Originally published by AxiTrader
Market Summary (7.40am Monday May 7)
Unemployment in the US fell to the lowest level in more than 17 years with a print of 3.9%, according to Friday’s jobs report. That’s probably the more important stat for the Fed than the fact that jobs growth of 164,000 and hourly earnings of 0.1% for the month were a little underwhelming.
For markets though the data had a little bit of Goldilocks about it. Neither too hot or too cold stocks were able to rise, bond rates were fairly quiet, and the US dollar remained strong and – crucially – closed the week above important resistance at 92.56 in US Dollar Index terms.
And it’s this recovery in the US dollar – one based on the data flow in the US against the rest of the world – that is catching many (but not readers of this note) by surprise and causing ructions across emerging markets. It’s also now worrying many that a continuance of same could, if accompanied by rising rates in the US, destabilise global markets more broadly.
We’ll see – but that is the emerging fear.
In terms of price action the US dollar gave back a little of it’s weekly move late Friday which allowed euro, sterling and yen to close off their lows. As we open the week in Asia Monday EUR/USD sits at 1.1956, the pound is at 1.3532, and the yen is at 109.16. The Aussie and kiwi managed to continue to consolidate from their lows a day or so earlier and open the week at 0.7537 and 0.7016 respectively. Both look like they may see further topside probes. In the case of the Aussie that would be towards 0.7580/0.7600.
I’ll get to stocks in a moment because for me the big story this week is going to be about oil and the Iran Nuclear deal. We know President Trump doesn’t like it. We know the Israelis and Saudis are manoeuvring for him to pull out. Indeed Israeli press says the IDF believes Iran is readying a strike from Syria. Over the weekend we saw some interesting signals from Iran though, with President Rouhani saying his nation is ready for the US withdrawal from the deal but that would be a mistake. At the same time the Iranian oil minister said Iran favours oil in the $60-65 region as more sustainable.
This week is huge geopolitically because of the May 12 deadline for President Trump on this Iranian deal. All in all the bets are – based on the price action in oil – that President Trump will withdraw from the deal. That helped both WTI and Brent rally more than 1% Friday to close at $69.72 and $74.87 respectively. In the case of WTI that’s a new high for this run.
Back to stocks then and after falling 35 points in trade Friday the ASX 200 looks set for a solid day with SPI traders having added 38 points by the close Saturday. That was on the back of a solid run higher in US stocks on a feeling that the jobs data, especially wages, didn’t put too much pressure on the Fed or – more particularly US 10’s which finished at 2.94% and 2’s which ended at 2.50%. Fed comments from Williams and Bostic that they aren’t overly worried about inflation above 2% certainly reinforces my take on what reference to the Fed’s “symmetric 2 percent objective over the medium term” meant in last week’s FOMC statement.
So at the close the S&P 500 was up 1.28% at 2,663. That still left the market down a little on the week, but for the second week in a row that was well off the lows. The Dow rose 1.39% to 24,262 and the Nasdaq 100 was 1.89% higher at $6,769. It was a good day in Europe as well with the DAX up more than 1% to 12,819 and the FTSE up 0.86% to 7,567.
In other markets, gold respected its range lows and opens the week today at $1314. This Iranian issue could put a bid into gold, especially given the belligerent posturing of the Iranians and Israelis at the moment. Copper is at $3.0795, while iron ore was a little lower.
Bitcoin is still trying to break out but can’t yet do it. It’s at $9,511 this morning.
On the day ahead the NAB business survey is out today (I know Monday?) as is ANZ job ads and the AiGroup's performance of construction index. Otherwise its fairly quiet with a few central bank speeches tonight from the ECB, Fed, and BoC
Here's What I Picked Up (with a little more detail and a few charts)
International
- Friday’s non-farm payrolls, when coupled with Fed comments, suggests a fairly benign environment for stocks. One which should enable them to break higher in the US. That is if the cash is there to enter the market and if traders have the gumption to break the range and take the market up and through the top of the current wedge.
- Of course, the big surprise from this stellar earnings season is that the market hasn’t broken higher. Certainly the earnings have been their but it seems the narrative was moulded by the comments of the Caterpillar (NYSE:CAT) CFO who said Q1 was likely the highwater mark. That he said that is not remarkable. That it resonated with the market is the important point.
- But the price action is wedging itself to some sort of break out. As I have oft written in the past couple of months there is little point getting too bearish unless or until the February and March lows give way. But we have seen consistently lower highs as well. So if a rally is on the horizon the first test would be to break the inner down trend at 2,679, take out last week’s high at 2,683 (remember these are in futures based CFD terms) and then run toward 2,720/30 where the outer wedge line sits.
- To that data and those comments now. Friday’s NFP rose a lower than expected 164,000 but that was mitigated by upward revisions to the previous two months of 30,000 which kind of gets us back to the 195,000 expected. Unemployment fell to 3.9% and looks set to track lower if the participation rate gains start to stall. But it was the rise in average hourly earnings of just 0.1% which saw the market take what was otherwise a solid jobs report – especially at this stage in the US expansion – in its stride. Rising just 0.1% for a 2.6% year on year rate the earnings data only undershoot by 0.1% but it serves to highlight that overall wages growth acceleration has stepped up the gear that the January data had previously suggested.
- I reckon the Fed must see a real uplift in inflation coming. I say that because the mention of symmetry in the statement last week and then comments from Williams, Bostic, and Dudley that they are not overly worried by inflation above 2% are clearly meant to get ahead of the curve and try to assuage the fears of bond traders which are likely to arise if this uptick in inflation does occur. On Friday Esther George said the US had reached its goals on full employment and price stability for the moment. That’s pretty hawkish in and of itself but those comments were tempered by Bill Dudley saying “I’ve said it many times: being a little above 2 percent after being below 2 percent for many, many years is not a problem”. Likewise, Dudley’s replacement at the NY Fed current San Fran Fed president John Williams said, “I am personally comfortable with the fact that inflation may overshoot that 2 percent for a while,” adding that the reference to “symmetric” was “a signal to say that inflation will sometimes be above, sometimes below, but on average at 2 percent”. But I think comments from Boston Fed governor Bostic show a real insight into the Powell Fed, one that highlights it is going to be truly data dependant. Bostic said he’s in the three hike camp for 2018 but that “I’m open to going either direction, going back to two (rate hikes) or going to four, depending on what the data show”. Data flow folks, data flow!
- Just quickly on trade, tariffs, and geopolitics. The North Koreans are trying to write their own narrative saying over the weekend they are not responding to US threats. That seems to have been a response to a comment that President Trump made in a stump speech on Friday saying that he’s got North Korea to the table because he was strong with them. That might help inform his approach to the Iranian nuclear deal which he could exit as soon as this week given the May 12 deadline.
- On the China tariff and trade issue the US delegation is back in the US after what appear to be robust discussions. And after the US gave China a demand for a reduction in the deficit of $200 billion. That’s something that is almost impossible to deliver anytime soon so we’ll see how things play out. But last week’s meeting may not have been the Glasnost we’d hoped for. Something to watch.
Australia
- The ASX had a tough day Friday as traders back off from the 6,100/6,150 zone that has been the range top earlier this year. SPI traders are betting that we run higher today though having bounced 60 points from the low of 6,032 to close at 6,092 on Saturday morning. The question now is whether the US surge kicks on and whether our market kicks higher today. There is a strong chance it will. 6,113 is the high in the SPI from early January. Friday’s candlestick on the ASX200 however was an interesting and ominous one. So it will be interesting to see just how things play out. Frankly, I’m not sure but I’ll go with the price action.
- The Australian dollar has consolidated reasonably well at the back end of last week. No doubt that was as a result of the data improvement that you can see in the CESI for Australia in the table below which improved to -8.2 as at Friday from -30.7 the week before. Looking ahead the budget is a reasonable chance as a positive for the AUD/USD. It’s a document that usually doesn’t impact markets that much but it is likely to reflect a positive backdrop for the economy and the governments finances. But before we get that tomorrow night the NAB business survey will be out. And it should be solid once more. Price action wise the Aussie looks like it is building a base and we might see a decent recovery toward 76 cents, maybe higher in the days ahead,
Forex
- The US dollar is doing better at the moment, that much is clear. But one very big reason for that recent resurgence – which might only just be getting started – is the outperformance of the US economy. It’s a theme I’ve been on for months now and it is a theme that will continue to inform my views on currencies and other markets. Friday’s non-farms was a little mixed as I’ve noted above. But the key for the moment is that save for the US and China data is undershooting expectations in other jurisdictions. In the case of Europe, the UK, and Canada the CESI’s are deeply negative. No wonder the US dollar is on the march.
- Milan will do his usual CFTC positioning report, but I thought it worth noting that as at last Tuesday at least CFTC data released Friday reveals the big speculators are still net long euro, GBP and NZD. That’s interesting in terms of positions which may yet still need to be unwound. It’s not a guarantee of further collapse. But it is a weight on any rally.
- So where does that combination of economics and positioning leave us? To me the answer is that it leaves the the euro, pound, and NZD still a little vulnerable to a US dollar short squeeze and thus should continue to underpin the US dollar overall. At most risk clearly is the euro and increasingly a number of strategists are piling in to call the euro lower. That gives some risk of a short term bounce in the euro for that second leg of the move lower which is the usually short term recovery before the big third leg down. If 1.19 gives way that outlook would be wrong. But as I highlighted last week the chances of a consolidation around here before the move toward 1.1700/20 are high.
Commodities
- Oil could be $5 higher by the end of the week, or it could be $5 to $10 lower. It all depends on what President Trump decides to do about the Iran nuclear deal. At the moment we have much posturing with last week’s PowerPoint presentation from Israeli PM Netanya Haaretz – an Israeli news site – says that Iran is readying a missile attack on Israel from Syria in retaliation for last month’s Israeli missile strike on Iran’s T4 base in Syria. There is much going on both sides. Israel’s PM Netanyahu has also referenced Europe’s appeasement of Hitler and said best to confront Iran sooner rather than later. He’s playing all the cards he's got. Iran is also aggressively posturing as well, should the US President withdraw from the deal. We’ve also got other issues like French oil giant Total (NYSE:TOT) losing access to investment in Iran to Chinese oil companies, things like the price of gas at the pump in the US, the Iranians signalling they're in favour of lower oil prices (a signal me thinks), and of course the politics of the hawks on Trump’s team and what they are aiming for with and in Iran. Indeed at a speech to an Iranian American audience over the weekend Trump's lawyer and former NY Mayor, Rudi Guiliani, intimated that given the hawks in the cabinet, President Trump had resolved to exit the agreement.
- As it stands that seems the most likely scenario. Or at least that’s what the price action suggests. Where that leads the Middle East only time will tell. But it doesn’t feel like it’s heading in a good direction. Which is why oil is higher. WTI at $75 in this environment is not out of the question. Indeed on the weekly charts that’s the suggestion of a target.
Have a great day's trading.