Originally published by AxiTrader
Market Summary
Buy the rumour sell the fact. It’s an old axiom of markets and it's worked again in oil overnight which has collapsed more than 5% after OPEC failed to add anything new to the plans it had communicated for a 9-month extension in the production cut.
You’d be forgiven for thinking that might hurt stocks – and indeed the energy sector in the US is down for the third day in a row – but the overall market is higher as traders buy retail stocks and celebrate the Fed’s gradualist approach the minutes to the May meeting seemed to suggest.
So we have the S&P 500 is at 2416, another record high. The Dow is 71 points higher at 21,083 while the Nasdaq 100 has to 6,213. It’s a very US specific move with European bourses mildly in the red and the SPI here in Australia down 3 points overnight to yesterday’s 21 point rally we saw in the physical market.
On forex markets the weakness in oil hasn’t helped the currencies of oil producers, nor the commodity bloc more broadly. The Aussie failed to take out this week’s high and has reversed back to 0.7450, the CAD lost less with a half a percent fall – that tells you something about the Aussie given the CAD is a quasi petro-currency, and the Russian ruble lost 0.8%. For the Majors there wasn’t a lot of movement but the pound has come under pressure after the weaker than expected Q1 GDP revision.
Elsewhere US bonds remain fairly quiet, gold is still in the mid $1250’s, copper is up as traders focus on the Grasberg strike in what’s a mixed night for base metals while iron ore is off a little.
Nothing of note out in Australia today but there is a G7 meeting this weekend, the second revision of US GDP is out tonight, and there is a holiday in markets on Monday for the US as it is out for Memorial day.
Here's What I Picked Up (with a little more detail and a few charts)
- S&P 500 +11 (0.44%) 2415 (7.15 Sydney - change since previous day)
- Dow +71 (0.34%) 21082
- Nasdaq +42 (0.69%) 6,205
- SPI 200 -3 (0.05%) 5,792
- AUDUSD 0.7451 (-0.66%)
- Gold $1258 (-0.60%)
- WTI Oil $48.71 (-5.13%)
International
- There’s a Hawk in Dovehouseouse. In a speech overnight Lael Brainard, one of the Fed’s move dovish protagonists, was pretty bullish on the global outlook which suggests market pricing about a June rate hike might be right. "The global economy is brighter than it has been for the last few years," Brainard said.
- US initial jobless claims rose 1,000 last week to 234,000. But that’s still very strong with the 4 week moving average hitting another multi-decade low. On the other hand wholesale inventories fell 0.3% against expectations of a 0.2% rise.
- The second read of the UK’s Q1 GDP was out last night with an underwhelming print of just 0.2%. That knocked Sterling a little lower and the Citibank economic surprise index for the UK has now fallen to -15.8 unwinding the upside surprises in the post-Brexit economy.
- President Trump berated NATO members who are not spending the agreed 2% of budget on defence at the NATO summit last night. You can understand his frustration and a feeling that with only 5 members of the 28 member alliance – including the US and UK – hitting this target that there is not equal burden sharing. The president moves onto G7 now.
- The US Navy conducted a FoNO drill within 12 nautical miles of one of China’s artificial islands in the South China Sea this week.
- Even though French president Emmanuel Macron won as a centrist and a committed EU member that hasn’t stopped him from calling for curbs on eastern Europeans being able to travel and work in France at lower wages than French workers. "When someone works in one country, for the same job, he must be paid the same salary” Macron said. Fair enough that’s the way it should work, and it’s likely crucial to macron overhauling French workers entitlements as he tries to reform the economy. But he might meet some resistance.
Australia
- The S&P/ASX 200 index was looking wobbly at one point yesterday before the buyers re-entered taking the market to 21 point gain. That the SPI has lagged the rally in US stocks – again – though is another sign in the price action that this is a very specific US based rally at the moment. The yawning gap between the performance of the ASX 200 and the S&P 500 also suggests to me that there has been a rerating by global – perhaps local – investors of the Australian stock market. Or at least the two big sectors which are so crucial to its outlook.
- Naturally it’s possible that the yawning gap, and what has been a pretty solid relationship, sees buyers renter. And it is to this relationship, and how it performs, which will inform me as to the accuracy – or not as may be the case – of my hypothesis.
- My sense is that how the data flows with the release of partials to GDP, and then Q1 GDP itself will be important. We’ll know next Wednesday but the ANZ joined the NAB yesterday saying that the risk is for a big undershoot in expectations for Q1 GDP. The bank tweeted yesterday that growth could print at just 0.1%.
Forex
- The US dollar has hardly moved this morning with the DXY sitting at 97.219 down just 0.02%. That’s left the Euro little changed at 1.1208 with the Swiss franc similarly quiet at 0.9733.
- But the Australian dollar is the biggest loser among the G10 with a fall of 0.68% in the past 24 hours to 0.7454. It’s the second day of relatively wide ranges and volatility and it was a rejection of the week’s high at 0.7516. What’s interesting about this move is that it pre-dated the OPEC move, it’s a bigger move than the Canadian dollar – which has a linkage to oil – and it highlights the potential rerating I’ve mention in the Aussie section above. I’ll write about in the next day or so but I’m starting to feel like the Aussie dollar has a rising risk of a capitulation. Not just to 72 cents, perhaps below 70 as the supports fall away.
- Yesterday I wrote a piece about GBPUSD which concluded the recent highs at 1.3050 might be it for the moment. The weakness in the data was a big part of this and it looks like Sterling has lost a little support of the bulls. The level I’m watching short term is 1.2888/1.2900.
Commodities
- Lucky for OPEC it is playing the long game of trying to adjust inventory levels and drive the structure of prices higher, not manage the spot price. Or at least that’s what Saudi oil minister al-Falih alluded to after the meeting last night in Vienna. He said the 5%= fall in oil was “technical” in nature and he was confident that prices would recover as inventories fall.
- It’s hard to disagree with him that if inventories do indeed continue to fall in the US and demand increase the structure of prices will rise. And he’s right that last night price move was a “buy the rumour, sell the fact” kind of market – not fundamentally – based move.
- Clearly al-Falih and his colleagues, in and out of OPEC, believe 9 months is optimum because he said just that. But to a certain extent in the same way as his and other jawboning to get prices higher spent their bullets before the meeting so OPEC agreeing to 9 months without deeper cuts leaves prices at the mercy of inventories and US production and demand.
- The Iraqi oil minister said the price fall is temporary. IN WTI terms ($48.63, -5.32%) prices need to hold above $47.50/80 in the short term while in Brent terms ($51.20, -5.11%) the level is $50.75. Here’s the Brent chart.
- Gold is mid-range of this $20 range it’s stuck in at $1255 this morning. But there might be a little wedge that it’s close to breaking out of. Very tentative at present but the parameters ar $1251.48 and $1259.62.
- Copper has hardly moved really and is sitting at $2.59 this morning. But that masks the 4 cent range it traded through overnight. Prices in London (LME) are just below trendline resistance as traders wonder on the twin drivers of slowing Chinese growth and the continuation of the strike at the Grasberg mine in Indonesia. Copper does seem to have a bid tone presently.
Have a great day's trading.