Originally published by AxiTrader
Key Takeaway
US stocks ended the quarter with a little fall as the Dow Jones Industrial Average dipped 0.3% and the S&P 500 fell 0.2%. US bonds retained a mild bid tone as data showed a further increase in PCE prices and expenditure. But probably more importantly three Fed speakers – including NYC Fed’s Bill Dudley – put the shrinkage of the Fed’s balance sheet by years end on the table.
That implies the potential for a more muted Fed tightening cycle over coming years and is an emerging Fed talking point worth noting.
Continental European stocks had a good day but the FTSE 100 fell around 0.6%. That hasn’t hurt the local market however with SPI traders marking the index up 7 points to 5855 after Friday’s half a per cent loss of 31 points.
On forex markets the euro had another shocker as its reversal of early week strength continued. Sterling was higher on trade data, USD/JPY fell back outside the range, and the Australian dollar was a little lower and is opening the week at 0.7627.
On commodity markets gold is $1248, copper reversed as the big three mine disruptions fade, and crude oil ended the what was a good week’s recovery off $47 support (WTI) with another positive session.
Now for the new month and a raft of data in Australia and across the globe.
The RBA makes its decision on interest rates on the same day governor Lowe speaks at an RBA board dinner in Melbourne. Today we have Australia’s monthly inflation data, retail sales for February along with building approvals. Of course across the planet there is the usual dump of manufacturing PMI data today as well.
Australian trade is out tomorrow before the RBA decision, global services PMI’s are also out this week, as is US non-farm payrolls and the very interesting meeting between Chinese president Xi and US president Trump in the US.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -5 (0.31%) 2363 (7.19 am Sydney)
- Dow Jones Industrial Average -65 (0.31%) 20663
- Nasdaq 100 -3 (0.04%) 5,911
- SPI 200 +7 (0.12%) 5,855
- AUD/USD 0.7627 -0.19%
- Gold $1248 +0.48%
- WTI Oil $50.60 +0.41%
International
- For the first time in a while US non-farm payrolls probably aren’t the highlight in the week they are to be released. I say that because the meeting between the presidents of China and the US has the potential to overshadow the data after president Trump’s tweets Friday about Deficits.
- That’s doubly important given the EO’s president Trump signed on Friday which asked the Commerce department to look into identifying any abuses that lead to US trade deficits. In particular Reuters reported over the weekend that “Commerce Secretary Wilbur Ross told reporters that one of the orders directs his department and the US Trade Representative to conduct a major review of the causes of US trade deficits, from unfair trade "cheating" to ‘currency misalignment’ to ‘asymmetrical’ treatment of tax systems by the World Trade Organization”. Peter Navarro’s trade representative office also called out China for financial support of industries like steel and aluminium which have lead to global flooding of cheap exports.
- The Chinese are certainly doing their best to put a conciliatory face on the meeting. Chinese Foreign Ministry spokesman Lu Kang told a daily briefing that "with regard to the problems existing between China and the United States in trade relations, both sides should in a mutual respectful and mutual beneficial way find appropriate resolutions, and ensure the stable development of Sino-U.S. trade relations. " Even the Xinhua news agency was conciliatory noting that to think one meeting can fix differences is unrealistic that “as long as the two nations can maintain their good faith, which they have shown recently, to talk and to make concessions based on mutual respect, then no difference would be too difficult to iron out”.
- China did say it has no policy to devalue the Yuan!
- Also on China – IMF data released Friday showed the Yuan hasn’t made much of a dent in global foreign exchange reserves just yet. Data showed that China’s currency made up just 1% of global reserves in 2016.
- The global stock market rally stalled in March as a lack of fresh catalysts and some diminution in belief that president Trump can fully deliver his agenda crept into markets. This seems to have been reflected in some small adjustment to big investor positioning. Reuters reported it’s latest poll of global investors in the US, UK, Europe, and Japan showed “investors trimming holdings of U.S. stocks to 40.8 percent of their global equity portfolios, from 41.2 percent in February. This is the lowest level since Donald Trump was elected US president in November on a platform of tax cuts and spending”. I've had a look at the data and stock nexus in this piece here - and there's a warning for the bulls.
- The conversation at the fed is shifting. Minneapolis Fed president Neel Kashkari – the dissenter at the rate hike last month – was the first to raise the notion of the Fed letting it balance sheet shrink a while back. He reiterated that on Friday and was joined in that notion by separate comments from NYC Fed’s Bill Dudley and Chicago Fed president Charles Evans. Dudley went so far as to say that it could happen this year. Watch bonds folks – they didn’t react Friday but this might be important.
Australia
- The market dropped 31 points on Friday for a half a percent loss. I confess to having been surprised by the strength in the financial sector – banks in particular – over the past few weeks. Yes I get the fact that an ability to move outside of the RBA means that the banks will make more NIM and as a result that means higher profits all other things equal.
- But it’s also clear that APRA is trying to slow demand for bank product. So it will become a question of flow and price for new product the banks sell. Clearly I’m in the minority at the moment because it was the banks which helped turbo charge last week’s move. But APRA is trying to slow the game down and as a behaviouralist there are important signals that will send to the population which could include a message that household wealth growth is about to slow or reverse.
- I worry about this for the economy even though the RBA continues to say the Australian economy will grow at potential in the years ahead. I’m normally Pollyanna not chicken little but I do see some rough times ahead for the domestic economy.
- And on that basis I’m not on this ASX200 rally right now. On the charts it could run to 5900, maybe a little more, but I’m in cash at the moment.
- Let’s see what the week brings, what the RBA says, how the data flows, and of course where US markets go.
Forex
- Sterling caught a lift Friday night after the release of the much better than expected current account deficit which halved to 12.1 billion pounds in the last 3 months of 2016. That suggested to many that the fall in the pound may be doing its job. Certainly any of us who lived thorugh Australia’s J Curve back in the 1980’s know that a lower currency can help. It’s natural to be worried about Brexit – especially at such an early juncture and with financial services such a large part of the economy. But a weaker currency is a pretty good cure-all.
- Anyway the pound is sitting at 1.2543 this morning against the USD while EUR/GBP is at 0.8496 looking extremely vulnerable.
- The euro had another night to forget Friday. It continued the capitulation of the bulls after the ECB sent the clear message last week – and inflation data seemed to support – that it is in no hurry to change policy. Euro is at 1.0660 this morning – down around 250 points from the high last week.
- USD/JPY fell back below the bottom of the old range Friday – it’s at 11.37 today and looking a little confused from a price action point of view – on the dailies anyway. Weekly charts still suggest lower levels for the USDJPY – maybe the changed conversation at the Fed might impact notions of policy divergence. But it’s worth noting that a Fed not reinvesting its bonds as interest falls due and bonds mature should naturally allow yields to rise.
- Looking at the Aussie dollar and we open the week with it on the back foot. It’s still within a range but the wedge pattern is ominous. This weeks data and RBA statements will be important.
Commodities
- WTI Crude has had an interesting period recently with a breakdown through the trendline from the 2016 lows, a retest, multiple tests of $47, and now a break back above the 2016 trendline. That’s an indication that solid demand remains below market – especially in the $47 region.
- But it’s also a recognition that OPEC, and Russia, are clearly pushing toward an extension of the production cut. I’ve written often that all OPEC is doing really is underwriting the investment and business plans of it rivals in shale oil with this strategy and that still holds true. But as Iraq pledged full compliance over the weekend with the agreement, as other talk about further cuts, and as investment banks like Goldman Sachs (NYSE:GS) continuing to assert the market IS rebalancing it seems traders haven’t given up on a crude oil rally.
- Indeed Reuters latest poll of oil forecasters says respondents expect WTI to average $55.29 a barrel in 2017. That means forecasters still see a big rally coming because the average for Q1 2017 was just $51.83. And that means to hit the $55.29 target across the year prices will need to move up and through that level and hold there for some time.
- Anyway here’s the latest chart:
- Gold had a solid bounce Friday night. After making a marginal new low below $1240 gold popped to $1248 Friday where it sits this morning.
- Copper is interesting at the moment. After breaking out of the little downtrend it has been in since early Feb’s aborted rally to $2.82 copper ended the week down at $2.65. The chatter in markets is that with the three big mine disruptions either over or close to resolution – in the case of Freeport McMoran’s Grasberg mine in Indonesia – that prices could come under pressure once more.
- On the daily charts copper looks a little messy but the weeklies just suggest a failed break. My charts suggest a move back to $2.55, possibly $2.55.
Have a great day's trading