Originally published by AxiTrader
Market Summary (7.33am Thursday May 3)
It’s only a few words different from the last meeting but the FOMC has roiled markets a little this morning since the release of its statement at 4am my time.
The focus has been on the use of the word symmetric with regard to inflation and what exactly that means for policy. I’ll discuss it later but while I read it as a warning not to freak out as inflation rises – which was stock and forex traders initial take – there has been more of a focus on the fact that the fed is actually waring that inflation is on the up. Indeed the Fed dropped a reference to the fact inflation “continued to run below” 2 percent replacing it with a statement that inflation, ex-food and energy, has now “moved close” to 2 percent.
Rate rises are coming and there’s nothing there to change the current outlook.
So with European, and other global data, printing weaker recently and again last night and this week, the clear policy divergence of the Fed, the US economy, and other central banks has been backlit starkly.
The result on forex was that the initial run in the euro from 1.1985 up to 1.2025 has been reversed and the euro is now trading at 1.1953 down 0.38% on the day. Likewise the pound's spike has been reversed and it’s back plumbing fresh lows at 1.3570/75, down 0.30%. The yen had a similar roller coaster with USD/JPY now trading back at 109.79 – just a little weaker.
The commodity bloc also rode the rollercoaster with the Aussie dollar trading back to 0.7536 before collapsing back to sit at 0.7492 as I write, largely unchanged. The kiwi is at 0.6996 off 0.1% and USD/CAD is roughly flat at 1.2869. 0.7470/75 is the key level to watch for the Aussie today.
Interestingly US 2's are a little lower at 2.49% and the 10's are at 2.97%
To stocks now and from the red to the black and then back to the red. It’s been an interesting few hours since I got to my desk. At the close, the S&P 500 is down 19 points, 0.72%, at 2,635. The 2,610/15 level is looking tractor-beam like and a retest, probably break, of the 200-day moving average is on the cards.
The Dow finished down 0.72% as well at 23,924 while the Nasdaq 100 ended the day down 0.56% at 6,644. Europe had a better day of it and may need to unwind a little of that ebullience when the markets open this afternoon. That’s particularly the case for the DAX which rose 1.5%. The FTSE was up 0.3% and the CAC rose just 0.16%.
Here at home SPI traders proved again that nothing can shake their confidence adding another 9 points overnight. Yesterday saw another remarkable rally on the ASX which meant that of the past 20 trading days there had only been 4 down days in this very strong uptrend. With fresh Commonwealth Bank Of Australia (AX:CBA) revelations overnight and a poor US lead – and after such a strong surge – I wonder if the rally can continue today.
On commodity markets oil ignored the big surge in US inventories because it seems, that was sourced in the volatile west. So WTI is up 0.7% at $67.70 while Brent dipped just 0.1% to $73.08. Gold is still holding above support and sits at $1304 while copper rose 1% to $3.04.
Perhaps that was on the reasonable Chinese and other manufacturing PMI data we’ve seen in the past couple of days. That’s been enough to lift the global PMI mildly but new orders are an issue. So too is global air freight which has fallen to its lowest growth rate in 22 months. More on both – and their relationship - in the full note.
On the day then and Japan is out for Constitution day. Here at home we have the release of services PMI, building approvals and trade. EU inflation is out while we also get Canadian and US trade data.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Why did the Fed put the word symmetric in the first paragraph of its statement this morning? My sense, and that of many others I’ve read, is that this is so traders and investors don’t put the cart before the horse and overreact to what the fed clearly believes is a looming increase in inflation. Think the way the RBA uses its available tolerance on setting policy when there is divergence in inflation outside its 2-3% band. But one of my favourite, and one of the best, global currency (but so much more than that) strategists, Marc Chandler of Brown Brothers Harriman, takes a different view. He wrote this morning after the release that the Fed “also inserted twice the word symmetrical in the statement, indicating that it will not let inflation run above target just because it had previously run below target”. That’s a different take to mine and one that changes the context of the statement in a material way. I guess we’ll have to wait and see what the minutes say about the discussion to tell. I characterise this in the same manner as I characterise NY Fed Bill Dudley’s comment that “there won’t be more than 4 hikes this year” a little while back. Inflation is coming but don’t get too excited about what the Fed will do. Besides the extra hike I expect this year to bring the total to 4.
- The price action initially seemed to support my take with euro running all the way up to 1.202, but it’s back down at 1.1943 plumbing new lows as the US dollar recovers and Marc’s view seems to take hold.
- Here’s some evidence that the slowing pulse of global growth is real. Overnight the IATA released data showing “growth in air cargo slipped to a 22-month low in March, as (the) boost to freight from (the) restocking cycle faded”. That was 5 full percentage points below the growth rate in the year to Febraury of 6.7%. Interestingly this move might have caught air freight companies a little by surprise given the IATA said “Annual growth in air freight capacity exceeded that of demand for the first time in 20 months in March”. The IATA says not to read too much into the monthly volatility, but there is one chart which I thought was really interesting given what the growth in FTK (freight tonne kilometres) implies for new orders in manufacturing PMI’s.
- Of course we’ve just had the update to global manufacturing PMI’s for April in the last couple of days. Europe has disappointed, as have some parts of Asia. JP Morgan and HIS Markit report that the bank’s Global Manufacturing PMI measure “saw a mild improvement in the rate of expansion of the global manufacturing sector” but that “the upturn remained subdued compared to the start of the year, in part reflecting a recent slowdown in growth of new export orders”. HT IATA I’d say. Overall though this softish patch should be characterised as a pullback from an acceleration as the global economy washs off speed rather than an outright slowdown. That’s something you can see in the table of the global PMI below.
Australia
- Sometimes you get out of synch with a move. Now is such a time with the rally in the ASX which has outperformed the US markets recently in what’s been a very solid run higher in the past 20 days. The cash market broke the trendline from the December highs yesterday with a bolt to close at 6050. Overnight the SPI is now up just a few points. But surely this has to be it for this run. Anyway as I say I’m out of synch on this one. Either a close above 6,058 or back below 5,988 (which I favour in the day’s ahead) would inform the next big move.
- The Australian dollar outperformed last night as the sellers came again for the euro and the pound. It’s not out of the woods by any stretch and today’s trade data will be important. The market is looking for a surplus – don’t you just love that word – of $650 million. So any material deviation, say $250 million, either way is likely to move the dial on the AUD/USD rate.
- Part of the Aussie performance I think has been the headline manufacturing PMI data – especially China – which continues to suggest global growth is not terrible. Just not as strong as it was thought a month or two back. Realistically though this is still the US dollar show. And on that front while there is a chance of a decent pullback in a mini time frame the fact that we are seeing a daily close above the 92.50 region for the US Dollar Index has me now targeting 95.20 for the Greenback. That might be enough to see the Aussie fall through this 0.7470/80 support and perhaps even the 0.7322 region.
Forex
- It’s a bull market. Be bullish. That’s the sound ringing in my ears this morning after I stupidly thought I’d trade around my long US dollar - shorts in euro and sterling - after the FOMC statement. I was right for a while and well in the money on that “legging” trade. But only for a short while. It’s a lesson that the trend is your friend till it bends at the end. It’s also a lesson that taking substantial profits can still give you the irrits. I was looking for a second wave bounce/reaction to this first move higher in the Greenback. It will come eventually. But evidently not this morning.
- Anyway, enough of my poor effort, back to the usual stuff. And the key, as I noted above is that the DXY has now closed above the 61.8% retracement level of the last move. That means I’m now targeting a full round trip of the move lower on a multi-week basis. 94.13 is the 38.2% retracement of the move lower from last December so that might be a way-point on the move higher. And a decent level to watch as well. I still wouldn't be surprised to see a big figure pullback though.
- And here’s the question I’m asking myself on the euro. It’s clearly not unrelated. The data is weak in the EU, Reuters reported that the pressure is now building at the ECB to change its plans to end QE though Bundesbank president Weidmann said overnight that that will still happen. He also reiterated that rates won’t rise for a while though. But the question I ask myself on the euro is where will the bounce come from. Or is this just a straight line move to my target of 1.1700/20. Non-farms will be important tomorrow night. As it stands I’m still thinking a run back toward 1.21, maybe 1.2135/40 is on the cards at some point.
Commodities
- US inventories were through the roof relative to expectations overnight with the EIA data showing a build in US crude stocks of 6.218 million barrels against expectations of a build of a little under three-quarters of a million barrels. You’d be forgiven for thinking that oil should be lower this morning, but that is not the case as traders shrugged off the fact that a large part, the majority, of that build was on the west coast. The reason for this is that west coast stocks are seen as volatile and feedback is traders expect the build to substantially wash away in coming weeks.
- So while Brent is a little lower this morning WTI is actually up. I know it’s kind of a weird move but part of the outperformance might also be a reaction to the recent spread widening between the two benchmarks which took the differential back to the wides of December last year. There is still a substantial discount between WTI and Brent – around $5.50 – so it will be interesting to see what happens between the two. May 12 and the Iran nuclear deal are likely to impact.
- To the charts and Brent found support at the mid-Bollinger band last night. My system is still pointing lower and a break of that low – at $72.36 – would signal a fall of another $1 at a minimum.
Have a great day's trading.