Oil Is Through The Roof This Morning

Originally published by AxiTrader

Welcome to my daily Markets Musings.

So I realised last night it was 30 years ago yesterday that I walked into the old Westpac dealing room at 60 Martin Place as a Retail Dealer on the Money Market Desk. What a journey it has been since then. Maybe time for a little rest and reflection.

Feedback always welcome

Greg

Market Summary (7.43 am Thursday April 19)

Oil is through the roof this morning with both Brent and WTI up more than 3% to $73.12 and $68.78 respectively. It’s a combination of inventory draws, geopolitics, and a little story on Reuters saying the Saudis are actually driving toward $100 a barrel as their next target.

Naturally, that’s had a bit of an impact on bonds with the US 2-year up at 2.43% - NOT A TYPO – and the 10-year at 2.87%. The Fed will certainly need to get busy on the tightening front if the Saudis get their way.

Naturally also, the energy sector has been a powerful driver of overnight moves on global stock markets. But the surge of 1.72% of this sector in the S&P 500, the 1% gain of industrials, and the 0.72% gain in materials has been largely offset elsewhere. That’s left the S&P 500 up just 3 points at 2,709.

Danger Will Robinson.

The Dow dipped 39 points, 0.16%, and the Nasdaq 100 was up 0.31%. In Europe it was a sea of green with the FTSE up 1.26%, but the DAX in Germany was only 0.04% higher while the CAC gained half a percent.

Yesterday China’s stocks rose and the 10-year rate collapsed to 3.6% in the wake of the previous night’s RRR reduction. But some, like me, wonder why the RRR needs a cut if the economy is doing so well. It’s worth contemplating.

Here at home the S&P/ASX 200 rose 20 points yesterday to finish at 5,861. Frankly that was disappointing. But the 24 gain SPI traders have added overnight – reflecting the big moves in energy, industrials, and basic materials offshore no doubt – looks set to take the 200 index above recent resistance. It has to close above 5,871 to remain positive however.

Turning to forex now and both the pound and Canadian dollar came under selling overnight with both currencies down around 0.6% against the US dollar. In the case of sterling, it was the lower than expected inflation prints (0.1% mom v 0.3% exp and 2.5% v 2.7% exp for yoy) which did the damage while in Canada the BoC left rates at 1.25%. And while it upgraded the economic outlook Governor Poloz essentially said he’s going to let the rabbit run (the economy) a little harder before jacking rates again. So this morning GBP/USD is at 1.4206 and USD/CAD is at 1.2626.

Elsewhere for the third day in a row early Europe thumped the Aussie dollar with the kiwi joining in for a bit of fun. Both have recovered from their lows, but where the Aussie is up 0.24% at 0.7784 the kiwi is down around the same amount at 0.7320. The euro is largely unchanged at 1.2377 and USD/JPY is up 0.2% at 107.21.

Besides the rally in crude there were some decent rallies in base metals. Aluminium in Shanghai was up sharply yesterday as was copper. The Dr is up a stunning 2.68% in US trade at $3.1575 a pound. No wonder the Aussie has caught a bid.

There was another big round of central bank speak last night. ECB’s Villeroy worried that trade and the exchange rate may see the ECB change its plans. The Fed’s Beige book was pretty solid but there we’re concerns about the trade and tariff issue while Bill Dudley suggested the neutral rate in the US is up at 3%. He might be on the way out but it’s worth noting the Taylor Rule is currently sitting around 3.4%. Bullard worried about the yield curve and Kaplan said growth will moderate in 2019 and 2020.

On the day ahead we get employment data here in Australia. The Reuters poll says markets are expecting 21,000 jobs and an unemployment rate of 5.5%. before that though we get NZ CPI with the market expecting 0.5% for Q1 2018.

Tonight it’s UK retail sales, more central bankers speaking from the BoE, ECB, and Fed as well as jobless claims and the Philly Fed index.

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

International

• “If you divorce yourself from a general feeling of anxiety and just look at the facts and the numbers and what you can measure, you can say things look awfully good, and it feels like awfully good in a way that there could be a bit of a runway here for things to remain pretty good”. So said Goldman Sachs (NYSE:GS) CEO Lloyd Blankfein on CNBC overnight.

• I wanted to lead off this section with that because he is dead right when he says “if you divorce yourself from a general feeling of anxiety”. I know, I know that’s a big ask. But his message is that the great majority of Americans are just getting on with things. And on that front, things are better than they have been for ages. And they are still improving.

• It’s why the Fed, even doves like Kashkari and Bullard, recognise rates need to go higher in the US. And they will folks. That will impact asset prices and might even have an impact on the US dollar. Yeah Yeah I know, don’t be silly Greg, nothing helps the US dollar.

• President Trump and President Putin seem to have decided to de-escalate tensions between the two nations based on a bunch of articles I’ve read this morning. Whatever you think of either man that’s a good thing for the globe. Interestingly for markets though it hasn’t impacted the geopolitical risk factor in markets too much.

• The new governor of the PBOC has been widely lauded for his initiative in cutting the RRR by 1% the night before last. But I have to wonder why the need to ease if the economy – which is running at 6.8% GDP growth apparently – is so strong. It’s a question twitter mate Daniel Lacalle asked last night and it’s a point I made on Sky Business talking to Nadine yesterday afternoon. Certainly, I’m not going to fall into the trap of saying the Chinese data is not real – though the presentation of GDP data 18 days after the end of the quarter does stretch credulity. But if it’s true the PBOC cut to release funds so banks could repay MLF outstandings that seems an interesting tell.

• Anyway, China is undergoing an important transformation in its economy as consumption replaces investment as the dominant driver. But it still has an issue with debt, and there are signs consumers appetite for debt accumulation – and thus spending – is diminished as the risks to the outlook increase. Here’s a little collage of three charts I picked up from the Wall Street Journal’s Daily Shot Blog overnight.

Source: WSJ Daily Shot Blog

Australia

• The Australlian dollar is higher this morning with copper and base metals on the up. That’s part of the reason it has outperformed the kiwi, which isn’t leveraged to these commodities. But the AUD/USD has still not been able to break up and through the downtrend it currently sits in. It’s high of 0.7797 was pretty solid last night given it had fallen to 0.7744 earlier in the evening but the trendline at 0.7815 is still yet to be breached. Could today be the day? Another solid employment print would certainly aid the bull case. And a breach of the downtrend could ope the way for a run toward 79 cents, perhaps a little higher. But the data needs to support, and the trend needs to break first.

• The ASX200 and the SPI are the “Little Engines that might”. I can’t say could because they haven’t actually kick materially higher yet. But the the rally overnight in the SPI is a sign that a move back to and through 5,900 is on the cards. The big winners on US markets are a classic case for the bulls on the ASX today. We’ll just have to see what – if any – handbrake the financials put on the local market. It should be a better day though now the SPI has bested 5,855 and looks set to test 5,896.

• We get the sniff test on the economy today with the release of the latest employment data. It’s a rubbery series prone to volatility usually because of the way it is collected and due to the large error possible given the sample. But, even with these limitations Australia’s job data has been pretty solidly positive over the past year or so reflecting both a big jump in employment and increased participation in the workforce. Those two stats together are good for growth in aggregate even if they may mask the pressure that individual consumers, families, and households feel. We should get a solid number again today if the NAB business survey is any guide. But there is always a chance for a surprise with this data.

Forex

• I know it’s unfashionable to say that fundamentals might matter in Forex, but this is important folks when it comes to the EUR/USD rate. We know the US-EU 2-year spread has blown out, we know the fed is hiking, we know the US economy looks strong, and we also know that Europe’s economy is not weak, but it is facing headwinds. So I offer you this from ECB policymaker Francois Villeroy de Galhau overnight. Villeroy said that while presently there is general agreement at the ECB to halt QE this year, “we should pay close attention to a possible cumulative risks scenario, the likelihood of which has increased recently: an adverse loop of protectionist threats, unfavorable exchange rate movements, and abrupt financial markets corrections. Such a negative loop would tighten financial conditions, and deteriorate the growth outlook in the euro zone. Our monetary policy stance would then have to be adapted, depending on the ultimate impact on inflation prospects”. The ECB and fed still have differeing outlooks. It just that traders are already looking through the Fed.

• Anyway, overnight GBP collapsed back inside its range and the Canadian dollar too reversed with USD/CAD climbing after the BoC decision and Governor Poloz’s comments. Essentially Poloz said the economy can continue to grow, indeed at a better clip, but that this growth won’t be as inflationary as the bank previously thought. That means there is no rush to hike rates. That’s aa little more cautious than many thought previously when Poloz has said that being cautious doesn’t mean doing nothing. It seems perhaps that in the end that is exactly what it means.

• 1.2690/1.2700 seems a reasonable target now for USD/CAD and if that breaks it’s the 38.2% retracement level at 1.2755 in the frame.

Commodities

• $100 a barrel! Seriously?

• That’s the new Saudi target according to an exclusive Reuters story overnight. Ahh, and here’s the rub. This is partly what this whole business of driving oil prices higher over the past couple of years is all about. Reuters says the Saudis are happy to see prices at $80 (they have oft said that themselves) and even $100 because, “this shift in Saudi Arabia’s stance to its desire to support the valuation of state oil company Aramco ahead of the kingdom’s planned sale of a minority stake in an initial public offering”. SHAZAM! – utterly transparent, utterly understandable and so far very effective at driving prices higher. As I have written over the years, the Saudis and their colleagues in OPEC need higher oil for their fiscal positions and the kingdom is on a bold – and costly – reform program. So they might continue to squeeze the lemon while they have the chance.

• But will prices get there? I have written often recently that a break of the recent highs in WTI and Brent opened up the chance for a run of $8-$10. We are experiencing part of that move now. Importantly the $75.60 target that gives me for WTI is just below $76 which si the 61.8% retracement level of the 2014/2016 collapse in prices. So that’s looking like a formidable resistance zone should prices get near $76 bucks. Here’s WTI weekly.

• The Saudis need to be careful though here. I’m not sure the global economy is strong enough for $870 or $100 oil. And I’m pretty certain the global economy is not ready for the kind of central bank response such a move might precipitate if inflation spikes.

Have a great day's trading.