Originally published by AxiTrader
Market Summary
Well, that was unexpected.
British Prime Minister Theresa May caught markets, and many in Westminster on the hop overnight, when she announced June 8 as the date for a snap general election in Britain. This is May’s Brexit election she never really wanted but said she had called it because the country was coming together but Westminster was not.
The net result is that forex traders took the sterling up 2.29% to 1.2850 – its highest level since before the October GBP/USD flash crash. The FTSE 100 fell by a similar amount losing 2.46% to close trade at 7147.
Elsewhere the poor lead from Australia’s stock market yesterday (S&P/ASX 200 down 0.9% to 5836) was followed across the globe with much of Asia ending in the red (Nikkei exclude) which ushered in decent falls in Europe and then falls on Wall Street.
Today looks like it has more of the same in store for the local market with the SPI 200 down a further 35 points overnight.
Naturally the surge in the pound undermined the US dollar and the euro is also higher near 1.0750 while USD/JPY is back down below 108.50. The Swiss franc is also stronger with a gain of 0.85%.
But the dollar’s weakness didn’t help the Aussie dollar which is down on the day at 0.7557 along with the Canadian dollar and most EM currencies – or at least most of the once I watch actively.
Gold is higher and having another pop at breaking important resistance – it’s at $1290, US bonds are lower again with the 10 year at 2.17% - THAT’S NOT A TYPO – with the 2 year note at 1.17%. That tells you a lot about both fear and the diverging view of bond and stock investors.
Oil is a little lower and copper collapsed 2.79%.
Oh, and the IMF upgraded its outlook for global growth based on lifts for China, Japan, and Europe with the US expectation remaining firm.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -7 (0.29%) 2342 (7.15 Sydney)
- Dow Jones Industrial Average -113 (0.55%) 20523
- Nasdaq 100 -7 (0.12%) 5,849
- SPI 200 -37 (-0.635%) 5,791
- AUD/USD 0.7555 -0.46%
- Gold $1289 +0.39%
- WTI Oil $52.36 -0.55%
International
- Here’s the first poll from YouGov on the British General election. PM May is way out in front at the moment.
- The key to the election and the outcome is that should May win decisively she will have a stronger hand to negotiate with Europe on exactly what Brexit ends up looking like. That doesn’t change the European position – as they reiterated last night – but it will give prime minister May the ability to push and pull, to make compromises where required in the knowledge she was elected to do this. Now for the campaign!
- Ester George, Kansas City Fed president, has joined the chorus of Fed speakers calling for balance sheet reduction this year. She is not a voter for another couple of years but Reuters reports she said “I do not favor prolonging action for the purpose of allowing inflation to overshoot the 2 percent goal or to press labor markets into a condition where they are overheating".
- US housing starts fell 6.8% in March and manufacturing output dropped 0.4% during the month data released last night showed. That’s important for the US Dollar Index and US rates because it has seen the Citibank economic surprise index for the US collapse to just 6.6 this morning from 38 before retail sales and CPI also missed last Friday. THAT’S HUGE!
- Chinese iron ore prices collapsed another 6.5% yesterday. Prices are now back to where they were earlier this year as the bull run unwinds. No wonder the Australian dollar and the ASX are under pressure.
- Speaking of China – there is more volatility coming to global oil markets it seems with reuters reporting Shanghai will launch a crude oil futures product later this year - :S
Australia
- What an awful day’s trade it was for the Australian market yesterday as the sellers came for the miners and banks knocking 53 points, 0.9% off the ASX200 Index. Of course the telecom’s space had some issues as well.
- We can’t talk specifically about individual stocks but what’s clear as APRA and the RBA try to restrict demand for bank products and as metals futures struggle in China and beyond there is a perception in the market that the recent run up in prices has seen valuations become a little rich on the local market.
- You’ll recall last week I wrote that I though the market would fall toward 5844. Last night’s close at 5836 satisfies that target and the SPI 200’s 31 point fall overnight drops the index down toward support from the last move up around 5809/12 and then I have support at 5876 from the trendline you can see in the chart below.
- Longer term if that breaks 5604 becomes the target.
- On the RBA yesterday it is worth noting that the minutes confirmed my initial thoughts that the RBA is worried about labour market softening, low inflation, moderate growth, and is struggling hard to restrain housing.
- But the very last sentence in the minutes which said “The Board judged that developments in the labour and housing markets warranted careful monitoring over coming months” suggests that if housing can be restrained the RBA has a much more dovish tone than even I thought. Now last week’s employment data will be an important salve to their concerns. But we’ll have to see what the next – March – jobs data says. Will it confirm the February bounce.
Forex
- Yesterday I wrote that the pound could break its 200 day moving average for the first time since Brexit. But not for a moment did I expect it would trading near 1.2850 this morning. But the key here is that the set up on the charts suggested all that was needed was a catalyst for the break. With big speculators still very short the pound according to the latest CFTC data the balance of probabilities was that the break would come topside. That fact also implies dips are likely to be bought in the short term.
- And the pounds strength leaked into the other big 4 majors with the Swissie, Euro, and yen all strengthening. That’s knocked the US dollar index down below 99.50 as it heads toward very important 1 year support which comes in around 99.80/90.
- For the Aussie it was a day to forget. What afflicted the stock market also afflicted the perception of forex traders to the Australian dollar and once the support at 0.7575/80 gave way the AUD/USD ran lower. At 0.7556 it’s off its lows near 0.7530 but it – and most EM currencies – and the CAD, but not the Kiwi, have materially underperformed the other Majors.
- For me this is about the specificity of the moves but also about risk appetite which is so important for the Aussie and EM. We’ll see how gold, stocks, and bonds travel in the next few days and the impact on the AUD/USD.
Commodities
- Gold just might be doing it. With stocks and bond rates falling, with the new political risk around the British election, and with the French election tightening up as we enter the last days of the campaign gold is at $1290 and trying to slip up and out of the recent and long term downtrend. A break above $1295, yesterday’s high, would be an important signal the bulls have control.
- Copper got hammered last night. After a retest of the recent breakdown it is lower by more than 2% at $2.52. My $2.45 target remains intact as copper, iron ore, and other base metals suffer as Chinese traders unwind positions.
- Crude’s retracement continued overnight from the recent sharp rally. It’s rollover time for the front contract which means it’s also shenanigan time as traders play with a little thinner liquidity as another roll to the second contract.
- This morning’s API inventory data which showed a draw of 840,000 barrels undershot expectations of a 1.5 million barrel draw. It's knocked WTI down another half a percent to $52.36 so my bias for a deeper dip remains.