Oil Collapses As The US Dollar Catches A Bid

Originally published by AxiTrader

Market Summary

Stocks were down across the board overnight as the price of crude collapsed more than 2%.

In the US the Nasdaq lost 0.82% to 6,188, the Dow Jones Industrial Average dropped 0.3%, and the S&P 500 dipped 0.67% to close at 2347. Only 100 stocks rose in the S&P in what was fairly broad based selling with only healthcare and utilities closing in the black on the day.

European stock markets were similarly funky with early strength giving way to weakness. The FTSE was 0.68% lower, the DAX fell 0.58% and the CAC closed down 0.32%. That weakness followed a poor day in Asia – ex-Nikkei which rallied on a weaker yen – and a big reversal on the S&P/ASX 200 which dropped 0.8% as it reversed off 5,800. Again.

Overnight SPI traders have marked prices down another 27 points.

On currency markets the US dollar is getting a lift from the hawkish messages emanating from the Fed with the US Dollar Index up at 97.98 and ready to break first resistance. It’s a different story for the pound as Mark Carney swept last week’s split vote at the BoE aside with a pretty dovish speech overnight. GBP/USD is at 1.2629. The euro is a little lower and at risk of a big break should 1.11 give way, while the yen is largely unchanged. The AUD/USD has failed again atop 76 cents and we are now watching 0.7566 support.

Getting back to oil and it’s all about supply and demand, inventories, and a lack of efficacy from OPEC’s production cuts. It was roll night in US futures so I don’t want to draw too many conclusions. But prices dropped more than 2% even after the API inventory data.

Gold is becalmed, copper, base metals, and iron ore are down.

Westpac’s leading index of growth is about it today. Nothing much else is out until the EIA Crude inventories at 12.30am tomorrow morning.

Here's What I Picked Up (with a little more detail and a few charts)

International

• Bank of England governor Mark Carney was on the dovish side of the ledger last night. Carney made it clear that he is in no rush to raise rates in his speech at the Mansion House last night. He’s worried about the outlook for the economy more than he’s concerned at the uptick in inflation recently. Indeed in one key paragraph, he highlighted the inflation uptick is about the pound’s fall as he laid out both his concerns and the roadmap to a re-evaluation.

• “From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment. In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations,” Carney said.

• The IFO institute rose it’s outlook for the German economy overnight from 1.5% to 1.8%. The French economy is also picking up with INSEE saying that growth this year will be the strongest since 2011 at 1.6%. That’s a 0.5% lift from the last forecast.

• Europe’s existential threat is now completely non-existant. I say that after reading news that Beppi Grillo’s 5-Star movement has resiled from its former Euro-skeptic stance as the wave of Europhoria that was associated with Emmanuel Macron’s march to the Elysee Palace sweeps across Italy.

• And it would hardly be a morning wrap without some sort of US political content. To that end, House speaker Paul Ryan said overnight he wants to take advantage of a "once in a generation moment" and pass tax reform this year. But they need the Health Care bill to get out of the Senate first. But the good news is Mitch McConnell says the bill is coming Thursday for a vote next week.

Australia

• Traders didn’t like the Moody’s downgrade of 12 Australian banks the previous evening, marking down Australia’s financial stocks sharply yesterday and leaving the ASX200 down 48 points, 0.83%, to 5757. It’s another fail above 5800 which means we now have a downtrend coming in above that level from the highs of the year at 5950.

• But closer to hand with SPI 200 traders marking prices down another 28 points overnight. We are likely to see the market collapse through last week’s lows at 5752 in the physical market. The market has already, with yesterday’s close, taken out the 38.2% retracement level of the recent rally so the focus for local stock traders is again firmly on the search for support 5733 is the 50% retracement level of the move to last week’s high with 5,708 the 61.8% level.

• It looks like it could be another rough day and in SPI 200 terms my target is the 5600/5620 region.

• Yesterday’s RBA minutes were pretty interesting. There was a clear message from the RBA that it believes growth is going to reaccelerate from Q1’s dip and as a result, it is a bank disinclined to cut rates anytime soon. That's equally the case because the RBA minutes reflect a bank concerned about financial stability in the economy. Not in the way central bankers across the globe were during the GFC with banks at risk of default but rather at a household level and the impact that the focus on debt could have on economic growth.

• That’s the consistent theme we’ve heard from governor Lowe and his colleagues in recent months. The bank is focused on it as a risk to growth medium term should consumers become more circumspect. I am too. But as the record sales of motor vehicles data this week suggests the fears consumers hold seems less related to their actions right now. So consumer retrenchment in the face of debt is a risk not a certainty – at least in the medium term. Longer term all that debt has to be repaid.

• And it’s worth noting that the RBA lauded the relationship it has at the Council of Financial Regulators and the work that APRA is doing in the minutes yesterday. That’s important if I swing back to the current battle between the bulls and the bears over the valuations of Australia’s listed banks. APRA has reined in lending growth. Introduced caps on investor and interest only loans and CRUCIALLY introduced a set of guidelines that banks need to follow when they are assessing serviceability of borrowers. It’s called APG223 and I strongly believe you can see its impact already – and APRA’s hand - in the changes Westpac announced yesterday about serviceability for borrowers, which were associated with the increase in interest only home loan rates.

• Business Insider reported that George Frazis, chief executive of Westpac Consumer Bank said “we hope the rate reduction will encourage owner-occupier customers with interest-only home loans to switch to principal and interest repayments, helping them to pay down their home loan in this low-interest rate environment”. That switch will increase repayments and decrease free cash available for discretionary spending. But it’s the rules around serviceability at Westpac, and Macquarie and the changes being made to them to asses the real expenses of households which are part of the APG223 push. My reading of the changes, and of the new APRA guidance, is that it will ultimately reduce demand for home loans as some borrowers are locked in and other just won’t service. That’s good news for financial stability but it is likely to decrease demand for loans, or at least the growth rate.

Forex

• Central bank speakers are again driving currency markets in the absence of important data. So it is that the combination of Dudley and Evans comments yesterday morning, and then Kaplan’s assertion overnight that US growth will be at 2% this year and that the recent weak inflation will prove “transitory” (awful word) as eventually upward price pressures return – have helped the US dollar.

• At 97.74 this morning the US dollar Index is at the top end of the range I’ve been talking about. It was above 97.80 at one point this morning but I’m comfortable to call the turn I’ve been hinting at over the past few days since the big post-Fed reversal. That’s mostly a technical call and it means that the 98.50 region I’ve also highlighted this week remains important topside resistance. It’s my target right now. Certainly, the US data flow is a handbrake on the US dollar. But central bank intentions are important and on the front, the Fed has been unequivocally hawkish.

• That’s in contrast to the ECB, BoJ, and last night Bank of England governor Mark Carney. Carney’s speech hit the pound for six and it sits at 1.2630 this morning, down 0.82%. The low overnight was 1.2603. The 1.2557/1.2578 region contains the 200 day moving average and 50% retracement level and is next support for the pound against the US dollar.

• The euro is marginally lower. It’s sliding back into the old uptrend but for the key level remains 1.1100/10. It’s at 1.1126 this morning after an overnight low of 1.1119. My system is short and a break of the levels I’m watching could see a big cascade lower. USD/JPY is mixed at 111.46 and the Canadian dollar is on the back foot as crude oil collapses and the US dollar lifts. That’s driven USD/CAD up 0.38% to 1.3266. The Canadian dollar is actually hanging quite tough all things considered.

• Closer to home the Aussie has fallen out of bed and it’s at 0.7571 as I write. That means its testing the bottom of the very recent range with a break below 0.7565/66 opening up a run toward 0.7515/20 which has been recent lows. A stronger US dollar, falls in iron ore and base metals, a collapse in stocks again yesterday, and concerns over the economy and banks are all weighing on the Aussie. The run above 76 cents is starting to look like it might represent an important top.

Commodities

• Ugh Ugh Ugh. OPEC just doesn’t get people does it. Or at least the learnings from behavioural economics and finance, and the nudges we know can influence people have escaped them. I say that because after the Saudi finance minister exercised his jawbone to try and support prices earlier this week we heard overnight that OPEC compliance had been higher than 100%. Sources told Reuters that compliance hit 108% in May.

• That’s good right? NO, it’s not. Think about the message it sends. Even with OPEC compliance above the agreed targets US inventories are not falling as fast as expected. That screams “lack of efficacy” for OPEC cuts. So the nudge that traders get is simple – OPEC’s cuts aren't working.

• And the washup is that WTI (August as it was the July contract closeout date) is down 2.14% at $43.48 while Brent is off 2% to $45.97. WTI respected this very steep downtrend last night and has slipped below the bottom of the current medium-term downtrend. It’s starting to look oversold. But Brent has really only just broken down in many ways – I’m targeting $43.50.
  

• Even a solid draw of 2.75 million barrels last week that the API data showed hasn't helped prices overly this morning. EIA is a huge event at 12.30am given current prices.

• Gold is becalmed at $1242 while Copper dropped 1.33% in what has been a reasonable broad reaction in base metals and iron ore over the past 24 hours.

Have a great day's trading.

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