Originally published by IG Markets
As we move further into the second quarter, markets continue to struggle with conviction – whether it turns to a long-overdue deleveraging or supply another buy-on-the-dip charge for the speculative opportunists.
Wall Street has a very different open versus close: From a technical perspective, the US indices have not produced meaningful progress from the tentative hold at noteworthy trendlines from the likes of the S&P 500 and Dow. For those with candlestick charts, the day seems robust with large green candles between the open and close. However, the comparison of Wednesday’s and Tuesday’s close offers a very different perspective. It was little changed. To achieve that, there had to be a hefty gap lower on the open. In fact, the Dow posted its largest opening gap lower (percentage based) in 17 years. The S&P 500’s drop lower to the session’s open was the second largest I have on my records. This speaks to a rising state of volatility – not implied as in the VIX but in realized as measured through ATR. Headlines involving the US President’s interests in undermining a top performing stock (Amazon (NASDAQ:AMZN)) and progress on trade wars does not help matters. But will it start to genuinely undermine markets?
Trade data to weigh in on trade wars: We are still largely in the theoretical stage of trade wars. While the US has announced its metals’ tariffs and is arranging plans for the $50 billion duty meant to offset perceived intellectual property theft by China, these moves don’t readily show in the data…yet. However, threats and preparation have explicit influence beyond the speculative realm. It can show through in actual economic data registering trade relations. February trade numbers from the United States and Canada may not cover the bulk of headlines that we have seen recently, but the pressure on the NAFTA relationship will start to show through in their respective numbers. The Aussie trade figures for the same period is due as well, but the direct connection to the US will not register as readily. As we move forward with these official statistics, it will be the general level of global trade and the effort to route relationships away from a more belligerent US that will be most important to register in the data.
China responds to US threats with a $50 billion response of its own. The Chinese government announced that it would be responding to the United States’ $50 billion hike on the cost of imported goods with its own measure tallying the same cost, aimed at airplanes, automobiles, chemicals, and perhaps most importantly, soybeans. While superficially imposing, a deeper dive suggests that this is just a public response with no intended follow-through by China. Why? China uses imported soybeans to grind into feed for livestock – pork, in particular – and a 25% hike on imported soybeans would no doubt result in higher food prices for consumers. In a sense, China may feel like it is standing up to Trump by targeting exports from areas in the United States that form Trump’s political base – the American heartland – but this may be a situation of ‘cutting off the nose to spite the face.’
AUD/USD offers little hint at what will provide motivation for an inevitable break: Over the past six trading days, AUD/USD has carved out a remarkably restricted range. In fact, the 0.7 percent range over that period is only the narrowest since January 10, but it is the third smallest in over a decade. This is in part due to the remarkably quiet conditions afflicting the US Dollar as it is painfully unclear what the future holds for the benchmark currency at the centre of a protectionist drive that will draw it out of the global circulation of capital. However, the Aussie dollar is suffering its own trouble with conviction. The past two weeks have seen an equally-weighted Australian Dollar Index consolidate at 18-month lows. The RBA has refused to put it back into carrying contention and risk trends are neither undermining or propping the currency up generally. Moves by China will increasingly become important on the macro stage, but the nebulous nature of developments on that front will keep traders on edge.
Another strong intraday reversal from commodities: This week, we have already seen a dramatic opening move on Monday followed by a meaningful correction the following session for gold and crude oil. It seems that we are accelerating the time frame for the trading schizophrenia. Oil prices dove this past session towards $62 but, a staunch rebound through the session retraced much of the full 2.3 percent slide through the trough of the day. Gold meanwhile rallied as a safe haven on the same general course as the drop in equities through US session open, but the 1.2 percent advance at the peak nearly fully evaporated by session end. As an asset class, commodities are struggling like most other financial products. Yet, as systemic indicators (gold as a haven and oil as a measure of growth forecast), this indecision is concerning.
Strong US data points to another robust US labour market report. The March US ADP Employment Change report came in at +241K versus +210K expected, and the March US ISM Non-Manufacturing/Services Composite came in at 58.8 versus 59.0 expected. While the latter of the two reports was weaker than anticipated, it still pointed to a robust pace of expansion for what accounts for two-thirds of all employment in the United States. Accordingly, the incoming official government report this Friday should see the labour market add around +200K jobs again with the unemployment rate dropping to a fresh 17-year low of 4.0%.
S&P/ASX 200 avoids a fourth consecutive day of losses: Shares on the benchmark Australian index started the day lower but were able to finish the day slightly in the positive, up by +0.2% to 5761.40. Higher base metal prices, particularly copper, helped shares of CSR (AX:CSR), Sandfire (AX:SFR), and Western Areas (AX:WSA) finish in the black. Financials, which have been struggling of late, finished up by +0.16%, but ANZ (AX:ANZ) still closed down for the tenth consecutive session. Thus far, despite volatility wreaking havoc on Wall Street, the impact to Australian equities has thus far been limited and doesn’t appear likely to pick up barring a global rout.