Originally published by AxiTrader
Market Summary (7.47 am, Friday April 6)
Markets continue to react to the de-escalation of tensions between China and the US over trade that occurred over the past day and a half. Presidential economics adviser Larry Kudlow again sought to calm nerves noting the negotiations between China and the US are ongoing and could have a great ending.
As a result, stocks are higher again across the globe, US rates are rising with the 10-year treasury back at 2.84%, and the US dollar has caught a bid making significant headway in particular against the yen where USD/JPY has broken up and through the recent high.
It makes for an interesting set-up as we await global markets most important monthly economics release tonight with March non-farm payrolls to be released at 10.30 pm Sydney/Melbourne time. Will we see another strong jobs number, what about wages, and crucially what will 10-year bonds do?
Back to the overnight action then and it’s been another good night for stocks with very solid rises in Germany, France, Italy, and the UK of 2.9%, 2.62%, and 2.35% (for both the FTSE MIB and the FTSE). Across the Atlantic at the close the Dow Jones Industrial Average is up around 1% to 24,505, the Nasdaq 100 is up 0.53% to 6,594, and the S&P 500 rose 0.69% to 2,662 – more than 100 points above this week’s low.
On forex markets traders are starting to notice the build up of positives for the US dollar. It seems those who sold on the back of worries over the trade spat and sought the safe haven of the yen and gold are exiting with the yen now sitting at 107.45, up another 0.65% since 7am yesterday morning. That’s about 200 points off the low earlier this week.
Likewise, the euro is lower, but less so, with a fall of 0.35% after EU data (services PMI’s, retail sales, and PPI) all continued to print on the weaker side of the ledger. The CESI for Europe is now down at -72.5. So it’s no surprise the euro is off 0.35%. The surprise is it is still at 1.2237, and above the recent range low around 1.2150. The pound is a little lower as well losing half a percent as its economic momentum wanes too – GBP/USD is at 1.4003.
On the commodity bloc the kiwi's levitation took a little hit and NZD/USD is down half a percent to 0.7268. The Canadian dollar did best of the three with a gain of 0.17% with USD/CAD falling to 1.2748 while the Aussie dollar reversed 0.44% and is at 0.7680.
Non-farms is going to be huge tonight. Range breaks or range confirmations in forex markets awaits.
On commodities gold is down $6, 0.47%, as the US dollar and stocks both gain. It’s at $1326. Copper had a nice bounce as well in US trade up 1.76% to $3.06 amid mixed base metals trade. On crude oil markets the Qatari oil minister said it is too soon to exit the production cuts which, when combined with the better tone in markets, helped Brent and WTI both rally 0.43% and 0.6% respectively. Chatter is starting to increase about the Houthi targeting Saudi oil infrastructure which heightens the geopolitical bid in oil as well.
Also in Fedspeak Boston Fed President Bostic says inflation is about to leap above 2% in the next quarter or two and that rates need to rise as a result.
On the day today there is nothing of note in Australia, we get household spending data in Japan, industrial production in Germany, Canada releases its jobs data, and then the big one in non-farms for the Us tonight. The market is expecting 190,000 for March after Feb’s outsized 313,000 gain. The unemployment rate in the US is forecast to fall to 4% and the part rate is expected to rise again. But in many ways average hourly earnings are as important as the headline jobs number, perhaps more so. Economists expect an increase of 0.2% for the month.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I’m not going to give a blow by blow update on EU data. All you need to know is contained in this chart of the Citibank Economic Surprise Indexes (CESI) for the US, EM, and EU. Just look at that orange line. Ahem, Mr Draghi sir! Markets are finally starting to pay this divergence, and what it means for policy, a little more attention.
- On this topic though. With the massive US trade deficit last night the AtlantaFed has downgraded its guesstimate for Q1 growth back to 2.3% from 2.8% when it last updated the Nowcast for GDP.
- Larry Kudlow knows Wall Street, is a terrific communicator, and knows the medium of television better than anyone in the White House’s economic team. Indeed he might even get the power of TV as well as the President himself. Anyway, he’s been out hosing down concerns about a trade war with China and told Fox that trade barriers “will come down on both sides”. Reuters reports he said, “there is a process here. There’s going to be some back and forth, but there’s also some negotiations. I think we are going to get a deal over a period of time.”
- To counter that China state media says the nation never backs down. But the secret here might be an acceptable end to hostilities where both sides can claim some sort of victory. I was talking to Juliette Saly on Bloomberg Radio yesterday and noted I thought a negotiated settlement is still the most likely outcome. For example, China has just increased the cost of Soybeans, a staple in the economy. President Xi might be ruler for life now but he still understands his people. We had pork riots a few years back. The citizenry will not be happy if prices rise for their staples and Xi knows this. So I’m hopeful this is a big negotiation.
- That does not mean the Thucydides Trap has gone away. Indeed many folks are now talking about it. What it means is that right here and now China may not be in a position to fight as hard as it can in the future. So it may find a way to placate Wilbur Ross, President Trump, and the growing voices in the international community and business leadership – JPM’s Jamie Dimon is the latest to add his voice – who say that China has done the wrong thing on IP and broken the rules. We’ll see.
- Things could still go awry. But with Wilbur Ross at the helm my sense is not at the moment.
- And of course China’s holdings of US Treasuries is getting some airtime. You can read a story on Reuters here where they canvass the idea it could sell down and exercise a nuclear option in a trade war. We aren’t there yet. Here’s the chart Reuters tweeted on the topic. You can see a recycling effect.
Australia
- I love this chart form IFM’s Alex Joiner which compares the RBA’s forecasts for growth against those of other central banks. What Alex is highlighting is that the RBA is somewhat Panglossian about the outlook for the economy here in Australia when compared to the outlooks from other central banks which see the current sweet spot as unlikely to continue in the out years. What’s worth noting is the RBA has been Panglossian for sometime and forecasting bounces that have failed to materialise.
- But I highlight this chart today because it speaks to a risk to the Australian dollar, and to lower – not higher – interest rates if the RBA is wrong about consumers. Indeed I have long been banging on about the crunch APRA – and the RBA – are engineering in debt creation in Australia through their policies. APG 223 is the real force here in that it really looks to income and expenses when assessing a borrowers ability to repay their debt. It materially lowers the leverage available which in turn means smaller loans which in turn will lead to lower price appreciation – perhaps falls. It is no surprise to me that house prices have stopped rising across the nation. The question for me – which is Germane to the conversation about retail spending and household consumption – is whether the constraints on new originations lead to materially lower prices. At best I’d expect stagnation, at worst maybe 10-20% inflation adjusted falls. Time will tell – as it always does.
- And it might be too early for an adult beverage so save this, but Morgan Stanley (NYSE:MS) says the Australian property outlook is the worst in 30 years. So of you won’t remember that. But we had this thing called a recession back then :S. Anyway here is the AFR yarn on what they say.
- To stocks now and the SPI is up another 20 points this morning. But as yet neither it or the ASX200 yesterday has been able to take out the resistance I talked about. We are close though and the 20 point gain in the SPI suggests we’ll see the ASX200 index above 5,800 this morning. The next level of resistance though is 5,817 for the physical market. That’s the 38.2% retracement of the most recent downleg. The break up of the S&P reurns which showed solid runs for Basic Materials, Energy, and Industrials RICs should also help the local market.
- Looking at the SPI chart above is interesting though insofar as we didn’t see it hold above the 38.2% retracement at 5,793. Sure it’s up 20 at 5,790 – and looking good. But perhaps the lift in bonds has left traders here at home and in the US just a bit wary before non-farms tonight. That certainly makes sense. On the day if 5,793 can be bested then it’s 5,829/36 which should pull up SPI as it’s the recent high and 50% retracement level. Support is 5,759.
- Turning to the Australian dollar now and it’s remarkable the dissonance I felt yesterday when I wrote here in this space and then in my Aussie specific piece. While I wondered if it was time to buy the Aussie dollar there was enjoy residual US dollar bullishness for me not to. Indeed I’m short both the Aussie and the kiwi and looking for further weakness. It’s the trouble with writing a daily note but trying not to get caught in the maelstrom of mini-time frame machinations and perturbations.
- What we have here is the competition of time frames. We have an AUD/USD that is clearly getting support against the US dollar from the long term trendline which stretches back to the 2015/2016 low. And we also have an Aussie dollar that is getting some, if not much, of that support, from the weaker US dollar. All we need for a break to test 76 cents, perhaps lower, is for the US dollar to follow it’s break out against the yen with one against the euro and the Aussie could come under acute pressure. And that’s where the time frames clash. A long term weekly support at 76 cents against a shorter term daily downtrend where the Aussie could rise to 0.7760, or even 0.7800/20 and still be within the current downtrend.
- On the day the levels I’m watching are – last night’s low of 0.7673, this week’s low of o.7662, and last week’s low of 0.7646. Topside a break of 0.7697 might open a run toward 0.7710/15. But the sellers are likely to be lurking.
Forex
- It’s funny how narratives take hold. The Thucydides Trap I’ve been banging on about for ages is suddenly gaining traction and airtime and yesterday’s chart of the Libor-OIS spread and the US dollar is now a bit of a “thing” in forex discussions and on Twitter. That makes sense because when the spread fell heavily so to did the US dollar. Where this feeds into other narratives and maybe only needs a strong non-farms, or slightly stronger growth in wages, is that it’s a change in the conversation at the same time traders are starting to notice that European economic data has collapsed relative to expectations. Of course I’ve been banging on about this for ages as well. But the prevalence of charts showing the CESI for Europe running through my Twitter feed has grown materially in the past week or so.
- So traders are noticing tighter conditions for dollars, weakness in EU data, continued strength in US data, and a reduction in tensions between China and the US right now. And that combination is very good for the US dollar which could soon see a break out, up, and through resistance at 91 in US Dollar Index terms. Indeed talk or a DXY revival is growing – as this tweet shows.
- Short term it’s all about US non-farms. And while 91 is important in DXY terms for me the key is 1.2150 in the Euro. That’s the bottom of the current range for EUR/USD and a break is necessary to really get the US dollar moving – across the board. While it holds, the range is intact. Should it break my targets become the 1.1950, and then 1.1730 zones.
Commodities
- We need to keep an eye on the Yemeni conflict. It’s the flash point between thee Saudis and Iranians and the Houthis have started to target Saudi oil infrastructure. So far Riyadh has been up to the task of protecting its oil fields but the tactics have changed and oil infrastructure is being directly targeted it seems. That’s important because it only a short walk from some sort of material infrastructure damage and the Saudis increasing pressure on Iran either via the US or via a direct confrontation.
- Through in the fact stocks and bonds are rising again, that the Qatari oil minister was the latest to add a voice to the “keep the production cuts in place” theme, and we have a range top that may be approached again. Key here of course is that we are in a range at the moment – or a wedge if you prefer. And only a break of that range will get prices moving materially.
- Here’s Brent for today,
Have a great day's trading.