Stocks Are Down But Oil Went Wild

Originally published by AxiTrader

Key Takeaway

The ides of March is going to be one heck of a day.

Not only did we have oil collapsing again as news broke the Saudis upped output last month (before mounting an almost full reversal after the close) but we have the Dutch election, the US debt ceiling agreement expires, and of course we also get the decision of the FOMC which will be released tomorrow morning Australian time. Oh and a massive storm in the Northeast of the US is keeping volumes low and traders away from their desks.

In the run up to that though stock markets across Europe and the US were lower overnight with the S&P 500 down 8 points at the close. All sectors of the S&P are in the red this morning and that’s knocked the SPI 18 points lower overnight. So it’s likely to be a challenging day on the ASX today.

On forex markets the US dollar has found its feet and knocked the pound and euro around half a percent lower. The yen is a tiny bit stronger and the Aussie dollar is largely unchanged day on day.

Base metals and iron ore had another good day, gold is a little pressured, and US bonds have rallied a little.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 -8 (0.3%) 2865 (7.39 am Sydney)
• Dow Jones Industrial Average -44 (0.2%) 20837
• Nasdaq 100 -19 (0.32%) 5,856
• SPI 200 -10 (0.2%) 5,752
• AUD/USD 0.7557 -0.13%%
• Gold $1197 -0.5%
• WTI Oil $48.36 -0.19%

International

• The Fed, the Fed, it’s all about the Fed. With the market convinced the Fed will hike it’s the language it uses in the statement, the dot-plot of expected moves in the next year, the new fan chart, and Janet Yellen’s press conference which will be the big movers when the Fed announces its decision early tomorrow morning. My sense is that the Fed will signal at least another 2 hikes this year and another 3 to 4 in 2018. Chair Yellen and her colleagues have been very patient and let the US economy and inflation lift toward their goals. Now they’ll be trying to normalise policy so that they don’t have to hike aggressively at some point later this year.

• Against this backdrop I expect Yellen to seek to focus discussion on the end rate of the Fed rate rise cycle, which should not be too high relative to history, rather than the number of hikes. The question is whether the market wants to listen.

• Inflation data overnight confirmed that price rises in the US and across the globe are back.

• Polish inflation hit a 4 year high of 2.2% yoy in February, US producer prices were up 0.3% in the month taking the year on year rate to 2.2% which is the faster pace of rises since 2012. Indian inflation data was also out with the yoy increase of 3.65% suggesting that the record low in January is behind it. Swedish inflation data showed consumer prices hit 1.8% - a 5 year high, Spain’s inflation sits at 3% data overnight for February confirmed, Finnish inflation rose to a two and a half year high of 1.2%, while German yoy inflation rate was confirmed at 2.2% - the highest since August 2012. Now of course these numbers are not suggesting prices are galloping away but they are a sign that global reflation is real at the moment.

• Also on the data front last night in the US the NFIB business optimism survey dipped ever so slightly to 105.3 in February from 105.9. German Zew economic sentiment printed 12.8 in March up from 10.4 the previous month. It’s a little below expectations of 13.4 but it’s still a good result.

• You have to wonder, or at least I do, why Donald Trump is walking the same path Barack Obama did in tackling healthcare first up and possibly wasting a huge amount of political capital. Yesterday the CBO released its look at the impact of the republican plan to repeal Obamacare and the news at a very high level was that 14 million Americans will be without coverage by 2026. That and other nuances in the GOP bill is going to make it harder to get through the House let alone the Senate at first push. That matters because it could delay the president’s planned tax cuts and infrastructure spending. And that could impact markets.

• French presidential candidate Francois Fillon has been formally put under investigation as magistrates investigate whether he embezzled state funds. You have to wonder how he can stay in the race with the April 23 first round of voting coming up fast.

• Speaking of elections the Netherlands goes to the polls today. Geert Wilders is expected to come second to the ruling party of current prime minister according to the pundits. That should assuage the fears of some in markets and due to the fractured state of Dutch politics any government is likely to need to enter a coalition. So hopefully we can tick off one of Europe’s elections without event in the next 48 hours.

• But back to the French election and the aggression of Turkish president Erdogan, who continues to rail against the German and Dutch refusal to let his ministers address expatriate Turkish crowds as he pushes toward his own referendum, has to impact at the margin. Last night he doubled down saying the Dutch have blood on their hands over the Srebrenica massacre during the War in the Balkans during the 1990’s. He also doubled down on the Nazism call and went very close to saying the words about Germany.

• So as a behavioural economics and finance guy I wonder how this won’t cut through and strengthen the hand of far-right candidate of Marine Le Pen. Marine Le Pen still has a tall order to win but with FIllon imploding and Turkey ramping up the rhetoric some of the noise is likely to cut through to voters. Anyway April 23 is the big day.

• And before I leave the political sphere China has quietly voiced its displeasure at tour of duty of Japan’s biggest naval ship through the South China Sea. Chinese Foreign Ministry spokeswoman Hua Chunying said “if it's only a normal visit, going to several countries, and passing normally through the South China Sea, then we've got no objections, and we hope this kind of normal exchange between relevant countries can play a role promoting regional peace and stability. But if going to the South China Sea has different intentions, then that's a different matter.

• And while I’m on China the data dump yesterday was a little disappointing on the retail sales front with a print of 9.5% against expectations of 10.5%. But the investment picture and industrial production data was positive. Urban investment rose 8.9% yoy while IP was up 6.3%

Australia

• Price action on the local market continues to fail near recent highs. Yesterday’s rise of 2 points on the S&P/ASX 200 to 5759 was 24 points below the high of the day for the ASX200 which speaks to overhead resistance in the overall market.

• That’s not to say there isn’t plenty going on below the surface – because there is. But when you combine all the sectors together to get a net result – as the index does – it’s clear that overall the Australian stock market must be viewed by investors as having much baked into the cake.

• I know I say that often but the performance of the local market relative to the S&P 500 suggests that this is the case. Or at least has become the case over the past month. Likely that reflects a sense from many investors and traders that all the good news across our dominant sectors is already in the price. Equally Australia is a derivative of global reflation not the centre of it.

• Here’s the latest relative performance chart….

• On the day the SPI is only down 10 points from yesterday afternoon. But it's broken below the little wedge I've been watching and lower levels toward 5700/10 from the current level around 5750 look possible.

• Yesterday’s NAB business survey was a bit disappointing but hardly unexpected. With such a strong surge the previous month not really gelling with the way the economy feels it was no surprise that business conditions and confidence pulled back. Conditions dropped 7 points to 9 while business confidence fell 3 points to 7. Trading dropped 10 to 13 and profitability dipped from 13 to 11. In more encouraging news the employment sub index was at 5 from 7 previously. So on balance if last month hadn’t shot the lights out this would be a very solid result. So lets call it for what it is – it’s a solid result which helps support the RBA’s hypothesis that Australian growth remains relatively strong.

• Likewise data out of China yesterday was positive for base metals and by extension Australia and Australian growth.

Forex

• The jockeying continues with the euro and pound reversing the strength of recent days overnight with loses around half a per cent each. Sterling looks like it was hit by the parliamentary victory of Theresa May which now allows her to trigger article 50 when shes decides its time. At 1.2155 this morning GBP is off its low of 1.2108 and remains pressured. The Euro is under pressure as the proximity of the Dutch election and Francois FIllon’s problems raise political risk on the continent. The euro is back at 1.0607 this morning.

• Both currencies, indeed the whole of the currency universe, are waiting on the Fed however. My sense is there is still room for surprise by the market sceptical of the Fed’s recent change of stance and rhetoric. That means that the statement, dot plot, and chair Yellen’s press conference are important trigger points. As I noted above my sense is the Fed is committed to ensuring a measured pace of rate rises – but that actually means raising rates. So as Janet Yellen said recently – and tomorrow morning’s decision is likely to reflect – 2017 is not 2015 or 2016 where only one rate hike occurred.

• On the commodity bloc the CAD is suffering as oil collapses again with USD/CAD up at 1.3490. The Kiwi and Aussie however are largely unchanged. All three currencies are likely to trade around until 5am tomorrow when it all kicks off.

• For the kiwi in particular the key level I'm watching over the next 24 hours is 0.6850. If that breaks the NZD/USD could be in for a solid run lower.

Commodities

• Ahem. OPEC data released overnight showed a big surprise, one that fit the current bearish narrative perfectly. So prices for crude are down again this morning. The piece of news that so flustered and already panic bull was that Saudi production had marginally increased last month. Now of course that would be natural if the rest of the bloc upped compliance with the OPEC production cut deal. But in a bear market it was read negatively.

• So even though OPEC also increased its demand growth expectation in the year ahead WTI was down 1.36% to $47.74 while Brent is off a more subdued 0.74% at $50.97 nwhen I originally wrote this at 6.30 am Sydney. But it has bounced all the way back to $48.27 a little over an hour later as wgispers circulate that the next API data will be positive for oil.

• Anyway looking at the charts in WTI terms the low of $47.07/10 was just a little below the 61.8% retracement level of the rally from last November. So, Oil is looking short term oversold. But increasingly the charts suggest a move toward $45, maybe lower after we see how far this bounce runs

• Copper is getting the benefit of the rally in iron ore, steel, and base metals. But it’s also benefitting from enduring issues at mines in Chile, Peru, and Indonesia. It’s up 0.7% at $2.63.

• Gold is getting hit. It’s slipped back under $1200 and charts suggests it's headed for $1180.

Today's key data and events (all times AEDT)

• Australia - Westpac Consumer Confidence Index (Mar) (10.30am); New Motor Vehicle Sales (MoM) (Feb), New Motor Vehicle Sales (YoY) (Feb) (11.30am)
• New Zealand - Current Account (QoQ) (Q4), Current Account - GDP Ratio (Q4) (8.45am)
• China - Nil
• Japan - Industrial Production (YoY) (Jan), Industrial Production (MoM) (Jan), Capacity Utilization (Jan) (3.30pm)
• Germany - Nil
• EU - Employment Change (QoQ) (Q4), Employment Change (YoY) (Q4) (9pm)
• UK - ILO Unemployment Rate (3M) (Jan), Average Earnings including Bonus (3Mo/Yr) (Jan), Claimant Count Change (Feb), Average Earnings excluding Bonus (3Mo/Yr) (Jan), Claimant Count Rate (Feb) (8.30pm); BoE Quarterly Bulletin (11pm)
• Canada - Nil
• US - API Weekly Crude Oil Stock (8.30am); MBA Mortgage Applications (Mar 10) (10pm); NY Empire State Manufacturing Index (Mar), Retail Sales ex Autos (MoM) (Feb), Retail Sales (MoM) (Feb), Retail Sales control group (Feb), Consumer Price Index n.s.a (MoM) (Feb), Consumer Price Index (MoM) (Feb), Consumer Price Index Ex Food & Energy (MoM) (Feb), Consumer Price Index Core s.a (Feb), Consumer Price Index (YoY) (Feb), Consumer Price Index Ex Food & Energy (YoY) (Feb) (11.30pm); Business Inventories (Jan), NAHB Housing Market Index (Mar) (1am); EIA Crude Oil Stocks change (Mar 10) (1.30am); FOMC Economic Projections, Fed's Monetary Policy Statement, Fed Interest Rate Decision (5am); FOMC Press conference (5.30am); Total Net TIC Flows (Jan), Net Long-Term TIC Flows (Jan) (7am)

Have a great day's trading.