Originally published by AxiTrader
Market Summary (Tuesday March 27 – 7.35 am AEDT)
Stocks across the globe are higher this morning after good news broke in late Asian trade yesterday that the Chinese are indeed working very hard to accommodate the US Administration.
Whether it’s Premier Li, other officials, or the press, the news is that China is working to and both open up the economy and address the issues raised by the United States around intellectual property. That the Chinese are still railing at the US tariffs threat at the WTO and essentially trying to say que sera sera on what has gone before – and the source of the 301 complaints – is getting less press.
But after the S&P 500 pulled up exactly where it needed to at the 200 day moving average Friday, and given that moving average was also the low in February, it was always a chance that we saw a bounce overnight. Of course it could have gone the other way. But the good news won out and the S&P 500 is 2.7% higher at 2,658. The Dow has climbed 670 points, 2.84%, and the Nasdaq is up 3.8% (Facebook (NASDAQ:FB) bounced back sharply from its lows after the FTC revealed a probe)
That stocks aren’t fussed with the US by the announcement the US will expel 60 Russian “diplomats” in a co-ordinated expulsion with European nations found no traction in US markets. But European stocks closed in the red with the DAX off 0.83%, and the FTSE down 0.5%.
Here at home SPI traders are finally getting into the action in the past 50 minutes and have added 33 points after yesterday’s, not too bad, loss of 30 points. You’d be forgiven for thinking that is still utterly underdone as an outlook for a bounce today.
On bond markets US 10's are at 2.85%, the 2's are at 2.28% and the curve is at 57 points.
On forex markets Pavlov’s US Bears continue to salivate at all news. Stocks are down, sell the dollar, the US is at the heart of the trade war, sell the dollar, stocks are up, sell the dollar, China and the US are actually talking, sell the dollar, Europe’s data pulse has faded, sell the dollar, Halley’s Comet will return in July 2061, sell the dollar.
Okay, I’ve over-egged it a little with the comet. But it seems that everything is a sell the dollar excuse at the moment. Which is exciting because this is just the sort of pessimistic crescendo in which powerful rallies are born. Not yet maybe, but soon.
Looking specifically at currency markets and the sell the dollar theme has seen the US Dollar Index fall to 89.06 for a half a percent loss. The euro has roared 0.8% higher to 1.2451, the pound is 0.7% higher at 1.4225, and USD/JPY is up 0.64% in a rare show of US dollar strength and sits at 105.39 this morning. Of the commodity bloc no prize for guessing which one rallied the hardest. The kiwi is up 0.9% at 0.7298, the Canadian dollar is at 1.2863 in USD/CAD terms for a 0.2% gain while the Aussie had rallied 0.6% to 0.7745.
Elsewhere after a rally in early Asia, to test range tops, crude has dropped back to settle a little lower this morning. WTI is down 0.6% at $65.51 while Brent is down a similar amount at $70.05. Gold is higher up half a percent to $1354 and Goldman Sachs (NYSE:GS) says it is bullish for the first time in ages. Copper was a little lower at 2.98%.
On the day today we get new home sales in Australia and the calendar sites are saying the RBA’s Chris Kent is speaking, but I cant see it on the RBA website. Tonight it’s German import prices, EU economic sentiment and business climate before the Case Shiller house price data and Richmond Fed manufacturing index in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- You hear from me every day so this morning I want to share with you the views on the current maelstrom of Greg Valliere. He’s the Washington based chief global strategist for Horizon Investments. Greg wrote in his daily note overnight:
- We're Not Buying the Hype – Not on China, interest rates, Facebook, or Stormy Daniels…We were adamant late last week that the US and China are in a trade dispute – not a trade "war," as hyped by the media. Sure enough, this morning's Wall Street Journal describes behind-the-scenes talks between the two countries, neither of which wants a "war."
- THE TEMPERATURE IS FALLING ON TRADE, as the US exempts most allies from steel tariffs and the Trump Administration cools the rhetoric. Our guess is that top Wall Street leaders got to Trump, Steve Mnuchin and others late last week, telling administration officials to dial it back. And they have. Trump views the stock market as the ultimate arbiter of his policies, and last week's selloff sent him a message.
- CHINA SEEMS EAGER to negotiate; their initial response to Trump was mild, threatening only $3 billion in new tariffs, a rounding error. We'll be paying particular attention to talks between Mnuchin and China's top economic policymaker, Liu He; the first breakthrough may come on tariffs imposed on US autos….
- The big story for the markets is that we're simply in a trade dispute, not a trade "war," between the US and China. Our odds are 75% that Beijing will grant concessions, with both sides claiming victory after several weeks of negotiations. This will be classic Trump – he has bombastically appealed to his base, and will get something from China after he backs down on radical proposals. The markets should ignore the hype.
- I certainly hope he is right. And at this stage, while President Xi has only just cemented his place as leader for life why wouldn’t he seek to lessen any chances of an escalation just now. I’ll put the Thucydides Trap talk back on the shelf for a while. Hopefully not to be taken down again, but always remembering the lessons of history.
- Just quickly ono the tooing and froing of the China and trade tariff skirmishs.
- The South Koreans and US seem to be close to agreeing a deal with Korean Steel likely to be subject to quotas.
- The Europeans are starting to think about what they need to do to avoid Asian steel getting dumped on the EU.
- Steve Mnuchin said he’s “hopeful” a deal could be reached with China to avoid a trade war. Though he had said on Sunday the Trump Administration is not scared of a trade war. Classic Trump negotiating strategy. And White House trade adviser Navarro also confirmed that US was talking to its Chinese counterparts on trade.
- China has continued to make conciliatory noises, offering to buy more semiconductors from the US rather than South Korea or Taiwan. It also said it is willing to step up communication with Europe on steel.
- Premier Li continued his conciliatory tone from the national parliament saying Monday that China will open its markets to stave off the trade war.
- But China is also railing against the US at the WTO saying the US is “wrecking” the global framework and members need to put the US tariff “beast back in the box”.
- There is one thing I’ve noticed about markets which is really bothering me. That is the impact of headlines and the slant of stories on price action. Behaviourally I’d say this means that traders and investors are confused and uncertain. And readers know that would fit the narrative I have been writing about in 2018. But I fear that perhaps there is as much headline reading algo action as there is human reactions. And that’s got me thinking the bottom half of this note should be a weekly and those of us who actually trade should simply look at the 1 and 4 hour charts, play the price action and forget fundamentals except in the very long terms.
- The expulsion of Russian “intelligence officers”, as Theresa May put it is a big deal even though we are all focussed on the trade war. Russia’s bellicose belligerence seems to know no bounds. We’ve heard in the past 24 hours from the Russian side that it is the powerful forces in the US and UK which are responsible for the nerve agent attack in Britain. It’s a continuation of the deny, deny, deny approach the nation has used from Ukraine on through. Markets aren’t focussed on it though so I won’t bank on about it. But it will make the Middle East more complicated, read Iran, if Russia feels it has to bolster its stocks by opposing the US. That’s a potential flash point for May however when the President might repudiate the Iran nuclear sanctions deal.
Australia
- It is going to be a good day in index terms for the ASX 200 today. Yesterday’s 30 point loss wasn’t terrible in the context of the big falls on Wall street though we did trade below the February lows. That’s actually good news as we can tick that one off our list and get on with it. The US has not yet, but it did bounce off the 200 day moving average – and then some.
- SPI traders have added 33 points to last nights close – BUT let’s target 5,865 in the ASX 200 and 5,835 for the June SPI (CFD) as the levels we are looking to test. That’s the garden variety 38.2% retracement level of the latest selloff. Here’s the SPI.
- The Aussie dollar is lagging the kiwi and the euro a little in this US dollar sell off but it has still down well with a gain of 0.65% as risk appetite seems to be a little stronger this morning. There are still warnings and vulnerabilities for the Aussie and one thing I should have written elsewhere in this piece (I’m writing this last) is that we should ‘t make too much of any one or two day’s moves. That’s something I forget some mornings when I am writing this not. One tends to appear to extrapolate to infinity what is really just short term noise – volatility is volatility after all. Both up and down.
- Anyway back to the Aussie and the fall in copper, continuing pressure on iron ore, and interest rate differentials are still handbrakes on the Aussie. But the rally in stocks when combined with the weaker US dollar has been a salve for the bulls. What was an ugly close Friday night has morphed into a solid up day Monday. It’s still very noisy and a break of last week’s high of 0.7784 would be a clear signal the Aussie has regained its footing. A fall below last week’s low of 0.7671 would be necessary for the bears to get the upper hand once more.
Forex
- There is a clear bias against the US dollar again. It can’t take a trick as I’ve highlighted in the introduction. We are seeing this rotating series of reasons folks are using to justify euro strength and US dollar weakness. It was the economic pickup, and the 2 year forward look at rates. But now that both those indicators suggest a weaker euro the bulls have moved onto something else. Like the theory that the US dollar should be sold because Trump is stating a trade war. Oh, that’s receding, buy euro anyway.
- So as Keith McCullogh said in a Seeking Alpha interview with Daniel Lacalle, the biggest risk in macro at the moment is that “the dollar is the new VIX. In other words, if thee dollar were to go up meaningfully here I think that would catch a lot of investors offsides”. Yes it would. Lacalle said his biggest risk was the synchronised growth theory which is breaking down. Yes it is as I’ve written endlessly lately. But don’t tell the Pavlovian US dollar bears who salivate at every piece of news as a reason to sell dollars.
- Indeed, check out this chart of the copper/gold ratio versus US 10’s. Is this the McKenna/Lacalle idea that the synchronised global growth theme is breaking down – or as I have put it recently, the global growth pulse has passed. Or instead is something different this time? It might be. This is important for currency markets. Eventually anyway when the headlines reflect it and the algos take note.
- Back to forex for a chart of the day is the Kiwi and yesterday’s announcement of the agreement between incoming RBNZ governor Adrian Orr and the government which included employment in his mandate was widely viewed as not overly effecting policy. So after a false break out of the recent range last week powered a very strong rally back up toward this little resistance line. Will it be like the Pound and Euro and run through that line for another powerful rally? Kiwi is within a 0.7150 – 0.7450 range at the moment so there is nothing to stop a further run if that line breaks. It’s at 0.7316 this morning.
Commodities
- Oil caught a bid in early Asia yesterday after news broke that the Saudi’s had come under missile attack and that Israel had turned on Iron Dome. That saw both WTI and Brent have a run at range tops but fail to break them. That reinforces these levels for now and Brent – chart below – is looking a little stretched at the extremes of the Bollinger bands. So a pullback toward $68.00/20 might be on the cards.
Have a great day's trading.