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Oil On A Wild Ride But Gold And The Yen Are Interesting

Published 04/07/2018, 09:12 am
Updated 06/07/2021, 05:05 pm
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Originally published by AxiTrader

Market Summary (7.55am Wednesday July 4)

Forget the price action overnight for one second. The most important thing that happened last night was another sign this “cold” trade war is about to go hot. The US government recommended China Mobile not be able to offer services in the United States on national security grounds and news broke that a competitor to Micron Technology (NASDAQ:MU) had won a patent case in Mainland China.

Both these events, more below in the main body, highlight that while trade is the headline battle, it is the battle for intellectual property and technological advantage that is where the real battle lays. But this also highlights that until these areas are resolved, trade will be the frontline.

The shooting starts on Friday when the first round of US tariffs go live. China’s Global Times tweeted that “China should prepare for the worst”.

Perhaps we all should.

To the markets then and US stocks gave up early gains by the close of the truncated pre-holiday session. The S&P fell around half a percent to 2,713 after hitting a high around 2,736. The Dow dropped 132 points for a 0.54% fall to close at 25,174 while the Nasdaq was weighed by Facebook (NASDAQ:FB) (DoJ investigation) and chip shares to close down 1.17%. This index, this sector seems a little vulnerable.

Europe had a better day of it after Chinese authorities stepped in to stem the bloodletting in the yuan and steady the currency ship such that the USD/CNY is back at 6.6450ish after trading up to a high of 6.7168 yesterday. That intervention and soothing words from the PBOC saw mainland Chinese stocks recover early sharp loses. That, in turn, set the tone for Europe where the DAX was up 0.91%, the CAC rose 0.76%, and the FTSE in London was 0.6% higher. All were off their highs though.

Here at home the Chinese reversal rescued the S&P/ASX 200 which finished the day half a per cent to the good at 6,210. The action in US markets however has seen SPI traders knock 21 points off prices overnight pointing to a weaker open for the local market.

Forex traders had a wild ride. Whether it was rumours the BoJ is about to downgrade its inflation forecasts, the mess and then bounce in Chinese markets, or the overall weaker tone of the US dollar as traders slide toward the 4th of July, there have been some decent moves.

What’s striking about the wash up for me though and a signal that markets may indeed be about to get funky is that both the yen and gold hit and rejected important technical levels I’ve been watching. USD/JPY traded to 111.13 but it’s back at 110.57 for a los of 0.3% while gold traded to $1237 and is back at $1252 for a gain of 0.88%. Something to watch folks.

Elsewhere in forex land, it’s mostly gains against the US dollar which sees the US Dollar Index off around half a percent to 94.57 despite a much better than expected factory orders print of 0.4%. Euro is 0.18% higher at 1.1660 (EA PPI 0.8%!!!), GBP/USD is at 1.3195 up 0.41%. The commodity bloc has had a good night with the Aussie and kiwi doing best once China stabilised and bounced. AUD/USD traded back to the previous night’s lows around 0.7315 yesterday but it’s at 0.7387 now, up 0.64% since 7am yesterday morning. The kiwi has gained about the same amount to 0.6756 while the Canadian dollar is resting on support at 1.3136 after a 0.4% gain.

Oil shot higher and then reversed. We had the Iranian President appearing to threaten other nations supplies if they can’t export. But there was other news suggesting the Saudis will step up production and worries over disruptions were overcome by a need to enjoy the 4th of July holiday with squarish positions it seems.

Copper is lower again however losing 0.82% amid what was a broadly weaker night for industrial metals. Bitcoin is around yesterday’s levels near $6,600 and US rates markets are waiting for guidance from non-farms Friday. The 10-year Treasury is at 2.83% while the 2-year is at 2.53%.

On the day today, we have a couple of big releases here in Australia at 11.30am this morning. May Retail sales and Trade are to be released with economists forecasting a rise of 0.4% and surplus of $977 million. After the RBA’s obvious concern about households but still positive outlook for growth expressed in Governor Lowe’s statement yesterday this data will be an important touchstone for traders.

Elsewhere it services PMI day here in Australia and across the globe. Of course, the US is out for the July 4 holiday so that is going to dampen trade and reactions.

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

International

  • This tweet from China’s Global Times tells you everything you need to know about how this trade tussle could easily get much worse before it gets better.

Image

  • Then throw in the news that Micron Tech – which was the subject of a big expose recently saying its IP had been stolen – may have lost a patent case in China, and the US government’s attempt to block China Mobile operating in the US on national security grounds and we can see there is still plenty of room for escalation. Indeed Reuters reports that a Chinese Foreign Ministry spokeman urged the US to “provide a fair environment for Chinese companies doing business in the country”. As the Gobal Time says, perhaps we all should prepare for the worst.
  • There was also news that Europe is resisting Chinese overtures to come out strongly in a joint statement against the US after the joint summit later this month. Europe would be mad to do that. It would open the Pandora’s Box of consequences the height of which might be NATO and US troops on the continent.
  • ING has released its inner bear on the real chance this trade war hots up. Dow Jones reports, “Asian currencies may fall by 6% to 7% in the medium-term, assuming a temporary 20% decline in global dollar trade values on the back of trade disputes between the U.S., China, Europe, and rest of the world, says ING. Moreover, ‘a fall in global trade of this magnitude is likely to weigh on commodity prices,’ ING says. The trade war dispute will hurt China, and "anything which hurts China's purchasing power is also likely to weigh on commodities," since the country imports most of the commodities. ‘This could be the second leg of a looming global trade shock,’ the Dutch bank says.”
  • And it’s not just ING worried. The FT reports on a note released by Pictet Asset Management which says, “Our model, which is based on IMF estimates, shows that if a 10 per cent tariff on US trade were fully passed onto the consumer, global inflation would rise by about 0.7 percentage points. This, in turn, could reduce corporate earnings by 2.5 per cent and cut global stocks’ price-to-earnings ratios by up to 15 per cent. All of which means global equities could fall by some 15 to 20 per cent, assuming that US bond yields rise in line with inflation. This in effect, would turn the clock back on the world stock market by three years”. Sorry, should have issued an adult beverage warning with that one.
  • A few months back I was talking about the risk to tech. It dipped and then pressed on once again. But this tweet from Northman trader shows just how dependant the S&P’s move in 2018 has been on the tech sector, indeed on Amazon (NASDAQ:AMZN).

Table
Source: Twitter Screenshot

  • EA PPI shot the lights out with a 0.8% print last night. No wonder ECB chief economist Peter Praet said he thought that the bank’s inflation target would be realised even at the end of QE. And there was more chat from BoE policy makers that rates may need to rise faster than the market thinks.
  • US factory orders were stronger than expected overnight. Reuters reported, “Factory goods orders increased 0.4 percent amid strong demand for machinery, the Commerce Department said on Tuesday. Data for April was revised up to show orders falling 0.4 percent instead of the previously reported 0.8 percent decrease”.

Australia

  • RBA Governor Lowe remains hopeful. That was the key takeaway from his statement yesterday. He’s hopeful that the tide of the global and Australian economy outside of the consumption and household bit will eventually lift wages and relieve the debt burden on households and get them spending once again. But as I tweeted yesterday my sense is that the RBA for all its positivity – remember this is the bank that said in the minutes a couple of meetings ago it need to be a source of stability and confidence – is actually quite concerned by the outlook for households. As the tweet/charts I showed Monday highlight the fall in demand for debt is important for the growth outlook. The RBA didn’t change its rhetoric yet. But it might soon.
  • Today’s data is going to be an important input in that along with the NAB business survey and the Westpac consumer sentiment releases. Retail sales for May are expected to print solidly with a with a 0.3% print after the 0.4% rise in April. 0.2% either side of that and we could get a big reaction in markets and the Aussie dollar.
  • Speaking of which the Aussie dollar bounced back strongly with the recovery in the Yuan and Chinese markets more broadly. I wrote about that linkage in my AUD/USD note yesterday noting that as China and EM go so goes the Aussie. So the bounce in AUD/USD was to be expected once the USD/CNY rate started to reverse. But while that and the US dollar weakness helped lift the Aussie the fact that industrial etals were largely all lower, that copper has dipped again, and that the yen and gold found their feet (along with the fall in US stocks) suggests to me that something else might be afoot. Genuine concerns about the global outlook and the chance of risk aversion rising materially. It’s just one day, but it’s a hint. As such I retain the outlook that the AUD/USD downtrend continues. On the day resistance is 0.7415 and then 0.7445/50 with support at 0.7370, 34, then 0.7315. 73 cents looks to be building into a very important level to watch though.
  • SPI traders look to have it right with the 20 odd points they have knocked off prices overnight. Perhaps given the move in industrial metals they may be a little optimistic. I don’t know, the vagaries of intraday trade on the SPI and ASX are mostly always lost on me. Structurally though we have a market that is stuck below recent highs and wedging itself into some sort of conclusion. 6,249 I the topside level give or take a few points with short term support at 6166 and then the trendline at 6,112.

Chart

Forex

  • I am genuinely fascinated by the moves in USD/JPY and gold this morning. I know I could be over-egging the fact they both simply found the support/resistance that the charts suggested they should which then aided the recovery in the yen and gold. But I wonder if there is something else going on, some deeper concern now that the actual imposition of tariffs is upon us, now that the blood letting got so bad the PBOC and SAFE had to enter the market (by proxy) to steady the yuan’s fall, now that industrial metals are slipping further. We’ll see.
  • In that context the US dollar's overall weakness was a little off last night. If policy and data matter, as they do, then the recovery of the Citibank Economic Surprise index from -4.9 last Friday to +8.9 this morning after this week’s data highlights the divergence between the US economy and the looming divergence between the Fed and other central banks. But as we’ve seen in recent session central bank messaging still matters – just look at the moves in the Pound and Loonie last week, the Yen yesterday (on rumours the BoJ is lowering its inflation targets) and the Swedish Krona last night after the central bank’s upbeat inflation forecast. So data matters and non-farms Friday is going to be huge.
  • I’ll use the euro again as the Bellwether and highlight the weekly chart I picked up on Twitter via Mystery Trader who said, “WEEKLY #EURUSD : $EURUSD appears to be basing here. 3 green dojis in a row with potential breakout coming if this weeks #EURO candle can produce bullish engulfing. Stoichs looking bullish, MACD starting to curl in a base too if upward momentum can be maintained”

Chart
Source: Twitter Screenshot

  • A bounce may come. But my base case remains a test to 1.1150/1.12 at a minimum. And then we can go even lower in time. That pesky 1.15 level has to break first though.

Commodities

  • Just when you thought you knew the playbook the Iranian President hints at somehow disrupting other nations supply of oil and all heck breaks loose. Hassan Rouhani said, via the Presidential website “The Americans have claimed they want to completely stop Iran’s oil exports. They don’t understand the meaning of this statement, because it has no meaning for Iranian oil not to be exported, while the region’s oil is exported”. As veiled but threatening as that was Rouhani said in repsinse to question while in Europe, “Assuming that Iran could become the only oil producer unable to export its oil is a wrong assumption ... The United States will never be able to cut Iran’s oil revenues”. Clear as mud right? But also obvious.
  • So prices rose before falling back as some of the disruptions that were worrying traders seemed to ease. We can’t rule out what Iran thinks it can do next as a driver of oil and a thwarter of President Trump and the Suadis plans to stop Oil from spiking higher once more. Indeed Morgan Stanley (NYSE:MS) upgraded its oil price forecast to $85 overnight. It’s hard not to come to the conclusion that the risk is off further spikes in the short term and that at the very least support on any pullbacks is likely to remain intact.
  • Looking at the WTI chart we see that last night’s high above $75 finally got prices near the $8-10 Fibo target that resulted from the original range break week’s ago. With an indecisive candle we may be able to say that’s it for now. But I don’t yet have signal so I’ll sit still for the moment. But technically I’m on watch for a top forming.

Chart

Have a great day's trading.

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