Originally published by AxiTrader
Market Summary (Monday 19 March 2018)
An up day to end a down week for the S&P and Dow Friday with the two indexes finishing 0.17% and 0.29% higher respectively on the day. The Nasdaq dipped 0.16% Friday. That meant that the big three US indexes were all lower for the week with falls of 1.04%, 1.57%, and 1.27% for the S&P 500, Dow, and Nasdaq.
Stocks were able to shake off the week’s slide by a little bit of end of week position squaring – something I did myself – together with some relatively strong data in the US. Industrial production surged 1.1% in February while the JOLTS surged an incredible 645,000 taking the number of job openings in the US to 6.3 million (sa) which is the highest number since the survey was started in 2000.
Also out was University of Michigan consumer sentiment which showed US consumers don’t seem to be affected by the constant turmoil in the White House and messiness of US politics not to mention the Mueller investigation. Data for March, released Friday, showed consumer sentiment hit a 14 year of 102.
But there seems to be a disconnect between sentiment and Q1 GDP growth which was again downgraded by the Atlanta Fed’s GDPNow model to a guesstimate for Q1 of just 1.8%. One of the reasons given for Friday’s revision was “downward revisions to the nowcasts of the contributions of real consumer spending…” the Atlanta Fed said.
More importantly is the disconnect between market price action and the surge of cash back into stocks. Via BAML Reuters reported a record $43.3 billion into stocks last week including $22 billion into US large caps.
Mmmmmm folks, something to ponder – please see below. I’ll also highlight movements in the Mueller probe over the weekend.
Anyway, back to markets and Europe had an okay day with the DAX up 0.36%, the CAC was 0.29% higher, while in Milan the FTSE MIB was again the outperformer with a 0.63% gain. In London stocks were also firmer with the FTSE up 0.34%.
And all that means the ASX is pointing higher. After Friday’s 0.48% gain and close at 5,949 SPI traders have punted on another 16 point gain when trade kicks off today. Asia has some catch up to do today, so maybe.
On currency markets, the Aussie dollar was belted lower along with the kiwi and to a lesser extent the Canadian dollar. The Aussie has opened this week at 0.7720 – 195 points below the high last Wednesday night at 0.7915 and still looking wobbly as the sellers finally gain the upper hand. Likewise, the kiwi at 0.7219 is at risk of a big break lower if 0.7180 gives way. Of the other majors, the US dollar gave up the gians it made after the data Friday and the yen is stronger and continues to find a bid and is 105.84 this morning while the euro is at 1.2288. That the euro is still holding in despite inflation data of 1.1% yoy for the EU coming in weaker than expected is a testament to how much so many money managers and traders dislike the US dollar at the moment. The pound is currently trading at 1.3944.
On commodity markets the fact that gold is in the doldrums at $1313, and US 10’s are back at 1.85% tells you the yen bid is not yet about a funky risk-off feel to markets. Indeed gold is starting to look rather sketchy here and has to hold recent lows to avoid a precipitous fall. Oil was higher, however, rallying back to range tops Friday despite the Baker Hughes rig count hitting 800 for the first time since April 2015. Copper was lower, however.
Looking ahead and it is a quiet day today with Japanese trade data the highlight. And it’s a reasonably quiet week save for three big central bank meetings in what looks like a super Thursday in my timezone. The Fed will announce its decision – and the dot plot at 5.30am, to be then followed by the RBNZ at 7am and then the BoE at 11pm Thursday night. And of course Australian employment is out Thursday as well. It really is going to be a big day.
Clearly the FOMC is the key event for global markets. But President Trump’s tirade over the weekend about the Mueller inquiry will keep plenty of focus on Washington and the White House.
Here's What I Picked Up (with a little more detail and a few charts)
International
- There is a bit of confusion in global money managers minds it seems. Or at least that is my takeaway after seeing a tweet from Ant Barton over the weekend which highlights that even though 40% see monetary policy divergence as a key driver of the US dollar the CFTC data shows Euro longs went UP – not a typo – last week. But perhaps it’s the trade war idea keeping them on the back foot from buying US dollars. The same survey showed that when it comes to a trade war 40% think the result will be lower equities while 19% believe a trade war will lead to a lower US dollar. We’ll see.
- Also worth noting as we head into a new week is the weekend kerfuffle over the Mueller investigation. Deputy FBI Director McCabe was sacked by AG Sessions, President Trump’s lawyer called for the special prosecutor’s inquiry to be shut down and then the president himself went on a bit of a Twitter tirade – here’s a flavour of it in the tweets below – but I raise it because if he fires Mueller all heck could break loose on markets. Worth noting many Republicans have suggested gain over the weekend that the President should let the probe do its job.
- Turning back to Friday for a sec and it’s worth noting that EU area inflation again disappointed. We’ve heard from Knot and Villeroy on their Sunday that inflation will head back toward 2% but at 1.1% it’s going the wrong way at the moment. We should probably take more head of the ECB’s chief economist who doesn’t appear to have the cheerleading proclivities of the individual national central bankers and who said Friday that it’s unexpected slack in the Euro zone which could slow the uplift in inflation. Reuters reported Peter Praet told it in an interview, “it is clear that if you believe that the degree of slack is higher, then the process of convergence to below, but close to, 2 percent over the medium term would be drawn out. Other things being equal, it would (mean a) shallower (inflation path)”. He added, “Mario Draghi was opening the conversation on the possibility that there may be more slack in the economy”. Indeed. The EU2yr forward 2 years is slowly repricing rate hikes. Euro has yet to react too much though and 1.2155 is still the big level to watch.
- And on markets now there is a huge question raised by that fund flow last week. How the heck did US stocks fall when a wall of money flooded into the market? Mostly it was into passive ETF’s with tech stocks receiving another record inflow. But it was a massive amount of cash to come into the market for it to still end the week lower. And therein lies the argument I think. Passive index and ETF funds have to buy the market and BANL data showed active managers, mutual funds, actually lost funds. So what’s going on? If we tie the chart at the top of today’s piece on the impact of a trade war with a comment I picked up from a fundy, via Zerohedge, on Saturday we can see the dichotomy between passive and active. ZH said, “Georg Schuh, CIO of Deutsche Asset Mgmt told Bloomberg, ‘we have moved our view on stocks from ‘buy the dips’ to ‘sell the rebounds’ adding that ‘I’m not ruling out one final peak in stocks, but we’re getting late in the cycle and we’re starting to see anecdotal evidence that points toward the end of the rally."
Australia
- Not much to say about Australia really this morning. That said though the Labor party’s victory in Batman - which was kind of against the odds even though they were defending the seat after David Feeney ran afoul of the constitution and had to resign from parliament – will embolden Bill Shorten and Chris Bowen to pursue the tax policies they have announced with regard to imputation credits and negative gearing. It was widely suggested to Labor leader Shorten by the punditry that he had made a tactical error with the timing of the announcement last week on imputation. But it seems he may have a better ear for constituents than those stuck playing inside Canberra baseball.
- So, given Labor is a real chance to form government investors may need to take the Labor leader’s thoughts and comments as a genuine chance to be implemented.
- That doesn’t mean stocks are suddenly going to slide today or tomorrow. Because a non-partisan look at the proposal suggests it is a fair balance of retaining current arrangements but curtailing Howard/Costello era areas of overreach with regard to fiscal largesse. But it was not the vote killer many pundits thought it would be. So expect Labor to bat on. We might actually get some real policy debate here in Australia. Gee whiz maybe even someone will dust off the old Henry Review – sorry I slipped into a dream state there for a sec. back now.
- Turning to stocks now and the ASX had a good day Friday helped by the announced demerger of Coles from Wesfarmers (AX:WES). That saw stocks up a solid 0.48% even though Asia was under pressure. That also suggests perhaps the ASX front ran the rally in the US Friday which to me suggests maybe the SPI’s rally might not be a great indicator for gains today. The chart of the SPI speaks for itself though. The key here is the 38.2% retracement level held.
- The Australian dollar had no business being above 79 cents last week. I’m sure you would have picked that up from my musing when it was up there. No business fundamentally – commodity prices, interest rate differentials, and risk appetite - that is. As I suggested at the time it was simply the US dollar’s weakness that saw it head up to that level. Subsequent price action suggests it wasn’t just me scratching my head – and selling some AUD/USD – when it was up in the high 78 cent/79 cent region. You can see that in the price action over the last couple of days of last week. The Aussie’s fall to Friday’s close around 0.7711 puts it under intense pressure for further falls toward 0.7600/20 perhaps even 75 cents.
Forex
- The US dollar is still consolidating. But as you can see in the above discussion on the BAML survey there is a level of cognitive dissonance among money managers who think there is going to be genuine policy divergence but who are still mega long the Euro with positioning back up near recent highs the latest CFTC data shows.
- When trading Forex, or any other market, sentiment is as fundamental as fundamentals. As Dennis Gartman is want to say, id a market doesn’t react to bullish (or bearish) news then it is not a bull (or bear) market. You could certainly take that slant on the US dollar. And in truth the best you can still say about the Buck is that it has paused in an overall downtrend. Likewise a look at the weekly euro charts suggests the same thing. My read on the euro weekly is that all we need for a break to 1.17 is a fall to and through 1.2150. But many others I have read say that while this level holds a run to 1.30 is on the cards. Both views are in fact correct. How the market reacts to the FOMC decision this week is critical not just for the euro but for forex markets more broadly.
- Here’s the weekly EURUSD chart.
Commodities
- I’m not exactly sure why oil surged so much and so quickly Friday. Some say it was in anticipation of a weekend interview with the Saudi Crown Prince and potential inflammatory comments about Iran which would add to the geopolitical tension. Honestly I have no idea if this is true or if it was the residual impact of the IEA saying that Venezuela is faltering and demand is growing. That’s a combination for a supply-demand imbalance favouring higher prices.
- What I do know however is that WTI remains in its box but that Brent has started to break higher. A move above Friday’s high today or tomorrow could see Brent surge another $2-3 a barrel.
Have a great day's trading.