Originally published by AxiTrader
Market Summary
Friday was a bit of a flat day on US stock markets with revelations that Robert Mueller’s inquiry had indicted almost two dozen Russians for meddling in US politics knocking the market a little lower. At the close the S&P 500 was up just 0.03% to 2,732, the Dow was up 0.08% to 25,219 and the Nasdaq 100 was 0.36% lower at 6,770.
But where Friday ended quietly the week was a stellar one for US stocks with the Dow up 4.25%, the Nasdaq 5.31% higher and the S&P 500 rose 4.3%. That recovery in US markets across the week helped global markets recover.
Here at home SPI traders are a little more circumspect with prices off 7 points from Friday’s disappointing close which saw the ASX dip back below an important Fibonacci level at 5916.
But it was bonds really, and the absence of further aggressive selling in the wake of continued strong US data, the CPI, and PPI which is the big story and for me driver of this equity market rebound. At week’s end the US 10-year sat at 2.88%, the 2 was at 2.19% so the curve is back down at 68 points – nine points below the week’s high.
There is a lot of debt being issued by the US Treasury this week with almost $200 billion on offer from the front of the curve out to 7 years. Something to keep an eye on given the US dollar is weak because of twin deficits and Treasury issuance theory that gripped traders in the past week or so.
And speaking of the US dollar we might be able to say “that’s it” for now after Friday’s very solid reversal. Such a move on a Friday before a long weekend in US markets is always questionable to a certain degree. But the fact that euro, among others, was chased back from a new high of 1.2555 to sit at 1.2406 this morning speaks to the key reversal Friday’s candle of the price action suggests.
The Aussie, yen, pound and many other currencies are also sharply of their Friday peaks against the US dollar. In early trade Monday the AUDUSD sits at 0.7914, USDJPY is at 106.38, and GBPUSD is at 1.4016. The kiwi is at 0.7314 and the Canadian dollar sees USDCAD sitting at 1.2548.
On commodity markets gold is a little bit lower after trading up above $1360 on Friday. It’s at $1347 as I write. Oil was higher though in what was a very good recovery over the week as both Brent and WTI held important support levels established the previous week. That rise came despite further increases in the US rig count which rose by 7 to 798 – the highest number in three years. Copper too reversed off its highs. But at $3.23/24 it is still strong – but near the top of the range.
On the day ahead it should be fairly quiet given the US is out tonight for President’s Day and parts of Asia are still off for the Lunar New Year. Europe might have some selling to do when it comes in to catch up with the dip in the US.
Otherwise it’s quiet here in Australia while in Japan we see the release of the Reuters Tankan and Jan trade balance. Euro area trade and construction is also out.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US data on Friday was again strong. Homebuilding rose to a one-year high while building permits hit the highest level since 2007. Export and Import prices were both higher as well rising significantly more than forecast in January. That took the year on year rate for export price rises to 3.4% while import prices grew 3.6%. Michigan consumer sentiment was also stronger with a print of 99.9 against 95.7 last while February’s reported conditions rose as well to 115.1 from 110.5 in January. Solid data yet bonds rallied!
- My colleague Milan will do his usual weekly wrap of the CFTC data which caught his eye. But I wanted to include a table each Monday from now on of where the big speculators are positioned in currencies, oil, gold, the VIX, and US 10’s. Save for the yen and Swissie the US dollar was a little more favoured the data – as at COB last Tuesday in North America – showed. Bets on gold, oil, the VIX, and US 10’s selling off further were pared back a little.
- What’s interesting about that, is that even a bond bear like myself recognises that the US 10 year bond is so steep it might need a pullback, fall, or consolidation before it can conclusively break 3%. I often write that prices that go vertical usually need some sort of rest/pullback. And perhaps the bear is priced in already given the lack of reaction last week to the CPI and PPI among other reasonably solid data. The weeklies posted an ominous candle last week and Thursday/Friday’s combo is equally ominous. We could see a consolidation back to the trendline at2.83%, perhaps 2.70/2.72% which is the 38.2% retracement level of the latest up move in 10’s. My fast moving average is at 2.81% and my slow moving average is at 2.70%. For me that reinforces those levels above as the ones to watch.
- And also interesting is that with a 0.81 correlation between the moves in US 10’s and euro if 10’s stop selling off and fall a little then the US dollar may catch a bid. Indeed that is the working hypothesis that popped into my head over the weekend as I was not thinking about the market. Indeed I was getting ready to go to a mate's 50th birthday party when that thought suddenly appeared. Anyway, A large number of charts show important reversals in the US dollar. Watch bonds folks.
- Special Counsel Robert Mueller on Friday indicted 13 Russian nationals and three organisations for election interference. It’s caused the usual kerfuffle including President Trump chiding the FBI for wasting so much time on the probe and missing the warnings about the accused in the latest mass shooting in Florida. Russian Foreign Minister Sergei Lavrov called it blather. But NSA, General McMaster, said at a Munich security conference over the weekend that Russia is still trying and is failing. Interestingly, and perhaps unhelpfully for the corporation, a Facebook (NASDAQ:FB) executive kind of sort to contradict the Mueller inquiry by stating most of the Russian money has been spent since the election. Someone needs to tell that fella shining a light on yourself with a straight arrow like Mueller running the investigation is not a good idea. And his claim also misses the point. Having succeeded in disrupting the election why wouldn’t Russia up the ante and foment more upheaval? It’s certainly what I’d do.
- But I’m blathering about Facebook and Russia because of two themes that continue to simmer. Regulatory scrutiny for Big Tech (Belguim has threatened Facebook with a €100 million fine over privacy breaches) and the Russia, US, Iran, Israel (and to a lesser extent Saudi) face off in Syria. There was much pushing and prodding on all sides at the aforementioned Munich conference with Israeli Prime Minister Netanyahu taking the prize holding up a piece of the drone it claims Iran sent into its airspace the previous week. It’s all a backdrop to a Reuters exclusive I saw this morning which says the US is asking its European allies to work with it on overhauling some aspects of the Iran deal in order that President Trump will recertify compliance.
- China has warned the US that it may retaliate if the Administration imposes metals tariffs. That comes after US Commerce Secretary Wilbur Ross said last week that the Administration may impose tariffs of up to 24% on imports of aluminium and steel. Wang Hejun, chief of the trade remedy and investigation bureau at China’s Ministry of Commerce, said in a statement that,” If the final decision impacts China’s interests, China will certainly take necessary measures to protect its own rights”. South Korean and Japanese officials, not to mention India and other nations are all watching closely as well. Trade wars folks. Not a good thing for a global economy just now starting on a real and self-propelling economic expansion.
Australia
- Disappointing. That’s the word that springs to mind when I look at Friday’s dip to close at 5904 for the physical ASX. I say that because, as I highlighted in Friday Morning’s piece, 5,916 was the good old garden variety 38.2% retracement level of the big selloff the previous week. That the price was able to get to 5,938 and then fall all the way back into the close is a testament to caution. Of course, that was caution which the price action in the US markets, like the S&P, then proved correct Friday night. Indeed the candles on the S&P 500 and ASX200 are fairly similar and ominous. It’s just that while the ASX struggled with the 38.2% level the S&P 500 was dealing with the 61.8% level of the move.
- Turning to the price action on the SPI now and given it is open almost a full turn of the clock it has had deeper down moves and thus a bigger recovery. So, like the S&P 500 it was the 61.8% retracement of the fall which constrained its price action in the last couple of days trade last week. As we face the week ahead this 5,892/5,922 region looks tough.
- Turning to the Aussie dollar now and it too failed at the 61.8% level of the down move before falling back to the 0.7890 region. That is the key for me in the week ahead. If that level breaks then the Aussie is headed back toward 0.7850, and then 0.7800. Much of this move may come from the US dollar side of the cross once again and also through the negative feedback loop of a stronger US dollar on commodity prices which will then, in turn, weigh on the AUDUSD.
Forex
- USDJPY is off the mat this morning after Japanese policymakers finally kicked up the smallest of stinks Friday. While the newly reappointed (officially now) BoJ governor Kuroda again stressed it is too early to withdraw stimulus Japanese finance minister Taro Aso said he would deal with forex moves “with a sense of urgency” after USDJPY fell to 105.54 in trade Friday. His comments were in line with those of colleagues cabinet secretary Suga who had said the move was becoming “one-sided”. Jawboning folks, an age-old tool for arresting currency moves but not always effective. Indeed the Japanese will be hoping that Friday’s key reversal in the US Dollar Index is the start of a sustainable recovery for the Buck so that it takes downward pressure off the yen which broke the downtrend line which stretches back to 2012 last week. 107.50/108.00 likely needs to be retaken for the Japanese officials to be completely satisfied and the outlook turn higher as USDJPY moved back into the wedge formation. Without that a move to 103.50, 101.50 and ultimately 98 can’t be ruled out.
- Turning to the US Dollar Index now and the key reversal, and the not perfect but close double bottom above 88 might be a sign that the outlook has turned. Indeed if the US bond market can get through all the issuance this week with rates flat to lower we may see the US dollar higher. BUT again all I can say so far as this is a hiatus in what is an otherwise still strong US dollar downtrend. I’d still need to see 91 give way topside for the DXY to be confident that a bigger bounce was occurring.
Commodities
- An increased rig count, US production sticky above 10 million barrels a day, and a slight uptick in US inventories lately haven’t been enough to knock oil down and through recent support. Indeed both WTI and Brent rallied strongly last week as the support zone established during the acute phase of the recent selling held firm once again. I’m not sure oil is out of the woods in a medium-term sense given these trends. But for the moment the price action suggests there are still buyers lurking on any dips. In terms of Brent crude the $64.85/90 region is the 38.2% retracement level of the fall, $65.86 the 50% and $66.84 is the 61.8% level of the move. A break of $65 could see a run a higher. But unless the 61.8% move is taken out a retest of the lows, and possible break, still seems high.
- Gold has moved with the US dollar but looks biased back toward the mid-Bollinger band level at $1337 after making a kind of double top. Here’s the chart.
Have a great day's trading.