Originally published by AxiTrader
Market Summary
The Macron trade never really appeared to kick the week off. Sure Euro traded above 1.10 but other than that markets just went above their business.
Stocks in Europe were lower with the CAC 40 in Paris actually down 0.9%. IN the US we saw a new high for the S&P 500 of 2,401.36 then it pulled back into the red but a late flurry saw it make a new closing high at 2399.38. The Dow Jones Industrial Average is up 5 points to 21,012 and the Nasdaq 100 is up 0.03% to 6102 as I write.
The washup is that after a disappointing day yesterday for local stocks SPI traders have marked prices up 6 points.
On forex markets the Aussie is down again (0.7383, -0.53%) with Chinese trade data and copper’s fall reinforcing concerns about the state of the Chinese economy. The euro couldn’t sustain above LT trendline resistance and is back at 1.0930 this morning. The dollar yen on the other hand has taken out resistance and is at 113.10. The Canadian dollar's strength reversed and the Mexican peso lost substantial ground.
On commodities gold hasn’t fallen much at $1226 but its strength was derailed, perhaps by the lift in US rates which sees the 10’s at 2.38% with the 2’s at 1.33%. Copper fell again – also hit by China – and is down 1.4% to 2.48. Oil is up 0.4% with WTI at $46.41 as OPEC floats the idea of production cuts to the end of time – okay just 9 months instead of 6.
On the day Australia’s budget is a big event. Especially for the banks with a new inquiry announced yesterday and reports that the big banks will be slugged with a new tax on their institutional lending. But given my thesis on the dichotomy between consumers and business that MAY emerge in the Australian economy I’ll be watching retail sales and their break up closely.
Offshore it’s German trade and the US NFIB survey which are the highlight for me.
Here's What I Picked Up - in a little more detail
International
- Lots of chat about the CBOE Volatility Index falling to the lowest levels since 1993. It’s at 9.78 now. But it is worth noting that 30 day historical volatility is 6.32. So what would we expect? The VIX has to come down if the actual level of vol is low. 90 day vol according to my Reuters is 6.91. So vol is low folks and the VIX is reacting to that. By the way when viewed this way you can see that the VIX is useless as a fear guage – it’s a coincident indicator at best. But it has zero predictive power. The spread between the VIX and historic volatility – that might be a different story. But the VIX, useless for prediction.
- From the FT
- And here is something I missed entirely on US stocks. Bloomberg reports retail investors are pulling money out of the markets at these levels. Richard Richtmyer writing on Saturday said “Appetite for U.S. equities evaporated even as prices inched higher, with price gains culminating in a Friday afternoon advance that left the benchmark 3 points above its March 1 close. Unimpressed, investors yanked more money from the biggest exchange-traded fund tracking the measure than any time since the presidential election”. Here’s the chart – interesting!
- Chinese trade yesterday was disappointing with the growth of imports (18.6% yoy) and exports (14.3% yoy) slowing sharply. That’s both against expectations but also from the previous month. The data reinforced notions that with the capital account and reserves under control Chinese authorities are free to rein in the speculative forces and make the transition toward services free from worries about hot money moving in and out of China.
- That’s a positive for the Chinese economic transition. But it worries some that the economy could slow more sharply that they expected. And for Australia it’s worth noting iron ore imports dipped back to October 2016 levels and copper imports fell 30% last month.
- German factory orders were up 1% in March data relewased last night showed. That takes the gains to 2.4% year on year. It’s a deceleration from last month but the March outcome was slightly better than expected. I watch China as a lead indicator here for this and German trade. So we might be at an inflexion point.
Australia
- Before I get to the underwhelming performance of the ASX yesterday and it’s inability to get back above the trendline it broke through on Friday I want to talk about the NAB’s business survey. While business conditions stayed elevated and healthy it was the bounce to 13 in confidence that really caught my eye. For some time now there has been a gap between conditions and confidence which no doubt reflected Business’ uncertainty about whether or not the good times would persist. But the fact confidence is now back near conditions tells me business is indeed happy with both the current economic settings and the outlook.
- Equally impressive is the strength of the employment sub index. Like the RBA I’ve been a bit concerned about the employment outlook. But a print of 8 is an incredible strong result. NAB chief economist NAB said in a astatement accompanying the release of the survey that it “points to an ongoing improvement in employment conditions, which is a trend that is critical to the likely path of the Reserve Bank of Australia’s cash rate”. He added that the NAB remains “confident in our outlook for economic growth to accelerate in the second half of 2017”.
- But on the flip side of the argument…and why I’m trusting the NAB survey on growth but a little worried about consumers we saw a big collapse in building approvals yesterday with March data showing a fall of 13.4%. Units were the big driver of thisnaturally
- So that gives us something to think about – The Australian economy transitioned from the mining investment boom to a housing investment boom. What’s the next shoe to drop. The NAB survey says the economy is doing well. But what exactly will consumers do when their properties stop rising in value? Pay down the mountain of debt would be my guess.
- Now the price action on the ASX. While every sector except telecommunications was up the rise of 34 points to leave the S&P/ASX 200 at 5870 at day’s end was underwhelming compared to the 55 point increase futures traders had pencilled in. Part of that is because Asia, and forex traders, didn’t really get too excited by Emmanuel Macron. Part of it is also overhead resistance in the ASX200.
- Looking overnight though the SPI flipped from down a few points to up 6 points in the last half hour of US trade. So SPI traders are looking for a better day ahead. But watch retail sales when it comes out at 11.30 AEST. The Reuters survey says the market is looking for 0.3% in March and 0.4% for the quarter.
Forex
- It is really interesting right now to look at the divergent moves across forex markets. The US dollar did okay last night and the US Dollar Index (DXY) is up about half a percent and it’s back at 99.10 this morning. 99.50 is the key level to watch – if it breaks the worm has turned.
- The impact of that is that most pairs are lower as I highlighted in the introduction. For me the key here is expectations about the Fed and US interest rates. 10’s might be fairly quiet but the 2’s – and expectations for a June hike – are elevated once again. At 1.33% the 2-year note is just 7 points from the years high. That’s important.
Commodities
- OPEC has it’s jaw bone working again as it tries to goose oil prices higher. But like most things its chat is facing diminishing returns. Yesterday we heard from Saudi oil minister al-Falih who said the market is heading into balance and that production cuts would be extended.
- Overnight we heard whispers that the extension might actually be for 9 months into the first quarter of 2018 when OPEC meets on May 25. But we also know US supply is increasing, rigs have been added for the last 6 weeks and Saudi Arabia by its own hand has shown its nervous about this. I say that in response to the price cut Aramco gave Asian clients – something I noted as bearish last week.
- Anyway Oil, in WTI terms, is higher and testing the underside of one of its many trendlines. For me it has to break up and through the $47.00/20 region to kick on.
- Copper is pressured and closing in on my long held – something I talk about in my morning video each day – target of $2.45. That’s where the 200 day moving average sits.
- Gold is largely unchanged and will struggle while volatility is low and US rates rising.
Have a great day's trading.