Originally published by AxiTrader
Welcome to my daily Markets Musings.
Shorter and sweeter today, I have a Sunrise interview in the block between 7 and 7.30am this morning.
Feedback always welcome
Greg
Market Summary (6.23am Wednesday May 2)
US stocks fought back from their lows overnight after being pressured by a big fall in oil, some disappointing earnings, and worries about how hawkish the FOMC may be tomorrow morning (my time) when it releases its statement after this week’s two-day meeting.
Again oil was the big story with a stronger US dollar, comments from BP (LON:BP) CFO that prices were “frothy”, and a wide acceptance that the Israeli revelations the day before weren’t fresh or surprising. But while we saw WTI lose 1.71% to $67.40 and Brent drop 1.95% to $73.25 both are off their lows because the Iran sanctions deal issue has not gone away.
Indeed the Israeli’s said, and the White House appears to have confirmed, that the revelations yesterday were a co-ordinated release. Smoking gun anyone? So the geopolitical bid stays in oil for the moment.
On stocks at the close it was a much better performance than it looked earlier. The S&P 500 rose 0.24% to 2,654. But that was off a low of 2,625. So it was a pretty solid recovery. Likewise the Dow bounce neatly from a low of 23,808 to finish at 23,099 – down 0.27% but still better bid then earlier in the session. The Nasdaq 100 ended at 6,679 up 1.1%.
In Europe it was a positive day with the FTSE up 0.15%, the DAX 0.25% higher while the CAC bounced 0.68%. That meant the SPI 200 preserved yesterday’s solid rally in its, and the physical S&P/ASX 200's, price. Indeed SPI traders have added another 5 points this morning.
Turning to forex markets it was the US dollar once more. UK data again suggested the BoE has the wrong end of the stick and the pound lost more than 1% overnight to sit at 1.3612 this morning. Likewise the euro came under selling pressure down 0.7% to 1,1990 even though the US ISM manufacturing data printed a little weaker than expected. The trouble was it showed building price and supply pressure which puts upward pressure on the Fed to perhaps add an addition 4th hike to rates this year. USD/JPY is also higher, up 0.42% at 109.80.
Of course all of that, and an RBA positive but in no hurry to raise rates, has hit the Aussie dollar. It’s down at 0.7487 after a loss of 0.58%. The kiwi too is down, under 70 cents at 0.6997 while USD/CAD lagged with aa gain of just 0.15% to 1.2855 after BoC governor Poloz said he is becoming more confident that less stimulus is needed for the Canadian economy.
Gold is down and about to break the bottom of the range it seems. It’s at $1304 with a range bottom at $1301 and very important support at $1284. Copper is also lower, it lost another 0.85% to $3.02 overnight.
Looking at the day ahead the FOMC decision at 4am my time tomorrow morning is the big one. But before that we get Asian manufacturing PMI’s including the Caixin in China. European manufacturing PMI’s are also out as is the Euro Area Q! GDP and March unemployment data. Italian GDP data is also out as is thee ADP employment report in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- When does slightly weaker data put more pressure on the fed to increase rates? When it has the break up we saw in the ISM manufacturing PMI last night. While the overall ISM index dropped from 59.3 in March to 57.3 in April it also showed a 1.2 point increase in prices paid to 79.3 – the highest since 2011. Tariffs appear to be hurting on that front and comments such as that they are “very concerning” and that “business planning is at a standstill until they are resolved” is a concern. But the key here is there are rising cost pressures that are likely to bubble to the surface and force the fed’s hand as the course of 2018 progresses.
- Interesting research from a few parts of Morgan Stanley (NYSE:MS) in the past few days which suggests a bear market in stocks is upon us. One theory on why stocks have been unable to rally on the solid earnings is essentially that the boat is fully loaded at the moment. That is retail is not playing, passive needs fund flows which appear absent, and hedge funds are overly concentrated and long anyway. If true then they are dead right – available position limits to take advantage of moves are always important in gauging where a market is at.
- The other Morgan Stanley theory fits with what the Caterpillar (NYSE:CAT) CFO said last week. That is the good news is baked into the cake and earnings dip a little from here. Business Insider reports Mike Wilson, Morgan Stanley’s chief US equity strategist, said “we expect both a deterioration in earnings quality and a peak in organic growth in 2018”. Thus, as a result, “the bear market in valuations has already begun and supports our overall view that the next cyclical bear market in US equities may have already begun, but is being masked by an index price level that has fallen only 12% thanks to the adrenaline shot to EPS from tax”. Deep breath, too long a sentence. Here’s the chart via my Business Insider iPhone App and a screenshot.
Source: Business Insider iPhone App
- Commerce Secretary Wilbur Ross tried to hose down expectations about the results from the US high level trade delegation that he and treasury Secretary Mnuchin are leading. Ross said that he doesn’y know how things will go until they all sit down and have a conversation and he also suggested that if things go poorly the US delegation may leave early. President trump had something to say on the matter. Like North Korea, he tweeted this is an issue which should have been dealt with ages ago.
- And speaking of trade, the Germans want the EU and US to directly negotiate a trade deal with German Economy Minister Peter Altmaier saying he wanted to see an end to the “problematic uncertainty”. Likewise the EU itself said it wanted a permanent stay on the tariffs which were again delayed till June 1 yesterday.
Australia
- I read the RBA governor’s statement yesterday afternoon and was struck by the caution of it. To me it read as a quite dour missive – even with the upgrade of the economic outlook to “a bit above 3% in 2018 and 2019”. But to a large extent I was disabused of this notion by the governor’s speech in Adelaide last night. Specifically, it was the paragraph where he talked about growth which suggested his confidence in the economic outlook and the reality that rates in Australia in governor Lowes view still have a topside bias.
- On growth he said, “at today's meeting, when we measured the pulse of the Australian economy, we assessed it to be stronger than a year ago. Business conditions are around their highest level for many years and the long-awaited pick-up in non-mining business investment is taking place. There has been a large pick-up in infrastructure spending in some states. The number of Australians with jobs has also grown strongly over the past year. The unemployment rate is lower than it was a year ago, although there has been little change for the past six months. Growth in consumer spending has been solid, although it is lower than it was before the financial crisis”. Take note of references to “highest level”, “large pick-up”, “grown strongly”, and “solid”. He highlighted also the notes of caution on wages, debt, and inflation. But this is not a man who sees the Australian economy struggling anytime soon. And given the RBA’s stellar track record over a very long time I will worry a little about housing and the credit crunch, but not a lot.
- So whack off my head and put on a pumpkin – how wrong can a bloke be?. You just can’t kill this ASX with a stick and I was wrong again yesterday as the buyers came driving the cash index all the way to a retest of the downtrend line from this years highs. SPI traders are not knocking too much off the top and are indeed adding 4 points as I write with about half an hour to go before the New York close. There is nothing like dividend yields and franking credits to drive a surge in buying it seems.
- But from here things get interesting as this chart of our cash CFD shows. A break of the line – recalling the McKenna Mantra which is to respect lines and levels unless or until they break – would open a run toward 6,088. But, assuming the line holds a reversal toward 5,987 is on the cards and if that breaks it’s 5,855 (which was a breakout level on the way up).
- The Australian dollar is still under pressure. Sentiment has turned against it and though positive on the economic outlook RBA governor Lowe has made it clear rates aren’t moving anytime soon. My guess is this time next year now at the earliest. That is based on his current settings and projections. But many offshore investors worry about interest rate differentials which will continue to move against the Aussie dollar, they worry about the impact that housing will have on the banks and the economy, and they worry that the global growth pulse may have already passed.
- Throw in a surging US dollar and you have a recipe for a buyers strike and thus further Aussie dollar weakness. AUD/USD is now through the December 2017 low and the May 12017 low of 0.7424 looks to be the next target. That’s interesting because it is also – coincidentally – the 138.2% Fibonacci extension of the last move before thee break overnight. So I’m targeting there if last night’s low at 0.7472 gives way.
Forex
- The US dollar continues to gain ground. Was it that the absence of European traders meant there were few euro bulls around last night or was it simply that this US dollar is starting to get some momentum going now? The US Dollar Index at 92.42 is ono the cusp of a break – on close – which can propel it for the run to 95.20 I would then be targeting. Of course the reality is that even though the ISM in the US dipped a couple of points the price pressures evident and tight labour market suggest both a strong US economy and the need for the Fed to perhaps tighten 3 more times, not two, over the rest of the course of 2018.
- So with the Fed meeting kicking off last night and the decision to be released at 4am tomorrow morning my time the sense is that economic and policy divergence matters again. I’ve been banging on about that for a while now. So I don’t want to jump ,off the US dollar bandwagon just yet. But I do wonder if we are nearing the extent of the first phase of the move. Indeed there has only been one down day for the DXY in the past 10. Sometimes it’s harder to stay in a winner than it is to cut a loser when your stop is hit – actually it’s usually always harder to ride the winners given our monkey brain gets in the way. So I’ll stay a US dollar bull and accept that there is a strong chance of a reversal at some point.
Source: Investing.com
- Sterling continues to fall out of bed. Last night’s manufacturing PMI data was just the latest sign that the economy8 is slipping toward Brexit. Chris Williamson, Chief Business Economist at IHS Markit, summed it up nicely with his tweet subsequent to the release.
Source: Twitter Screenshot
- So this morning GBP/USD is down more than 1% at 1.3617 of a low around 1.3587ish but still pressured. A break of the current level could be catastrophic (if you are a bull) and suggest a run all the way back below 1.31. Alternatively, of course, GBP could build a base here if the US dollar needs a breather.
Commodities
- Frothy. That’s the word the BP CFO used to describe oil markets in an interview with CNBC last night after the companies earnings announcement. Brian Gilvary told SquawkBox Europe that, “Sometimes people forget that actually, it was not that long ago we were down at $28 a barrel … I think oil prices today feel a bit frothy”. On the Iran sanctions deal he said “Geopolitics is now playing into where the price is and so I think you could see an oil price correction quite comfortably”.
- And on Iran, or more correctly Israel’s revelation of the Iranian documents the day before, it does seem to have been coordinated with the White House with Reuters reporting a “senior Israeli official” told them prime minister Netanyahu had informed President trump of the intelligence on March 5 and the latter had agreed the Israeli’s would release it before May 10. Anyone remember the Iraq War’s smoking gun :S. Anyway, as I write, the White House has released a statement saying the US “certainly supported” efforts of Israel’s Netanyahu to release intelligence about Irans Nuclear program. But Europe is pushing back, and most analysts are saying there’s not exactly anything fresh in the intelligence wew didn’t already know.
- The wash up is both Brent and WTI made a full round trip off the previous night’s highs to the lows prior to the announcement of the Israeli press conference. But both are now those lows because what the president does about the deal is still a potential flashpoint. My sense is he’ll renegotiate, or seek to. And I’m not sure that’s enough to drive prices up and through the recent range highs.
- Anyway, to the chart of WTI today and I have a very conventional setup for my system which has me short both WTI and Brent. My target is a move toward $64.70 for WTI in the first instance. A break of $66.60 would suggest the move is on. Otherwise we are still topping – or pausing for a run higher. As may be the case and I’ll be stopped out.
Have a great day's trading.