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Relax And Move Along

Published 06/03/2018, 09:39 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Market Summary (7.26 am)

Nothing to see here folks, move along please.

That’s the apparent attitude of traders over the course of the New York trading day where stocks entered trade under pressure but have traded nicely higher since with the S&P 500, Dow, and Nasdaq 100 all up 1.2%, 1.5%, and 1.2% respectively. Europe too, with the exception of course of Italy coming to terms with a new fractious government formation process, had a better day with the DAX up 1.49%, the CAC up 0.6% while the FTSE was 0.65% higher. Stocks in Milan didn’t do too badly all things considered falling just 0.4% in FTSE MIB terms.

The result of the above is that SPI traders have had a bit of a celebration overnight adding 59 points to yesterday’s 41 point loss and close below 5,900 at 5,895.

Proof that markets agree with Ray Dalio – see below – that the initial reaction may have been similar to last years threats from the DPRK which came to nothing can be seen in the steady upward trajectory once more of US bonds. The 10-year Treasury is back up at 2.89%, the 2-year at 2.25% and the curve is at 64 points.

On forex markets, the US dollar is a smidge higher in US Dollar Index terms on the back of a bounce in USD/JPY back above 106. The euro is largely unchanged even with the Italian governmental uncertainty – its at 1.2325. Sterling is higher on positive Brexit hopes but in the past hour we have heard from the Irish Prime Minister and “sources” suggesting agreement is still some way off. But the pound is at 1.3834 regardless.

In perhaps a sign that macro traders aren’t necessarily convinced that the stock market rally has legs the commodity bloc is under a little pressure. The kiwi is down 0.3% to 0.7222, the Aussie has made no headway and is at 0.7763, and the Canadian dollar has been pole-axed and is up near 1.30 as traders fret the last thing the economy needs is tariffs or the collapse of NAFTA.

On commodity markets themselves, copper is up a smidge at $3.1250, gold has dipped back to $1318, iron ore was lower by 1 to 2% depending on which contract you look at. Oil was higher however as the prospects for increased demand and a little bit of jawboning at the CERAWeek conference helped. WTI is up 2% at $62.45 while Brent is up 1.71% at $65.47.

On the day today the big event here in Australia is the release of the RBA governor’s statement to accompany what is widely expected as a decision to leave rates on hold. Before that though we also get retail sales for January and the Q4 current account and government spending data which feeds into tomorrow’s Q4 GDP release here in Australia.

Globally it is pretty quiet with New York Fed president Bill Dudley giving a speech around 11.30pm my time, Canada’s Ivey PMI out, and then at 5.15am tomorrow morning BoE chief economist Andrew Haldane will be speaking.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • I’m sure you are across all the "he said, she said" stuff on Trump’s tariffs and potential retaliation. So I’ll leave off on that specifically for this morning. The key thing to note is the President doesn’t seem to want to back down yet, China doesn’t want a trade war, but will prosecute one if necessary and the EU and other allies are up in arms as they count the cost on their own industry and economies. Need I say that this suggests the president might actually have a point? No I shouldn’t say that, how very heterodox of me.
  • Amos Tversky, one of the fathers of behavioural finance, is said to have quipped that pessimists lose twice. Once when they worry and then again when their pessimism is proved right. So you’re better off to be an optimist. I’m with Amos. And over the years I have been accused – especially when it comes to the Australian economy – of being Panglossian. But it’s a much more comfortable approach to be optimistic. And it puts you in the right frame of mind to make the best of opportunities as they arise. And it seems clear this morning that the optimists are in the ascendancy in US and global markets.
  • But here’s the question of the day. Are stocks and bond rates higher, the US dollar back above 90 because traders are betting President Trump will back down or because they are concluding the chat about trade wars and their implications are largely overcooked in a largely service based developed world economy? My sense is that it is the former. That traders are betting Trump will back down or be restrained by Congress. But this is not something that is likely to be settled in the next day or so. Behaviourally once a path is opened, once folks start to contemplate outcomes – on both sides of this argument – then we are half way there.
  • But it’s my sense that the gravitas and success of Bridgewater founder Ray Dalio writing in Linkedin that the market's reactions to the announcement of the Tariffs is “reminiscent of the markets’ first reactions to the possibility of a military war with North Korea—i.e., the seemingly aggressive posture of Donald Trump conjures up pictures of war that are very scary, so the markets react, but that doesn’t mean that such a war is likely (at least in the near term),” was a salve for many fears. Dalio explained the differing approach to negotiations of Americans and Chinese – confrontational versus harmony – and said that “good deals are to be had for both countries, while a trade war has the risk of tit-for-tat escalations that could have very harmful trade and capital flow implications for both countries and for the world”.

Image
Source: Twitter Screenshot (read from the bottom)

  • Dalio went on to say, “I wouldn’t expect it to amount to much anytime soon. If on the other hand we see an escalating series of tit for tats, then we should worry”. And that’s the key point even for an optimist like me. It’s easy to see the President’s posture as a negotiating tactic for NAFTA – which he again railed against last night on Twitter as you can see above – or other deals. But his tweets yesterday, and his comment – after House Speaker Paul Ryan signaled he didn’t support the move – that “we’re not backing down” means he’s likely to keep pushing till he gets what he sees as a fairer deal for the United States. But to get back where I started. Even though I am generally optimistic, one days rally in markets does not mean the uncertainty I believe has risen materially has suddenly washed away. But, the issues I have raised are medium terms issues in a daily note. So lets not get our timeframes mixed up.
  • Global PMI’s are still strong and in fact a global composite PMI of manufacturing and services calculated by JP Morgan and Markit rose to a 41 month high in February of 54.8 from the previous month’s 54.6. In a press release HIS Markit said, “Almost all of the nations covered registered an increase in economic output, the exception being a mild contraction in India. The euro area remained a bright spot, despite seeing its rate of expansion dip to a four-month low. The US saw a marked growth acceleration, while rates of expansion also improved in the UK, Brazil, Russia and Australia. Mild growth slowdowns were observed in China and Japan”. It also said job growth across the surveyed area matched 10-year highs. This is the global backdrop that we face with the tariffs. In many ways you could argue the argument couldn’t have come at a better time. The global economy should be resilient, so stocks are not misplaced in their optimism on that front.

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Source: IHS Markit

  • Ahem, Amazon (NASDAQ:AMZN) is looking at setting up cheque accounts. Banking disruption next?

Australia

  • Boing. The S&P/ASX 200 had a shocker yesterday but it’s likely to be back with a vengeance today if the SPI traders are right. They have added around 50 points to yesterday afternoon’s close and the SPI is actually around 76 points of the low of the past 24 hours. That’s a very nice bounce and one the local market is likely to be able to sustain as long as the US markets hold their own gains into the close.
  • But volatility beget volatility and upside vol like we are seeing here and offshore is still volatility. So it increases the chance of being was in and out of the money quicker than traders have become used to over the past 18 months or so. But a bullish outside day – as you can see on the chart below – is a very bullish candle and should set up a very positive day ahead.

Chart

Forex

  • I can’t really draw any firm conclusions about the US dollar or other currencies really after the opening days trade for the week. Certainly there is a chance that the Japanese yen has bottomed for the moment. The 4-hour charts certainly suggest that and the less defensive posture in stock and bond markets give support to that technical outlook. Of course that is also why the USD/JPY was able to rally so there is a little bit of chicken and egg in that assertion. 106.70/107.30 look like the key levels to watch topside with a break of this zone signaling a bigger move higher.

Chart

Commodities

  • I probably should have guessed, because it happened last year too, that OPEC and others would use the CERAWeek conference as a chance to jawbone prices. And so it is this morning that we have seen a focus on the moribund state of Venezuelan oil production and the issues that poses for supply, and we’ve also heard comments that OPEC is going to stay the course. Suhail Mohamed Al Mazrouei, the United Arab Emirates oil minister and OPEC’s current president said “we feel there are still market overhang”. But he added, “there are no talks about (extending cuts into 2019) at this stage”.
  • And while the IEA also again highlighted that US shale oil is on a tear it did say demand will grow 1.2% per year for the next 5 years and that productive capacity would fail to keep up. Indeed the IEA said, “One thing hasn’t changed over the past year ... Upstream investment shows little sign of recovering from its plunge in 2015-2016, which raises concerns about whether adequate supply will be available to offset natural field declines and meet robust demand growth after 2020”.
  • No surprise then that WTI and Brent are both higher by 2.2% and 1.97% respectively. Both crudes are now mapping out a little wedge formation a break of which would signal the next leg of this move. Frankly though, I’d need to see the highs and lows of the past few week’s break to get excited one way of the other.

Chart

Have a great day's trading.

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