalysts for trade today and tonight for forex traders. Japanese employment and retail sales, French GDP, German import prices and CPI, as well as the very important PCE data in the US.
Commodities
- Oil was marginally higher in thin trade with WTI futures up 0.38% to $49.99 while Brent was 0.19% higher to $52.25. There is not much to be garnered from these moves and we’ll wait and see what happens when the big markets come back online.
- My sense is that inventories and how they flow, their draws or builds, are the key to the outlook for oil in the weeks ahead. The daily charts, and my system, aren’t giving me much at the moment.
- Gold is quiet but held above the top of the recent range overnight – it is at $1266 this morning while copper is largely unchanged at $2.557 a pound.
Have a great day's trading.