Originally published by AxiTrader
Market Summary
Another month older, a new one just begun after stocks closed out April with a mostly negative performance in Asia, Europe and the US.
The Nikkei 225 dipped 0.3% in Tokyo Friday and the FTSE 100 fell close to half a percent in the UK. Both outcomes were more negative than the very mild falls in Europe and dips of around 0.2% on both the S&P 500 (2384) and Dow Jones Industrial Average (20940). The Nasdaq 100 (6047) again performed a little better with a fall of just -0.02%.
All this came after an interesting mix of data was released Friday.
The key takeaways were UK Q1 GDP (0.3% qoq) was a little weaker than expected, EU CPI at 1.9% headline and 1.2% core was a little higher than expected while in the US Q1 GDP of just 0.7% annualised on the weaker side of the ledger as consumers didn’t follow their confidence with spending. But pretty much everyone – including the Fed – expected a weak result for the quarter so it won’t unduly worry the market. What’s important now is Q’s 2, 3, and 4.
Chinese PMI data was out over the weekend and printed a little weaker than expected for both manufacturing (51.2) and services (54.0). Traders will have a weather eye on Chinese data in what is a very big week of data, central bank meetings, and news.
On forex markets the week is opening with the euro above 1.09 (1.0909), sterling (1.2937) still strong after a run to 1.2965 Friday night. The yen is at 111.29, and the Swissie is sitting at 0.9938. The Australian dollar is one of the early movers with a loss of around 0.3% to 0.7468 as result of the weaker than expected – and weaker than last month – Chinese data over the weekend.
Gold is hanging tough at $1267, copper is at $2.59 a pound and oil markets remain in a state of flux as the continued increase in US rig counts and production numbers appear to be offset for the moment by more noises from the Russians and OPEC about compliance and a production freeze extension.
There are quite a few holidays across the globe to start the week as countries celebrate May Day. Most notably China, Europe and the UK are out. But the US is in and the release of personal income and personal consumption out tonight.
And of course this week not only do we get the RBA announcment and SoMP but we also have a Fed meeting and US non-farm payrolls - amongst many other things.
International
- US economic data is slipping still. Friday’s GDP and other data has driven the Citibank economic surprise index into negative territory for the first time since president Trump prevailed in November’s election. Such is the nature of these types of indexes. Hope and fear get overdone and forecasters tend to over or underestimate the real level of growth in the economy and so we end up with a series that cycles back and through zero. The question now for traders is whether the weakness is as expected or instead signals that Q2 is not as strong as markets had expected.
- This is important for the market because there is now a clear dichotomy between the data that supported the Trumponomics and Traumpflation rally and the performance of stocks. Now of course a large part of that is because of the sold earning performance we are seeing from US companies right now. Factset reports that earnings growth of those who have reported and those yet to report is estimated to end at 12.5% year on year. That’s up from pre-earnings season estimates of 9% at the end of the quarter. If 12.5% is indeed where we end up that will be the best performance since 2011.
- Amazing! How the heck does corporate America turn 0.7% annualised growth – or even the 2.3-2.5% expected across the rest of the year – into double digit earnings growth. I’m not going to say it’s financial alchemy, because it’s not. But it tells us the lemon is being squeezed somewhere else in the economy.
- And speaking of US data back to Friday’s GDP release and probably the most startling result was the weakness in personal consumption which grew just 0.3% in real terms over the quarter. That’s a collapse from Q4 2016’s 3.5% pace. And it brings into solid relief the whole debate about soft and hard data. As we have found in Australia consumer surveys can show pessimism or optimism in the extreme but it’s not often the case that their spending matches their sentiment in level terms.
- Anyway here is a chart from JP Morgan via Business Insider showing the depths of the collapse in consumer spending.
- In other data released Friday - Japanese retail trade (+2.1%) was stronger than expected but CPI (-0.1%) and industrial production (3.3%) were weaker than expected. Chicago PMI in the US was 58.3 versus 56.2 expected, Uni of Michigan consumer sentiment pulled back to 97 from 98.
- North Korea is still smouldering. President Trump warned Friday their could be armed conflict and is putting pressure on the Chinese to rein in its neighbour. By Chinese foreign minister Wang said at the UN China can’t do it on their own and talks need to restart. But that is something US secretary of state Tillerson ruled out in the same fora saying Pyongyang wasn’t going to be rewarded for breaking agreements and rules.
- S&P is worried about the UK funding itself after Brexit. It wouldn’t be a credit ratings agency if it wasn’t worried about something.
Australia – I’ve run out of time on Oz will update for the blog
- After Friday's marginal rally SPI traders have pencilled in a pretty marginal loss for today marking the SPI 200 down 8 points at the end of trade on Saturday morning. That seems like a reasonable result when look at the performance of the miners offshore (good) versus the performance of financials (not so good) and throw in the other 190 odd stocks in the 200 index which sometimes hardly seem to matter in index terms.
- Key in Australia, like the rest of the world, is just as everyone is going passive active management is coming back into its own. We don't trade individual stocks at AxiTrader so I won't go into the details in that level of specificity. But I have a working hypothesis that even though I never believed markets were efficient the way the EMH said they were the fact that so much of global stock market capitalisation is now managed passively means the precondition for market efficiency - lots of folks buying and selling on news and views - is now fundamentally undermined.
- That has some very important implications for markets, market volatility, and the signals we can get from them...as I say this is a working hypothesis I have been formulating in my head for about 6 months now. But I think it has profound impacts on how traders will interact with prices. I also think it offers huge opportunities.
- Anyway, back to the price action and it's pretty clear there is a battalion of sellers in the 5920/50 region pushing back any advance the bulls are trying to make in that area. Interestingly, and why I love trendlines, the recent high corresponds to an old trendline as you can see in the chart below.
- A full data calendar this week, monthly inflation today is important as is the RBA meeting and governor’s statement tomorrow, trade Thursday, and then the quarterly SoMP on Friday.
Forex
- The US dollar – and other currencies as a result – are at a very interesting juncture as we start May. US data as I discussed above has now turned negative for the first time since November. UK data prints have also collapsed, even more sharply. Europe, on the other hand, has been going gangbusters on the data front with the eco surprise index up above 70 against the US negative print.
- Against this backdrop – and taking the French election last week and this Sunday – into account it’s not hard to see why Euro has been the standout over the past week. But the big gaps across multiple forex pairs from last Monday is still yet to be filled. And the question on traders minds is clearly will it, and when.
- You can see the battle raging in the US dollar index chart right now.
- My sense remains we’ll get those gaps filled as we head toward Sunday’s French polls – just in case. And if that happens it will give the US dollar a lift it clearly doesn’t serve on the fundamentals. That is of course unless the Fed signals that it is not worried about the Q1 or recent data weakness and is still on track for a June hike when it meets this week. It’s not a quarterly meting so there is no press confernec or dot plot. But we’ll all be parsing the statement for clues on where the Fed’s thinking on the economy and rates is at.
- For the Aussie dollar the outlook remains negative. The data is not terrible. But the drivers of Aussie dollar strength are lacking right now and the Chinese prints over the weekend will not have helped sentiment. I’ll write more on this in my Aussie specific piece later on.
Commodities
- Russian oil minister Novak said the nation is almost at full compliance with the agreed production cuts and that Russia will comply fully from May. It’s worth noting though that the EIA said Friday that US production is continuing to climb as is the Baker Hughes rig count which rose for the 15th week in a row. Equally though Reuters polls show that traders and investors believe an extension to the production cut will indeed see the glut reduced by the end of 2017. Most pundits still expect prices to rise but the slip in prices has seen spec accounts reduce their massive net long from gigantic to just large.
- It all means oil markets remain in a state of flux with prices remaining supported in the hop – or expectation – that OPEC will indeed extend its production cut agreement. And of course with the highest possible price the market can bare is their aim they would be mad not to. Prices will collapse below $47 and keep running if the deal is not extended. It looks like it will be though with the Iranian oil minister saying consensus is building this morning.
- Gold had an interesting week to end an interesting month of April. It hit but rejected long term downtrend resistance around $1295 an ounce but equally found very solid support around the $1260 level. A break below $1258/59 could open up further downside and is the level to watch.
- Copper could dip again soon after the Chinese data and failing to break up through resistance last week. I’m watching $2.5750 as a sign a deeper retracement has begun.
Have a great day's trading.