Upside Volatility

Originally published by AxiTrader

Market Summary (Wednesday, April 4 – 8.03 am Sydney)

Upside volatility.

That’s what we saw in US stocks overnight with all three of the big indexes closing higher. That’s a good day for the bulls but it’s also an “inside” day in chart speak which doesn’t really tell me anything. But at least the bulls will be pleased prices stopped falling.

Indeed, stocks hadn’t done much for most of the day but a story saying the White House is not looking at any action on Amazon (NASDAQ:AMZN) – which countered the President’s earlier tweet and comments - seemed to help sentiment in the last couple of hours of trade. So at the close the S&P 500 was 1.26% higher, up 33 points and easily back above the 200 day moving average, at 2,614. The Dow is at 24,033 up 1.65% and the Nasdaq is up 1.06% at 6,458.

Europe missed out on the rally for the most part and although the FTSE MIB managed to increase 0.44% the other major indexes were lower. The DAX finished down 0.78%, the CAC fell 0.29%, and the FTSE was 0.37% lower.

But it is a different story for the S&P/ASX 200 which had a remarkable day shrugging off the weak lead from Wall Street yesterday. SPI traders have continued that trend overnight running with Wall Street’s bulls and adding 23 points to where prices closed yesterday. Unless retail sales and building approvals are appalling today we should see a better day on the ASX200 today – 5800 anyone?

On forex markets it was another mixed night with the US dollar on balance a little stronger but not evenly. The euro dipped a quarter percent to 1.2269, while USD/JPY rose 0.7% to 106.61. But the pound is about 0.1% stronger at 1.4058 and the kiwi has fairly soared – for a flightless bird – with a gain of 0.6% to 0.7254. Likewise the Loonie – which can fly – gained 0.8% against the US dollar with USDCAD falling to 1.2803 on positive NAFTA news and a recovery in oil.

The Aussie was almost left behind in the rush for Canadian dollar and kiwi, rising just 0.3% to 0.7684. It did manage to lift above 77 cents to a high of 0.7706 in the past 24 hours. But that has proved unsustainable in the face of retail sales today and a little stronger US dollar. 11.30am is huge for AUD/USD traders today given RBA concerns – articulated again yesterday - about household consumption.

Elsewhere gold lost $8 an ounce to $1332, copper has hung tough with a quarter percent gain to hold around $3.04 a pound. Oil was higher with gains of 0.8% and 0.7% for WTI and Brent. But iron ore is a little lower down 2% overnight.

And US 10-year Treasuries are a little higher at 2.78% with the 2's rising to 2.78%.

On the day 0.3% is the magic number forecasters are expecting for February retail sales after January’s disappointment. Building approvals are also out and expected to fall 5% on the month.

Offshore we get the Caixin services and composite PMI’s for China and then tonight there is a big event in the release of the EuroArea inflation and unemployment data. The US will see the release of the ADP employment report in the run up to Friday’s non-farm payrolls. We’ll also see the ISM non-manufacturing data and factory orders.

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

International

• Stocks rallied overnight amid what feels like a clear shift by investors to try to focus on the positive. I personally had a number of folks write to me yesterday about the upcoming earnings season and the prospects of that to rescue the market from itself. It’s something Patrick Commins of the AFR Tweeted about yesterday afternoon when he shared a Credit Suisse (SIX:CSGN) chart which suggests the coming earnings season “sets up the market for a rebound”. I retweeted adding, “In the past we'd say, ‘well if that's consensus then we need beats to consensus to cause a rebound’. But things are so newsflow, short term, and passive/index/ETF lead at present that perhaps this is in fact all we'll need to see a bounce. After a little test lower :)”. I clearly got the last bit wrong overnight and we’ll see about earnings when they come. Certainly it’s a story gaining some currency as this one from the WSJ suggests. Either way we’ll know a lot about the economy, earnings, and market sentiment, soon. Here’s Patrick’s chart:

• Speaking of which the flow of funds out of US stocks in the past week suggests some genuine fear. Reuters Lipper reports that the week to last Wednesday investors pulled funds out of the market – for the third week in a row – “withdrawing $11.9 billion. While fund investors were net redeemers of equity funds (-$14.4 billion), they padded the coffers of money market funds (+$2.4 billion), taxable bond funds (+$121 million), and municipal bond funds (+$37 million)”.

• And perhaps we can see why folks need to be cautious in an article at Bloomy citing Leuthold Weeden Capital’s Chief Investment Strategist Jim Paulsen who said investors should “proceed with caution” given an indicator he build is flashing a warning up near levels seen in 2000 and 2007.

Source: Bloomberg

• In summary Paulsen said, ““Historically, this indicator has not been infallible, but its periodic cautionary advice has been extraordinary since at least 2000,” Paulsen wrote. “At a minimum, equity investors should not limit their attention simply to the struggles and messages coming from the stock market. Rather, chatter from all financial markets should be considered and currently they are jointly whispering to ‘proceed with caution!’”. Indeed. Whether the indicator is wrong or right it speaks to continued volatility.

• In Fed news the San Fran president John Williams has been confirmed as the new boss of the NYC Fed. That means he’ll now be a permanent member of the FOMC voting panel rather than a rotating one. Williams is a supporter of raising rates at the moment but has also canvassed changing the Fed mandate in the past. Also out overnight were comments from Minneapolis Fed president Neel Kashkari who sounded almost hawkish saying that he is surprised how much the tax cut has lifted confidence – something the Administration has suggested folks ARE underestimating – but he also noted that he’s unclear if there will be any impact on LT growth. He did say he’s more focussed on the real economy rather than the market volatility. Lael Brainard was also speaking this morning and highlighted again she thinks rates need to rise and said the tax cuts could re-anchor inflation expectations back up near 2%.

• President Trump is a great study in real time behavioural economics/finance/negotiations – whichever one you prefer. I say that because he is superb at anchoring his opponents and then getting what he wants. By starting off in an uber-aggressive manner with lots of threats and bluster he seems to be able to manoeuvre his opponents – be they Canada and Mexico, the Republican Party, South Korea, North Korea, and others – into thinking that what they would have previously thought an unworkable deal is now suddenly palatable because the alternative is worse. I know I have written this previously but this the ART in Trump’s deal making and it’s a well established process those of us who study behavioural economics and finance understand.

• I raise it again this morning because the President is doing it again with the wall in Mexico – talk overnight the Military is being deployed to the border – and he’s doing again with China. With regard to the latter last night Pres Trump praised President Xi but said he had issues with China’s trade and IP practices. Can he win this battle? Or is Xi fresh from his own battle to win complete control of China and the CCP an opponent Trump is underestimating? The Global Times continues to rail against Trump with editorial after editorial. Yesterday it was to suggest the issue isn’t China but the practices of corporate America in moving factories to China. Overnight, after news broke of impending new tariffs to curb China’s rise in technology, the GT was at it again saying, “There is no way for the US to rebuild the hegemony that elites in Washington picture. As globalization and democracy have dented the foundation for that hegemony, the US lacks the strength, will and internal unity needed. In fact, the US has found it difficult to subdue Iran and North Korea, not to mention major countries like China. Washington cannot rule the world as an empire. The US is probably able to scare off other countries from confronting it, but it can't make others surrender and prioritize US interests”. We live in interesting times.

• And remember a couple of week’s ago I suggested the northern European central banker to succeed Mario Draghi may not be the Bundesbank’s Jens Weidmann but Finland’s Erikki Liikanen. The FT has run a story saying he’s run to the front of the pack.

• The FT also has a story on America’s new digital cold war with China. Richard Staropoli wrote, “Any day now, the Trump administration will announce a new round of tariffs against China. Unlike the “old economy” steel and aluminium tariffs — against which the Chinese this week unveiled retaliatory duties on US food imports — the next tariffs will explicitly target Chinese technology. The new round will aim straight at Beijing’s “Made in China 2025” programme, which the US sees as a direct threat to American economic hegemony”. It’s a nice intro isn’t it. It’s also probably correct. And that day has come. Here’s the USTR list of products effected by tariffs. It’s pretty comprehensive.

Australia

• The RBA is on hold but it is also clearly noting the increased participation rate is dampening wages and that in turn is a potential headwind for household consumption. On the later governor Lowe said yesterday that, “One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high”. On employment I tweeted yesterday that the #RBA has changed the focus from "unemployment rate declined" to "Employment has grown strongly over the past year, with employment rising in all states". It also noted UE sticky at 5.5% in the April statement. No argument on employment growth but sounds a little #Lipstickonapiggy. My sense is that is where we are and the Australian economy is as reliant on population growth domestically and offshore influences as ever.

• Not that the ASX was or is hurt by that. It was a pretty remarkable recovery from the lows yesterday even when you account for the Santos bid effect. I received emails about bargains in Australian stocks at these levels yesterday as well as the overall US market which suggests there is still a residual level of demand out there – especially for yield. That can help on any day. But it probably can’t forestall the offshore, US, market induced effects if the sell off in the states is not yet done. But the feedback is that if we do head toward the 5600/5650 level there will be plenty of buyers lurking.

• The Australian dollar continues to do well, all things considered. Like many other currencies is is rangy at the moment and it certainly has the benefit of a massive trendline stretching back to late 2015/early 2016 sitting down and around the 76 cent mark. The fact that the Aussie has been hanging tough even when stocks stink tells us much about overall sentiment toward the battler. At least against the Greenback. ON the crosses it might be a different story – especially against the kiwi, which has miraculous strength.

• On the day the Aussie will be driven by retail sales and what it says about the concerns governor Lowe articulated again yesterday about consumption. Anecdotes aren’t evidence, but it does seem like the breakdown between the rising cost – and percentage of household budget – of non discretionary items is biting into discretionary items. Wages need to rise to fix that. But for the moment with a sticky unemployment rate, underemployment which ticked up a little, and a rising participation rate that doesn’t look like it will happen in a hurry. So retail sales are key.

Forex

• It’s a mixed-up world of forex at the moment. Certainly the moves aren’t that big and certainly most pairs are in some sort of trading range against the US dollar which continues to be on the back foot in almost every regard. Indeed I mentioned in yesterday’s note that the Atlanta Fed had upgraded its GDPNow calculation to a reasonably robust 2.8%. I’ve also mentioned that while the European, and other, Citibank Economic surprise indexes (CESI’s) have tanked recently the US has not. But neither that reality, not the fact the Fed continues on it’s path toward policy normalisation can persuade dollar sellers to change their tune.

• For sure the US dollar is hold in against the yen. But like the euro’s 1.2150-1.2550 range USD/JPY is just mapping out what looks like a rough 104.50/107.50, maybe 108.50 range. The kiwi too after a false break below 0.7180 a couple of week’s back has rebounded back inside its range. The Canadian dollar and Mexican peso are doing better over hopes of a NAFTA deal as soon as this month. But overall forex traders are not convinced one way or the other that for the most part they should buy or sell US dollars – and other major currencies – aggressively at present. When or how that will change I am not sure. Could it be a big miss – topside or lowside – for non-farms this week? Might it be the wages data contained within the jobs data? I honestly don’t know. This is a weird market right now. Prone to short term news based moves while the long term is range bound.

• In terms of chart of the day I can’t go past the Canadian dollar and it’s retest of the 38.2% retracement of the recent rally. Last night’s low of 1.2780 is the key. Prices are at the bottom of the Bolly bands anad may consolidate here. But a break would suggest further Canadian dollar strength against the US dollar and on the crosses.

Commodities - oil

• Not everyone is bullish oil. I myself am torn between the resistance the recent highs offer and the reality that a break would be a very strong technical signal for a rally of perhaps as much as $8-10 a barrel. I’m also torn between what is a clear signal that the Saudis appear to want to rope the Russians into a production cut for the long haul and the Russian energy minister again repeating that now is too soon to talk about an extension to the cut.

• And for me one of the more bullish setups comes from the real chance that just next month President Trump will repudiate the Iran nuclear deal. But the obvious question is what that actually means for Iranian oil production and thus the global supply/demand balance. But there is also a chance that the Saudi/Iranian rivalry fractures OPEC and the resolve for continued production cuts some – like Nitesh Shah, commodities strategist at ETF Securities say. CNBC reports he said, “Saudi Arabia-Iran tensions appear to be intensifying. While this provides a geopolitical premium in oil for now, it could develop cracks in OPEC's unity, which could end the pact prematurely”. Of course it could. But my sense is that this is a case of my enemy is my friend in this regard. Both nations need oil as high as possible given domestic and fiscal considerations.

• To the charts now and it’s too early to tell if the selloff is over. The API data this morning showed a big draw but we’ll see what the EIA data tonight shows. Crucially we’ll also see how the market reacts. Anyway here’s the WTI chart for a change. There is a small cluster of moving average support around yesterday and the day before’s lows. Below that it is the tentative trendline. Above is the recent high which is also the 50% of the 2014/16 selloff.

Have a great day's trading.