Originally published by AxiTrader
Market Summary
Stocks in the US are off their highs and had an awful afternoon after the minutes of the Fed’s most recent meeting reinforced the message that a few Fed speakers have been telling markets about the Fed’s need to move toward balance sheet size normalisation.
Stocks took a little fright but bonds and forex were more circumspect, perhaps because the minutes also revealed that the Fed wants to move toward balance sheet normalisation in a manner that is seen as “reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions”.
So the S&P 500 closed down 7 at 2352 off an overnight high of 2378, US 10's are at 2.33%, and the US dollar is stalled at 100.50. Locally the SPI 200 is down 17 points.
The afternoon slide in stocks is clearly a reaction to the fed given that earlier strength came after another booming ADP employment report (236k v 187k expected) suggesting Friday’s March non-farm payrolls is likely to be another strong print.
In other markets the British pound caught a nice lift of a strong print by services PMI (55 v 53.5 expected) and it’s back near 1.25. Elsewhere though it has been a fairly mixed 24 hours of relatively tight ranges although it is worth mentioning the Australian dollar found support again yesterday.
On commodity markets copper had a massive 2.6% bounce, gold is flat, and crude is off about half a per cent.
Today’s Caixin Chinese PMI and then Factory orders in Germany tonight will be important indicators of global growth.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -7 (0.30%) 2352 (7 am Sydney)
- Dow Jones Industrial Average -41 (0.2%) 20648
- Nasdaq 100 -34 (0.58%) 5,864
- SPI 200 -14 (0.24%) 5,845
- AUD/USD 0.7667 -0.0%
- Gold $125 -0.1%
- WTI Oil $50.86 -0.33%
International
- The Fed’s Minutes to its most recent meeting signal that it wants to “normalise” its balance sheet. This is huge news for traders in fixed interest and global markets more broadly. It means that a source of demand in US fixed interest markets is going to be reduced. All other things equal that would put upward pressure on US term rates. That in turn could put upward pressure on the US dollar, and weigh on stock prices a little.
- But the Fed is being very tentative in this early stage of the discussion – no doubt keen to avoid another taper tantrum and the potential instability that could cause in financial markets and the global economy. Indeed as I noted in the overnight summary above it says that expressly in the minutes. To this end the Fed also said “Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner”.
- Naturally the “how” of balance sheet reduction is important too and the fed gave guidance on that in the minutes as well. “When the time comes to implement a change to reinvestment policy, participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS. Policymakers also discussed the potential benefits and costs of approaches that would either phase out or cease all at once reinvestments of principal from these securities. An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.”
- I have been talking about balance sheet reduction for some time now – ever since Minneapolis Fed president Neel Kashkari mentioned it a while back. But don’t underestimate this as a game changer longer term folks. Maybe not today, maybe not tomorrow but taking the Fed out of the bond market will reverberate across global financial markets.
- But while I’m in the US I just want to highlight to readers that while I’m bleating about the top being somewhere around the 2400/50 for the S&P 500, and the risks associated with economic data not beating expectations as easily as it has been it is worth offering a counter view. So to that end it’s worth noting that CNBC reports Citibank says global equities will rise another 5% by years end. Citibank made that call it says because “fundamentals improving, valuations reasonable and interest rates still low we upgrade Europe, excluding the U.K., to overweight”. It said only 3 of the 18 points on its bear market checklist were flashing a warning sign right now that’s “compared to 17.5/18 in 2000 and 13/18 in 2007” Citi said.
- And while I’m on stocks the fed had something to say on this topic which suggests they may see some risks. The minutes said “Broad U.S. equity price indexes increased over the inter-meeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. A standard measure of the equity risk premium edged lower, declining into the lower quartile of its historical distribution of the previous three decades. Stock prices rose across most industries, and equity prices for financial firms outperformed broader indexes. Meanwhile, spreads of yields on bonds issued by nonfinancial corporations over those on comparable-maturity Treasury securities were little changed” (my emphasis).
- Donald Trump has removed Steve Bannon from the NSC – not market moving. But president Trump sees himself as a winner I think and he’ll cut and make changes where he needs to in order to get what he wants. I know Bannon has nothing to do with markets. But I expect the president to evolve and improve his efficacy this year and next. To me that means we will eventually get the policy implementation he has promised. It will just take time.
- Bundesbank president Jens Weidmann seemed a little more cautious speaking overnight than he has been recently. Weidman told Die Zeit “The time to keep the foot no longer on the metal, but to take it off slightly ... is approaching in my view”. But he added that any any slowing in bond purchases by the ECB could come in a year’s time.
- I wrote a piece wondering if markets are under-estimating the risk of a Le Pen victory in the upcoming election yesterday.
Australia
- Yesterday the local market again snatched a nice gain after mid morning weakness. The banks remain under pressure as traders worry that the macro prudential, and macro economic environment is turning sharply and quickly against them. There was some hope of a solid day today when London closed given miners did so well.
- But the big reversal this morning in the SPI 200 after the fed minutes knocked US stocks means that the stellar performance we saw from miners in the UK and the potential that had to boost the market today could be lost.
- So the lead of minus 17 from the SPI looks about right with the potential for a deeper move if Asia gets worried about the Fed tapering its balance sheet. The 200 index physically has support at 5815.
Forex
- Some days there just isn’t a lot to say in forex markets. That’s because they are big macro markets and more in reaction to that kind of stimuli. But what’s remarkable this morning is that neither bonds or forex markets have reacted to the Fed minutes and the clear signal that not only is it still going to raise rates but it is going to reduce the size of its balance sheet.
- Bond spreads matter and that – all other things equal – should naturally increase the US bond spreads to other nations giving support to the US dollar. But perhaps because the Fed is being so measured traders are taking it in their stride. Or perhaps no one really wants to add to US dollar longs before we see how this week’s meeting between the Chinese and US president’s concludes.
- Press reports say both sides a re a little nervous. And it’s no understatement to say this is president Trump’s most important meeting of his presidency so far – maybe even for the year. So cation makes sense in forex markets right now.
- Anyway specifically there isn’t a lot of movement other than Sterlings bounce back toward 1.25 as solid growth – AGAIN – and a very short market combine to keep the bears at bay.
- For the Australian dollar it rallied to about where it should have last night – 85/95 -but it’s drifted back with
Commodities
- Interesting price action in crude oil overnight. WTI is off about a third of a per cent to $50.86 and Brent is down 0.18% at $54.07 after EIA data showed inventories grew by around 1.5 million barrels last week not the 500 thousand odd draw the market expected. That was a bad enough miss but gasoline inventories also underperformed to expectations with a draw of 618,000 against the markets guesstimate of a 1.4 million barrel fall.
- So we are left with slightly ugly candles on both WTI and Brent this morning. In the case of WTI the price is a dollar off the overnight high but it has clung to the old trendline it recently broke down and through. Here’s the chart.
- Gold did nothing overnight and is quiet at $1255 largely unchanged. Ahhh, hang on the fact price is largely unchanged misses the reality that the price collapsed to $1243/45 after the ADP before bouncing once again. It found support at my fast moving average.
- Copper bounced quiet strongly again. There is much chatter that traders are looking over the horizon to the looming deficit in supply in a couple of year’s time. Whether that’s actually why prices rose 2.5% last night is hard to tell. But copper is closing outside and above the downtrend line from the $2.82 high for the first time this morning.
Have a great day's trading.