Originally published by AxiTrader
Market Summary
Markets digested two items on the menu for Triple Treat Thursday with the ECB and former FBI director James Comey’s testimony pretty comfortably. But the main course of the UK election has served up some unlikely fare if the Exit poll released at 7am this morning is on the money. Now for what was always going to be the main course – the UK election.
That poll says Theresa May's Conservatives will lose ground and their majority in the Commons with just 314 seats. Sterling has collapsed 1.8% as a result and FTSE futures will likely come under pressure when they open.
We'll update during the day.
Back to the overnight moves and at the ECB Mario Draghi and his doves still hold sway as the bank focusses on the pullback in inflationary pressures. That knocked the euro a little lower. Across the Atlantic James Comey was combative and certainly left plenty of questions on the table about the conduct of Russia during the election campaign and President Trump subsequently. But there were no material fresh revelations.
So this morning we’ve seen US stocks close marginally higher, the US dollar is little better bid, and bond rates are a little higher in the US. The Aussie is also higher buoyed by the solid Chinese data in what’s been a quiet 24 hours of trade.
Crude dipped again and gold is lower.
So now we wait for the UK election result. Sterling is poised to react sitting at 1.2950 about equidistant from either end of the range. 326 seats is the magic number and we’ll likely know a little after lunch in Asia today.
Here's What I Picked Up - in a little more detail
International
- James Comey's testimony was pretty forthright and genuinely questioned the president’s conduct. But it didn't appear to have any fresh revelations which increased the chances of the impeachment of president Trump. That's something stock traders initially cheered over the past two days. He said he thought Russia had actively interfered in the presidential election, that “they will be back”, and admitted he had leaked his notes to a meeting with the president to a friend after president Trump’s tweet that Comey had better hope there weren’t tapes of the meeting. Comey was combative saying he hoped there were tapes of the meetings if so they should be released. It is a very strong signal he's sending that he is telling the truth. Something president Trump’s lawyer has already questioned this morning.
- But given the appetite for impeachment - let alone the legal argument - is missing right now this is all a sideshow.
- But Comey's testimony, this whole business, and the president's tweets have damaged him on Capitol Hill. It's why I keep writing about it in this note.
- Stocks traders don't care but the flattening of the US bond curve, the outright rally in US 10's, and the weakness in the US dollar recently reflect a downgrading of US growth prospects while the Trumponomics agenda is stalled - which it is.
- After years of pursuing similar accommodative policies of low rates and QE it's easy to think all central banks are essentially the same. But last night’s ECB meeting should serve as a reminder to traders and investors that the ECB is different from the Fed in one very important way - it doesn't have a dual mandate of inflation and employment. Rather the ECB has a single mandate on inflation. So even as EU GDP was revised up to 0.6% wow for the 3 months to March 2017 it is the reduction in inflationary pressures recently that did, and will drive policy.
- To this end then the ECB was on the dovish end of the continuum last night. Growth was upgraded a little for 2017, 18, and 19 to 1.9%, 1.8%, and 1.7% respectively. But inflation was downgraded for these three years to 1.5%, 1.3%, and 1.6%. That’s weak. So it’s worth noting what Mario Draghi said about inflation in his opening statement to the press conference as a guide to the dovishness.
- He said the ECB sees the risks to growth as more balanced now and that inflation got close to butu remained below the 2% target inflation rate. He added “the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration”. The ECB and Europe is still years behind the Fed and the US economy. They are in no rush.
- Qatar has effectively said it won't surrender and won't change tack to placate Saudi Arabia and the other nations seeking to isolate it right now. This is one to continue to watch closely. Over the past 24 hours we have read on the wires the Emirate is putting its Military on high alert, warned the protagonists to stay out of its waters, that Turkey is falling in behind Qatar and that president Trump, and Kuwait, are trying to settle things down. It remains a fluid hotspot.
- China’s trade data yesterday was a cracker easily eclipsing expectations with a big lift in both exports and imports. At first pass traders and investors look to a lift in both sides of the trade ledger as a sign that the Chinese and global economies are doing well. So that’s positive for risk assets like stocks, and the Aussie dollar, and feeds back into metals like copper. The data showed (in yuan terms) that exports rose 15.5% yoy in May from Aprils 14.3% pace. Imports were 21.1% higher from Aprils 18.6%.
Australia
- I’m excited this morning. Could we be in for a rally on the ASX today after the market found support, perhaps a bottom over the past two days. Yesterday the S&P/ASX 200 finished up 9 points at 5,676 after being down 37 at one point during the day. That gives the physical market a nice long tailed bar for trade coming after prices snuck back to square the previous day.
- It’s still the case I think the 200 index needs to get back above 5,700 to rebuild some of the psychological damage the heavy selling has done.
- And when I look at the chart for the SPI 200 the outlook suggests we might actually be seeing this base building process. Friday, and a UK election day might be a fraught day to expect a recovery. But we’ll see how we close. Proximity to the bottom of the downtrend channel and recovery from those levels yesterday suggests some buying may eventuate. Even if it ultimately proves ephemeral while this down trend continues. Here’s the chart:
- Speaking of yesterday’s data the $555 surplus was a big miss given the market had been expecting a $2 billion surplus. Exports fell 8% as coal disruptions bit after cyclone Debbie. So this is hardly bad news on the trade front.
- But I am a little concerned about the business outlook. And while the NAB business survey is the big one I put my money behind yesterday’s release of the Dun and Bradstreet survey of the4 business outlook suggests some moderation of momentum. Stephen Koukoulas who is an adviser to D&B said in a release accompanying the survey that “The optimism from the business sector at the end of 2016 and the early part of 2017 has not been sustained. Business expectations remain cautious for the September quarter following the particularly weak ‘actual’ outcome for the March quarter”. It’s not weak by any sense of the imagination – and I wouldn’t expect the NAB survey to suddenly collapse to weakness after the recent robust prints. But it is something to watch.
Forex
- With the ECB on the dovish side Euro is on the back foot this morning. There is still plenty of support for the single currency but this pullback looks a pause in the pace of price appreciation that’s necessary for traders to decide whether to take Euro up and through 113 to 1.1450 or to a deeper pullback. And as I write often a “garden variety” pullback to the 38.2% level of the recent rally comes in at 1.1110/30. The latter level is the top of the old trendline.
- Sterling was at 1.2944 this morning just before the shock Exit poll showing Theresa May will lose here majority in the Commons knocked it for six. 326 seats is the magic number to take a majority in the Commons and the poll suggests the Conservatives will lose seats and only hold 314.
- The poll could be wrong forex traders will be watching all day.We've already taken out support at 1.2810 and GBP/USD is currently trading at 1.2740 just ahead of the 1.2680/90 support. The next level of support is 1.2578 which is the 50% level of the move and the 200 day moving average.
- The Australian dollar was doing very well again this morning until the uncertainty surrounding the UK election knocked it lower. It was at 0.7548 largely unchanged before losing 20 points to the 200-day moving average and yesterday's low at 0.7426.
- USD/JPY was a little higher this morning on the back of the better bid in the US dollar. That's reversed a little now with USD/JPY at 109.82. But you’d have to say the performance has actually been pretty poor given that yesterday’s Japanese GDP data was revised so drastically lower. Annualized GDP for Q1 was downgraded from a robust 2.2% to an awful 1% - 2.4% had been expected. So dollar yen only up 0.15% to 109.96 is a poor performance and shows persistent yen strength.
Commodities
- Crude oil is off a little this morning after rallying briefly in Asia yesterday after news that the Qatari’s seemed to mobilising their military gave the current diplomatic spat a harder edge. But as I wrote, and said in my morning markets video yesterday, it’s hard to see a circuit breaker for oils fall right now until we get inventory data next week to either confirm the EIA inventory build was a one off – or not as may be the case. Naturally if this battle does take on a military edge the chances of a spike in oil rise materially. But we can’t know if that will happen only that it’s a greater than zero probability and base case is it will not.
- So oil retains a downward bias WTI is off 0.22% to $45.62 and Brent is down 0.4% to $47.87. Both ar off their lows. But both charts suggest a continued downside bias. Here’s WTI - $44.30/50 is support and then the spike low at $43.74
- Gold is down again as it backs away from the trendline stretching back to 2011. US bonds are a little higher this morning, Stocks are slightly higher and the mild does of risk aversion we saw earlier in the week seems to have abated. So gold this morning is sitting at $1278 down 0.62%.
- There is nothing like solid Chinese trade data to goose copper. So we see copper up a solid 2.37% to $2.61 a pound this morning. It’s easily the best performing base with tin, lead and nickel lower. Iron ore was also down yesterday.