Originally published by AxiTrader
Market Summary (7.42am Friday April 20)
And there he is, the robot from Lost in Space rolling around waving his arms screaming “Danger Will Robinson”.
I know it’s a bit hyperbolic after just one day of losses on the S&P 500. But I mentioned “Danger Will Robinson” yesterday given the markets inability to take the solid earnings numbers and the surge in the energy, basic materials, and industrials sectors and run with it.
It’s not the guarantee of another collapse. But with US 10's up at 2.91%, oil holding near $74 a barrel in Brent terms and gold in the mid $1340’s again this does not feel like an equity friendly environment. Time will tell we need to see this week’s highs bested to kick on.
To the scoreboard then and at the close the S&P 500 is down 0.6% at 2,693. The Dow has dropped 0.34% and the Nasdaq 100 is off 0.75% as worries about Qualcomm (NASDAQ:QCOM) and tech more broadly bubble to the surface once more – it closed at 6,777.
Europe was mixed with the DAX up 0.2% but London and Paris down by around the same amount. Here at home SPI traders have knocked 0.1% off prices from yesterday’s close – 6 points. So it looks like a fairly quiet day. But I wonder about the financials in the wake of this Royal Commission (see the full note for thoughts)
As noted above US 10’s are back at 2.91% with the 2's at 2.43% on the back of worries of an oil induced spike in inflation coming down the pipe and underlying tone of the Philly Fed index which screams rising price pressures.
And maybe that, and some comments from BoE governor Mark Carney overnight and BoC governor Poloz the night before mean that policy divergence might be a thing again soon in forex markets. Carney said rates are likely to rise in the UK but seemed to demur about a May hike after another data miss (this time retail sales, -1.2% v 0.5% exp). GBP/USD is currently at 1.4092, down 0.75% on the day and around 280 points off the high this week. That’s what data misses and a false range break can do folks.
Elsewhere on forex markets the sellers came for the Aussie and kiwi around the same time they came for the pound. Australian employment yesterday didn’t matter at the time but Carney’s comments shined a light on policy I reckon. So AUD/USD is at 0.7728 and the kiwi is at 0.7269 this morning both down around 0.65%. The US dollar is naturally up a little with all of the above and the US Dollar Index at 89.87 while EUR/USD is down 0.2% at 1.2348. The yen is a tiny bit weaker at 107.34.
Oil was quieter last night as the debate about whether the Saudis actually want to drive prices to $100 a barrel hots up in the lead up to the OPEC meeting in Jeddah today. WTI dipped 0.4% while Brent rose 0.3%. Gold is still in the mid $1345 region which, along with the rate on US 10’s, is something we should all keep an eye on. Dr copper dipped 1% as did aluminium (which had been sharply higher in Shanghai) after a plan to nationalise Rusal hit the wires.
On the day today there is nothing in Australia but we get inflation data in Japan. Tonight its German PPI and then Canadian retail sales and inflation data tonight. We also get a speech from Bundesbank president Jens Weidmann and of course the OPEC meeting is on.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Risks of a recession in the US are rising. That’s what those who watch the flattening of the yield curve believe they are being signaled and that is what the latest JPM Private Bank survey of more than 700 ultra high net worth folks showed. CNBC reports that, “The US economy is firing on all cylinders, yet 75 percent of ultra-high net worth investors predict it will hit recession by 2020… a fifth of respondents — 21 percent — believe it will begin in 2019 and 50 percent expect the next recession to start in 2020”. Separately, but in the same article, CNBC also reports that Microsoft (NASDAQ:MSFT) founder Bill Gates says, “It is hard to say when but this is a certainty,” that we’ll see another 2008 style crisis. This is important folks because these types of views colour investment intentions and asset allocations. In some ways these views lead to the event. That’s going to impact markets and the global economy going forward.
- And while that recession talk is happening here’s a tweet I saw which neatly – and colorfully – summarises why strong earnings aren’t always as stock-friendly as you might think. This tweet from Jurrien Timmer, the Director of Global Macro at Fidelity is just fabulous.
Source: Twitter Screenshot
- And if you are wondering why the US 10’s are back up at 2.91% even though stocks fell, then look no further than this tweet from Glushkin Sheff’s David Rosenberg. Now you don’t need to wonder why pricing of a 4th rate hike by the Fed has risen. And, as I said on Sky – not sure if I wrote it here – earlier this week, Bill Dudley’s comment that “there won’t be more than 4 rate hikes in 2018” was masterful at signaling there might be. Yet he also signaled no need to panic if inflation pops.
- The trade spat between thee US and China may have quietened but it is not over. Currently Qualcomm is caught without Chinese approval for the takeover of NXP because of Chinese “concerns” about the deal. A little tit, for a bit of tat? Perhaps. Something to keep an eye on.
- Also worth watching are the FAANGS and sentiment toward them. Overnight Apple (NASDAQ:AAPL) and one of its production partners came under selling pressure after news broke that the partner is making less product because phone sales have slowed. We know the BAML survey has tech as the most crowded trade and we know that has recently meant that investors have sought to change their positioning which in turn has seen the assets identified – US dollar and Bitcoin the most notable recent examples in 2017. You can see the impact on prices since BAML identified them as “most crowded” earlier this year.
Australia
- The Australian dollar did fabulously well yesterday after that disappointing employment report. The loss of momentum in jobs creation in February (where we saw a fall) and march was utterly unexpected given the indicators I cited yesterday such as the NAB business survey and ANZ job ads. The fact that the part-rate dipped was all that stood between the 5.5% unemployment rate and something higher. That really would have spooked the Aussie.
- But in our time zone yesterday the US dollar was a little on the weakish side, Chinese commodity markets fairly ripped higher and the Aussie managed to rally back above 78 cents. It’s substantially lower this morning though at 0.7731 and my sense is that is because what Mark Carney said about rates in the UK, and what BoC governor Poloz intimated about rates in Canada resonated with Aussie traders looking at a genuine flat spot for consumers and rising RBA caution. So they sold – all three currencies in fact (and the Kiwi) at roughly the same time.
- If you believe, as I do, that credit creation – DEBT – plays a big role in the consumption side of the economy then the headwinds are growing (net of population growth) for the consumer sector. Of course you can’t net out population growth because that is the salve for these household ills in terms of balancing them out. THIS IS IMPORTANT FOR THE AUSSIE because even though commodity rallies and the US dollar are big drivers at the moment if next week’s CPI is on the weak side the Aussie dollar will get belted. Support on the day is 0.7715/18 and then 0.7696/7700. Resistance 0.7745/55, 75 and 90.
- Folks the big 5 banks in Australia plus AMP make up 26% of the S&P/ASX 200's market capitalisation and this Royal Commission has been revealing, to put as bright a face on it as possible. Realistically though, as the AFR reports this morning, having fought the calling of this Royal Commission federal Treasurer Scott Morrison is now going after individual and corporate misconduct. Okay great, but the bigger question is what these financial giants do and how they grow their bottom line in the future given this and APRA’s efforts to rein in demand for loans.
- No one should wish ill on the Oz banks. They are the bedrock of, if a little too heavily weighted, the ASX and our economy. But growth is going to be a challenge going forward. I’m not an individual stock picker, Axi does not provide services for these stocks. But the sector is important to the overall return environment. That is bound to have implications for the levels of the ASX200 and the SPI. Indeed former ACCC boss Alan Fels was on the ABC this morning seeking the “structural break up” of the banks and more enforcement from AIC.
- To the SPI then, and we’ve had a bearish outside day. Yuk. And price is back below the 5855 level I’ve been watching. Futures overnight lost 10 points and it’s clear that price is going to be driven by offshore. But a close of the SPI below 5,855 tomorrow morning would be somewhat bearish.
Forex
- Policy divergence. Yes I know, I’ve been banging on about this for ages to no avail. Traders in forex haven’t given a hoot that the US, and China, are the only major markets where the economic surprise indexes are in positive territory. Traders haven’t given a hoot that the Fed is aggressively talking up the prospects for more hikes this year while other central bankers are demurring. But maybe that might change. I say maybe because I read a report from a trader yesterday who said you just can’t own the US dollar while Donald Trump is in the White House. I did tell you that sentiment toward Trump was a factor in the US dollar!!! Cue the emails.
- Anyway, as I highlighted above the comments from BoC governor Poloz the night before last and then Mark Carney last night highlight this policy – and thus economic – divergence. Governor Carney said folks in the UK should “prepare for a few interest rate rises over the next few years”. But he also told the BBC that he does not “want to get too focussed on the precise timing, it’s more about the general path.” That and the fact that he acknowledged “we have had some mixed data” and that “I’m sure there will be some differences of view” at May’s MPC meeting and that those differences and the decision will be made “conscious that there are other meetings over the course of this year” knocked sterling for six. It also knocked the kiwi, Aussie, and to a lesser extent the Canadian dollar for six as well.
- But, it is important to also note the ranges are still holding, the US dollar is far from strong and there is still no guarantee that my policy divergence idea can play a role again. Certainly not while President Trump is a psychological hurdle many traders can’t leap to get to the “BUY” button.
- Quickly on the GBP/USD chart. We’ve seen a false break and then a reversal back inside the range. The big question is where to now? A break of 1.4067 (the 61.8% of the recent rally) would open the chance of a full round trip to 1.3973 and if that breaks it’s 1.3820. That folks, is still inside the range however.
Commodities
- So the Saudis don’t want $100 oil? I framed that as a question for a reason because while Reuters reported yesterday that price was in the frame and then also reported that Saudi Oil Minister al-Naimi told CNN he hoped oil prices would stabilise at “around $100” for a while an OPEC spokesman, and the Oman oil minister, both said $100 was not the target. The meeting of OPEC in Jeddah today might provide some clarification as to what the Saudis are looking for. But it is also worth noting some oil market players are worried that such a price would set the market up for failure with Reuters also reporting an unnamed Gulf OPEC member official said “no single player can dictate what the price is”. Indeed, but they can try when it is in everyone’s fiscal interests.
- To the price action now and the dailies on both Brent and WTI fairly scream caution this morning. That’s because after a run higher prices are now at the bottom third of the day’s range. So the bears won the day yesterday. That’s not unexpected on a daily basis given price had lurched through the top of the Bolly bands. A further pullback is possible. The key to the outlook now is this week’s low in both contracts. Here’s Brent.
Have a great day's trading.