Originally published by AxiTrader
Market Summary (7.30am Tuesday May 1)
Oil was the big mover overnight reversing early weakness after Israeli Prime Minister Netanyahu announced he’d be holding a news conference and then during that conference “revealed” news that Iran had been lying about it’s nuclear ambitions.
It was a clear Game of Thrones Littlefinger style move aimed at walking the US President toward a repudiation of the current sanctions deal. And it sent oil skyrocketing. Brent, which had made a low around $72.78 in early Europe roared up to a high of $75.59. It’s lost about a buck a barrel now and is up 1.1% at $74.62 for the second contract. WTI is up 0.57% at $68.49 off a high of $69.31.
Part of the reason for the reversal is that Netanyahu’s arrow may not have hit the mark in the way oil traders, or he thought. I say that because while Netanyahu delivered his presentation in English – so we know the intended audience - President Trump said subsequently “We’ll make a decision. That doesn’t mean we won’t negotiate a real agreement”. He’s also reported to have said a renegotiated deal might send a good signal to North Korea.
Game of Thrones indeed.
Elsewhere more negative data surprises in Europe in the form of weaker than expected retail sales (-0.6% v +0.8% exp) and inflation data in Germany, and Italy, stood in stark contrast to still solid US data on personal income and spending. While core PCE prices rose from 1.6% to 1.9% in March. Not a shock to the Fed, but certainly on track.
That helped the US dollar continue its rally overnight with the US Dollar Index up 0.32% to 91.84, euro is down a little more with a loss of 0.44% at 1.2075 while the pound is off just 0.1% at 1.3767 after testing the bottom of the range around 1.3711/12 overnight. USD/JPY is up about a quarter point to 109.31 while the Aussie dollar has been absolutely hammered. It’s made new lows for this run in the last hour and is currently sitting at 0.7526, down 0.73%. the support zone of 0.7475/80 must hold of the Aussie is a shot duck.
The kiwi is down 0.7% at 0.7035 while the Loonie is doing best only down 0.11% with USD/CAD at 1.2836.
On stock markets it’s not been the best day as US markets slid into the close.
Europe went home in a good mood with the DAX up a quarter point to 12,612, the FTSE marginally higher at 7509 and the CAC in Paris up 0.7% at 5520. That mood would have faded however with the move in US stocks which are lower on the day as economic strength and even a bond market rally can’t help.
At the close the S&P 500 is down in what looks like a bearish engulfing day. It’s lost 22 points, 0.82% to 2,648. IS this a fourth lower high? If it is then the outlook is lower – much lower. The Dow closed at 24,163 off 0.6% while the Nasdaq lost 0.62% to 6,614.
SPI traders aren’t that fussed though only knocking 17 points, 0.3%, off where prices were yesterday afternoon.
Gold lost around half a percent to $1315 and is at risk now of a run to support at $1285. Copper is largely unchanged.
On the day we get another check of the canary’s health with the release of South Korean trade data along with its and the Japanese manufacturing PMI. There are also many PMI’s out across the globe, but recall some countries in Europe are closed for May Day, as is China.
Today at home we get the RBA decision and while no change is expected I am curious if the board will say anything about the housing and consumer outlook. Perhaps that’s something for Governor Lowe in his speech tonight.
Also out tonight are UK and US Markit manufacturing PMI’s with the big daddy of them all, the ISM, also out. The global dairy auction is also on tonight.
Here's What I Picked Up (with a little more detail and a few charts)
International
- On North Korea, Iran, tariffs and everything else President Trump is pursuing. Horizon Investment’s Greg Valliere has a neat take I agree with. Greg wrote overnight that, “THERE'S A CLEAR PATTERN: The US is playing hardball, unwilling to accept a deal with North Korea unless Kim Jong Un agrees to a total capitulation; the US will pull out of the Iranian deal unless it's largely re-written to permit extensive inspections; a US delegation in China this week will insist on specific progress on intellectual property rights and technology. THE US GOAL ISN'T SPLIT-THE-DIFFERENCE compromises; the goal is victory, and this is finally dawning on the world's major players. Some experts we've talked with worry that this strategy could backfire spectacularly, while others think Trump will get much of what he wants. They agree on one point – the US is determined to flex its muscles. "John Bolton sends a signal," one expert told us this weekend”.
- He does also warn that Trump may fall afoul of hubris. But who doesn’t? I remember being introduced to the concept in Aeschylus “The Persae” – it was one of life’s most important lessons, though I am never the perfect student
- There has been much talk about the sweet spot for the global economy, or at least the rampant expectations, having passed recently. Yesterday’s South Korean data did nothing to dissuade the doubters from that course. While Korean retail sales looked solid the big miss on industrial production which fell 2.5% last month against expectations of a 0.5% gain and against February’s increase of 0.8%. That 2.5% fall was outside the range of the Reuters poll and thus a big surprise. But it highlights that it seems to be only the US and China that are still beating expectations when it comes to economic data at present. Indeed construction output fell 6.3%, and manufacturing production was down 4.7% - both year on year. To top things off shipments for exports and capacity utilisation were both weaker too. Chinese data – NBS PMI’s were ho-hum so nothing to see there.
- And on China. President Trump is apparently not only sending Treasury Secretary Steve Mnuchin, but also Larry Kudlow and trade advisers Lighthizer and Navarro in what looks like a very high level delegation to try to sort things out with the Chinese. But CNBC reported overnight that China is preparing a hardline on the US trade demands while former Australian prime minister Kevin Rudd, now president of the Asia Society Policy Institute, said the new undeclared cold war between the two nations is in information technology. Not exactly an earth-shattering revelation to readers of this note. But an important one given this is the very sector the US seems to be targeting with China going forward – as the action on ZTE and Huawei highlights.
- Are you bullish or bearish on US growth? That’s something you might need to thing about in both the immediate and medium term if you are trading bond or forex markets. The chart below from Callum Thomas over at Topdown Charts neatly highlights that “nominal GDP growth is a good guide for nominal bond yields. You can read the full post here. But I would add that with growth in other nations faltering this outlook also helps the US dollar as well. Most likely in a very material manner.
Australia
- It’s RBA day today. There is almost zero chance that the bank will move rates today. I will be watching what the governor says in the statement this afternoon and then speech tonight. Will he focus on inflation’s subtle rise as proof the bank is on the right track? Or could he mention the looming credit crunch and house prices falls as a weight on households and consumption going forward? If the RBA is of a mind to change its outlook – however subtly – this is the meeting to do it given the governor's speech tonight and the quarterly SoMP on Friday gives ample room to explain the shift.
- Looking at stocks with only 4 of the last 18 days on the ASX being down days we’ve seen a very solid performance on the local bourse. That run saw the S&P/ASX 200 close at 5,982 yesterday which – after brief foray above it intraday – saw a full round trip to where the last down leg started at 5,883.83. That the banks are powering this when they are in the middle of a Royal Commission Maelstrom is a remarkable testament to their resilience – or at least investor belief in the resilience of their income stream and dividend flows.
- Anyway, its likely to be a bit of a different day today. The SPI is down 17 points and has overnight basically rejected the downtrend line form the recent highs – on a continuation basis given this is a futures-based CFD. You can see that in the chart below. Friday’s low is the support level to watch and then of course we have the quite steep uptrend the SPI has been in recently. 5,906 and then 5,890/96 are the supports. Resistance is 5,984/91.
- To the Aussie dollar now and the risk off tone coupled with the stronger US dollar certainly hurt the Aussie. It’s down in the 0.7520’s as I write which is the lowest levels since last December when the period of US dollar weakness began. And that’s the story really. There are many negatives stacked up against the Aussie right now – interest rate differentials, RBA outlook, domestic growth hiccup, global growth slippage, and commodity prices, among other things. But it’s the US dollar which is the big driver right here and right now.
- It hasn’t even really broken out yet. So if it does then the Aussie will come under acute pressure. That’s especially the case if 0.7475/80 gives way. Then we’ll potentially see the cascade lower to 0.7330, and perhaps into the 71 cent region. Unless things change the chances of a run under 70 cents are growing materially.
Forex
- The US dollar continues to gain although its moves are not mighty ones yet. The fact that Sterling managed to hold the bottom of the range was interesting to me as it suggests there are still plenty of traders keen to respect ranges where they are still evident. But as I highlighted yesterday the weekly charts are suggestive of further gains. Indeed this recent change and the 3% or so rally in the back half of April has started to shift perceptions about the outlook for the US dollar. Indeed so has the wins President Trump is having on the geopolitical stage.
- But rather than show you another of my charts – readers know I see 92.50 in US Dollar Index terms as a key to a bigger surge in the US dollar – I thought I’d share a Bloomy chart which likely reflects how many are viewing the US dollar right now. What you see is the DXY approaching the 200 day moving average which it has been below since mid-2017. A break higher would be a signal of a trend change for many traders.
- Maybe it’s too early for the US dollar to break this or my 92.50 level. Perhaps we need a strong US non-farm payrolls to confirm. Perhaps its EU GDP? But there is also a chance – a strong one in my view – that the FOMC is more hawkish in its statement on Thursday morning my time than the market currently expects.
Commodities
- Am I being too sceptical when I ask if an Israeli prime minster gives a powerpoint presentation in English his target is the global audience and one English speaker in particular? Obviously that’s the US President. And while Netanyahu roiled the oil market I’m not sure his arrow flew straight. Indeed it appears to fresh intelligence Israel has of old data and documents from the Iranians. Indeed Bloomberg reported that Jarrett Blanc, a former deputy lead coordinator and State Department coordinator for Iran nuclear implementation said, ““The information he’s talking about refers to the period that led us up” to the nuclear deal…“we’ve always known they were lying, that’s why we did what we did.” What he said folks, what he said.
- Which is why I called Netanyahu Littlefinger in the introduction. And why in response to a Forexlive Tweet which said, “If the Netanhayu presentation was some kind of coordinated effort with the US, it sure doesn't sound very coordinated. Trump is saying the same things as before” I wrote:
“Game of Thrones:
Macron talks to Rouhani after being at the White House last week.
Netanyahu hits back and ramps up with block buster presentation.
Pres Trump to decide but doesn’t want oil to sky rocket.
Saudis to cover Iranian production of new sanctions imposed?
#Messy” But also straight out of the geopolitical manoeuvring playbook.
- And that folks is where we are. President Trump, and certainly his new NSA John Bolton, appear to want a new deal with Iran, a much harder one. But this is all happening while he is trying to get a lasting peace on the Korean peninsula and get the DPRK to give up its nuclear weapons. So even though Bolton used a Gaddafi analogy on US TV over the weekend – unhelpfully – its likely the US may want to soften this a little more than the Israelis are hoping for. At least for the moment with a bigger fish like a nuclear armed DPRK that seems capable of hitting the US mainland with nukes is still to be dealt with.
- This all means the geopolitical bid is likely to stay in oil until the May 12 deadline for President Trump to make his move. Indeed the Israeli parliament – the But, what’s interesting is that even though both Brent and WTI surged higher they didn’t take out the range tops. Brent does look like a bullish engulfing day though – so we’ll see.
Have a great day's trading.