Originally published by AxiTrader
Market Summary (7.36am)
US GDP was revised a little lower overnight with a print of 2.5% as imports and inventories subtracted from growth but domestic demand remains strong and at multi-year highs.
That, along with continued weakness in EU inflation and a material problem with Brexit negotiations, has seen the US dollar find a little more strength and push a little higher again overnight against the euro and sterling in particular. But despite stocks not being too spooked and comments from BoJ governor Kuroda that accommodation needs to stay in place the Yen has caught a bid.
Gold's resisted the US dollar's advances and US 10's are trading 2.87% so perhaps there is a little bit of rising tensions and risk aversion under the surface. Something to watch.
So, with 25 minutes or so of trade to go in New York the S&P 500 is down 0.38% (45 minutes ago it was up 0.37%) and it’s trading 2,733. Not looking healthy technically. The Dow is down 0.8% and the Nasdaq 100 is flat having lost three quarters of a a percent in the past 30 minutes itself. .
European stocks were lower overnight and the SPI 200 has slipped 30 points after yesterday’s big 41 point fall on the ASX 200. Gold is flat but copper is down another 1.4% at $3.11 and crude has lost more than 2% in WTI and Brent terms to $61.70 and $64.78 respectively (NB Brent is contract 2 as the front contract expires Feb 28).
So it might be a rough day for the ASX today. At least we’ll see a test of recent resilience anyway.
And speaking of the day ahead, being the first of the month we kick off with a raft of PMI data. After yesterday’s disappointing NBS manufacturing PMI for China traders will be watching the Caixin version of the release. Of course Korean trade data and the flow of global PMI’s – including the AiGroup version today – will also be important. Tonight in the US its PCE data that will garner the most interest along with the release of ISM manufacturing.
The question for me, one I think many others are also asking, is whether we have passed peak global growth optimism on the growth outlook. Watching the Citibank Economic surprise indexes for many nations it certainly seems that way.
And of course we have CapEx here in Australia out today.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US GDP was slightly downgraded on the second read overnight printing 2.5% from the previously reported 2.6% and Q3’s 3.2% pace. As you can see in the graphic below – which I found via my iPhone Reuters app btw - that investment was solid but there was a big drag from imports. That put a massive handbrake on growth in the quarter – recall the GDP equation is GDP = C + I + G + (X-M) – with the exports and imports the bit that pulled growth back. But if you are wondering why bonds are much lower and the US dollar much weaker it is because domestic demand grew at the unrevised rate of 4.6%. That’s its fastest pace in three years – stonkingly strong.
- PCE prices were a little lower than originally thought with a revision to headline from 2.8% to 2.7% but the core component stayed at 1.9%. More interestingly though the Chicago PMI fell to 61.9 from 65.7 last missing the forecast for February of 64.2 by the length of the Flemington straight. Pending home sales also missed falling 4.7% on the month. Tonight’s PCE price index is going to be closely watched.
- Data in Europe last night reinforced the ECB might be right to be cautious with yoy Euro Area inflation dipping from 1.3% in January to a “flash” estimate for February of 1.2%. Core was steady at 1%.
- The flattening yield curve means recession is coming is bullocks if this relationship between consumer confidence and recessions holds. I was derisive of the chat about curve flattening and recession a few months back when folks were wringing their hands and looking for the dark cloud on an otherwise bright blue sky. And this chart from RBC Capital Markets via a Business Insider article yesterday makes my point. The analysts say, “When confidence hit these levels in the late 90s the recession was four years away and in the mid 60s it was at least three years away”. Indeed!!!!! Recessions are grey by the way.
- Brexit is going to get really ugly or it's not going to happen. I say that because two things are becoming increasingly clear. First, the UK government is making a mess of the negotiations, thought they had the whip hand. They want to have their cake and eat it too. Second, the EU clearly does not want the UK to leave, is making it as difficult as possible for it to do so, and has just delivered a poison pill to British PM Theresa May that it knows she can not swallow.
- That pill arrived overnight via a detailed account from the EU side on what they expect from the Brexit process. The key message was, do your business or get off the pot. But the poison pill was the EU saying that Northern Ireland had to stay inside the customs union to avoid a hard border with Ireland. May told the Commons, “no UK prime minister could ever agree to it” and said she would make that “crystal clear” to EC President Jean-Claude Junker. I took some flak last year for highlighting Ireland as a sticking point but it’s clear the Irish are not going to stand for a hard border with PM Varadkar saying that it’s “not ok” for Brexiters “to just say no now”. He added that the preferred option was “that we have a very close new relationship between the UK and the EU that is so close that it does not require a border”.
- Sterling is down 130 points against the US dollar falling from above 1.39 to 1.3779 as I write. That’s a loss of around 0.93% while the pound has lost just 0.84% against the euro and is trading at 0.8857. I was 30/40% for a hard Brexit on the back of failure to do a deal before last night. I probably have to shift that a little now to maybe 33/43%. Still not 50:50 but now a little less than 60:40 in favour of a deal getting done.
- Folks we need to talk about the Thucydides Trap: That’s where the rise of a country challenges the might and power (nice name for a race horse) of the established leading power. It’s called the Thucydides Trap in homage to Thucydides' history of the Peloponnesian War, which chronicles the rise of Athens and the challenge to the then dominant Sparta. It’s a cracking book, one I was lucky enough to study for 3 unit Ancient History back in 1986. The “Trap” bit is all about how more often than not throughout time the world has seen the rise of a new power challenge the established power lead to an inevitable war. One major exception was the US and Britain. But I digress, I’m talking about China and the United States. Especially in light of President Xi’s confirmation this week of what we all guessed back at the 19th party congress when he did not name a successor. He’s keen on a long turn and China is not turning into the United States.
- That’s going to change how western governments interact with China and its companies. Geely might be the last big Chinese firm to be able to buy unfettered into iconic companies as it did with Germany’s Daimler (DE:DAIGn) this week. Already the Germans are looking at the rules around such purchases Reuters reported last night. And surely the Australian government would now veto the sale of Darwin Harbour, and the Sri Lankans might think a bit harder about who they take money from and whether they can service it or not.
- Anyway, it’s not important for my Aussie position, my thoughts on the S&P 500, or US bonds right now. But it is important for the trends that we have seen in markets, economics, and geopolitics this century. And that in turn will impact on investment returns and opportunities. Benign no more is likely how folks increasingly start to see the rise of China. To that end I offer you two more articles that I recommend reading. This one from the NY Times titled, As Xi tightens his grip on China, US sees conflict ahead. And this one from Reuters titled What keeping Xi in power means for China – and the world.
- Oh, and while I’m on geopolitics. Russian Foreign Minister Sergei Lavrov last night accused the US of arming and training Europeans with tactical nuclear weapons. While elsewhere Air Force Gen. John Hyten, the commander of STRATCOM, said Russia is the only existential threat to the US right now, adding North Korea is the “most dangerous near-term threat" and China “is the adversary that is moving the fastest”. The global economy is doing great but gee whiz geopolitics is unsettled.
- Even after February’s interesting month for global stocks it seems the bulls still have it. In the monthly polls of strategists and money managers Reuters reports the former are still bullish with an average expectation the S&P 500 will end the year at 2,900 (the median expectations is actually 3,000!!!) while the latter only adjusted down their equity exposure by 1% to 49%.
Australia
- Earnings season has ended here in Australia and the balance has been that things looked pretty good. We saw more upgrades than downgrades which went a long way to supporting the market overall in the past week when the ASX 200 had a goodly chance of sliding. But that is something it did in late trade yesterday ending down 41 points at 6016. Month-end square up? I’m not sure. But the index had been doing relatively better than expected for most of the day but started to slip during my time on Sky Bus with Henry Jennings and Ingrid Willinge at lunchtime yesterday.
- Price action wise that’s actually a really ugly down candle to follow the previous day’s inverted hammer. That leaves the physical ASX 200 just above the uptrend line from the recent lows which comes in at 6,010 this morning. That’s the first level to watch and then support is 5,994 which is the old resistance level on the way up.
- Looking more closely at the SPI 200 and we can see it is already busted right through the uptrend channel in the past 24 hours. The break is looking ugly for the SPI. It’s at 5,964 band could fall another 80 points toward the 38.2% retracement level of the recent move.
Forex
- The US dollar is breaking higher as it ticks off the milestones in what is becoming a relative solid break of resistance. So far it has taken out the little trendline I’ve highlighted recently and trading at 90.593 this morning it is now above the recent high I also mentioned yesterday. (1 is the next important level in US Dollar Index terms but I am now more confident the 91.70 level I highlighted yesterday is where we are headed.
- And euro is now starting to break down and through 1.22. I retain my target of a move toward 1.2120is, perhaps even as low as 1.1980/1.2220.
Commodities
- Oil is lower again after the US dollar marched a little higher and as US inventories and production beat expectations. Crude stocks were up 3.019 million barrels which beat expectations of a rise of 2.4 million. But it seems to have been the big build in gasoline stocks which caused a fair chunk of the downdraft in prices. Expected to fall 0.19 million barrels gasoline stocks actually rose 2.483 million barrels the EIA said in its report overnight.
- Part of the falls over the past couple of days though is also this cycle traders have got themselves into where whenever the IEA is bullish on US production recently crude ends up down for a few days before OPEC inevitably sends out the troops to jawbone it up again. And on that front, a Reuters survey on Wednesday showed OPEC maintained its supply cuts in February, dropping output to 32.28 million bpd, lowest since April of last year.
- So it seems I abandoned my bearish bias too early.
Have a great day's trading.