Originally published by AxiTrader
Market Summary
A win for president Trump and House speaker Paul Ryan overnight with the passage of the bill to repeal and replace Obamacare through the US House of representatives. There has been much celebration by the president and senior Republicans in the Rose Garden this morning.
But traders haven’t really cheered the way many might have thought they would. At the close this morning the Dow Jones Industrial Average was barely moved at 20,951, the Nasdaq 100 was up just 0.05% to 6,075, and the S&P 500 up a little less than 2 points to 2,389.
Europe was a different matter entirely with solid gains across continental bourses as the solid data flow continued overnight with the composite and services PMI’s across the continent hitting multiyear highs. Milanese stocks rose almost 2%, in Paris the CAC was up 1.35% and in Frankfurt, the DAX rose 0.96%. UK PMI was also solid but stocks in London rose just 0.20%. Maybe the continent has some give back when trade opens this afternoon.
The wash up is that SPI traders have marked prices down just 8 points now and are expecting a more benign day after the S&P/ASX 200 found support at the Trumponomics rally trendline yesterday.
On forex markets the Aussie dollar sellers finally relented when they drove prices to the other side of this downtrend channel. It’s at 0.7411 this morning. Euro is up near 1.10 after the solid data, sterling likewise benefitted from its own PMI print and is up at 1.2923, while USD/JPY traded to 113 but is back at 112.33.
But all of that was but a sideshow for the mess that was oil overnight. Prices came under heavy selling pressure with Brent and WTI off a little less than 5%. That stocks around the globe held up so well in the face of this week’s collapse is remarkable – but there it is. Gold was also sharply lower as traders marked up interest rates in the certainty that the Fed will raise rates in June. Copper was down another percent, iron ore collapsed yesterday and the tone in metals markets is weak.
Now for non-farm payrolls tonight. After jobless claims and ADP payrolls this week the market is expecting a big print. We’ll know at 10.30pm AEST. And of course we have the RBA's quarterly Statement on Monetary Policy this morning.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 +2 (0.06%) 2390 (7.34 Sydney - change since previous day)
- Dow Jones Industrial Average -6 (0.03%) 20957
- Nasdaq 100 +3 (0.05%) 6,075
- SPI 200 -13 (0.13%) 5,856
- AUD/USD 0.7412 Flat
- Gold $1227 -0.87%
- WTI Oil $45.49 -4.87%
International
- Ahem, where’s the bounce in stocks after Obamacare’s replacement has been passed. I really would have expected a bounce given this proves – kind of – that the republicans can actually get their act together and get stuff done. The absence of such a reaction from traders is interesting behaviourally. It could be time for a down draught soon for US stocks.
- Here’s the latest chart of the S&P 500 – 2370-80 looks like the key support short term.
- Jobless claims in the US fell 19,000 last week to 238,000 but the really good news was that continuing claims fell 23,000 to 1.96 that’s the lowest level since April 2000. That goes to the Fed’s outlook for the jobs market and assertion the preconditions for a bounce back in consumer spending are in place.
- Data in Europe was also solid with Markit reporting that EU April composite PMI came in at 56.8 which is around a 6 year high and better than the preliminary estimate from late last month. Market says this suggests to Q2 GDP growth of 0.7%. That’s not super strong. But it’s solid enough – and the data run has been solid enough – to suggest the conversation will be changing at the ECB and may become a public change at the June meeting.
- That notion was reinforced in comments from ECB chief economist Peter Praet who said overnight that “There may be a little upside risk for Q2, so maybe a bit stronger than what we have. The balance of risks has improved." Indeed it has.
- Donald Tusk, president of the EC, said overnight that Brexit talks will be impossible if emotions remain unchecked. He’s dead right when he said “The stakes are too high to let our emotions get out of hand. Because at stake are the daily lives and interests of millions of people on both sides of the Channel”. But hey this is still politics right :S
- Emmanuel Macron won the debate last night so markets are very comfortable that he will easily win Sunday’s French presidential election.
Australia
- The ASX tested – pierced – the uptrend line from the low on the day of president Trump’s election victory last November with a low of 5856.40 yesterday. That level is coincident with my slow moving average which is often associated with reversals. So it was not really surprising that this dual support held on the day.
- But I must say even though I thought we’d see a test of this dual support, and even wrote yesterday “any approach should hold, but if it breaks watch out”, I didn’t expect the collapse to support on the day. But one thing I’ve learnt in the past three decades in markets is that stuff happens a lot faster than you expect.
- Anyway here is the chart:
- Overnight though the collapse in oil, copper, base metals, and iron ore could weigh on the market today. SPI traders have marked prices down 11 points but my guess would be that yesterday’s lows, and the trendline, are retested today. If they break – watch out.
- RBA governor Phil Lowe gave a really interesting speech yesterday. It looked to me like the market read him as hawkish insofar that he showed no inclination at all to drop rates, said growth is headed back to 3%, and was pretty upbeat overall. But the behavioural economics and finance guy in me needs to highlight that he agrees with me with on the risks to consumption from all this debt.
- To wit, governor Lowe said (my emphasis) “the issue we have focused on is the possibility of future sharp cuts in household spending because of stretched balance sheets. Given the high levels of debt and housing prices, relative to incomes, it is likely that some households respond to a future shock to income or housing prices by deciding that they have borrowed too much. This could prompt a sharp contraction in their spending, as they try to get their balance sheets back into better shape. An otherwise manageable downturn could be turned into something more serious”
- Regular readers will know the point I’m about to make. While Lowe worries that a future shock causes a contraction in spending by households. My concern is that we don’t need a shock. All we need is house prices to stop rising and households will focus on their debt and start to pay it down. That’s all we need for the domestic slowdown.
- Anyway, hopefully, the RBA is right and I’m wrong.
Forex
- There is an asset allocation move afoot if the moves in forex markets are any guide. The continued improvement of UK and European data, along with the expected victory of Emmanuel Macron in Sunday’s French presidential election looks like it has emboldened buyers of UK and European currencies – a move into other assets can’t be far away.
- As a result we see both the Euro and pound breaking out this morning at 1.0982 and 1.2921 respectively. Euro is now up at the level I talked about a couple of months back I was targeting medium term. 1.1019 is where the downtrend line - two touches so tentative right now - from last May's high. Here's the chart.
- So while expectations of a Macron win and better data have exerted downward pressure on the US dollar. But in the end the relative moves of the central banks will also matter so we aren’t at the start of a collapse of the US dollar unless the Fed is wrong and the data does not bounce back. That’s the big risk for the dollar and it makes non-farms tonight as big as it ever is.
- Elsewhere the Aussie dollar found support at the bottom of the current downtrend channel we've been watching and finds itself back at 74 cents. It's been a wild week for the Aussie with a high around 0.7550 and a low around 0.7380. And it remains under pressure.
- And speakinig of trendlines - oh how I love them - the high in USDJPY last night was bang on overhead resistance. It's off a little at 112.51 now and waiting for non-farms.
Commodities
- What an awful week this has been for commodities. Oil, gold, silver, copper, base metals broadly, iron ore. Yuk, yuk, yuk. The falls have been huge and they have been instructive because while stocks are focussed on the lift in the global economy commodity markets are being buffeted by what appears to be a surfeit of supply relative to demand in many markets – or at least that seems to be a trigger point as inventories rise, or don’t fall as much as expected.
- Last night crude collapsed close to 5% in WTI and Brent terms. This morning WTI has conclusively broken the $47 support zone we’ve been eyeing and at $45.47 is down 4.91%. Brent is at $48.39, down 4.73%.
- Last night’s move appears to have coalesced around the technical break naturally but also that OPEC signalled a production cut extension but not deeper cuts. That the focus moved from an extension to deeper cuts in the past week shows how impactful the rise of US production and slowdown in gasoline demand in the US – along with some worries about China after this week’s PMI’s – has been on market sentiment.
- As discussed a break of $47 in WTI terms opens the way for a move to $44.00/44.50.
- Gold was hammered last night. US 10 year rates are back up at 2.35% as traders bet the ebullient Fed has a lock on a June hike. It’s fallen 0.78% to $1228 this morning. $1218/20 is support and then $1194, maybe even $1160.
- Copper, oh, copper. Again it is inventories – LME stocks up a ridiculous 25% - and worries about Chinese demand which knocked copper lower again overnight. It’s actually recovered from the lows and about mid range right now at $2.50 down 1.2%.
Have a great day's trading.