Originally published by AxiTrader
Market Summary (7.31am, Monday April 9 2018)
Asian traders were a little tentative Friday. They restrained their worst fears of the impact of President Trump’s latest escalation of the trade tensions with China in his after NYC market announcement of the potential for another $100 billion of tariffs.
There is unlikely to be any such restraint to kick of the week after US stocks capitulated again Friday night to worries about what exactly the President and his administration are walking themselves into. Certainly there are fears of further escalation. But I also sense that the President’s advisors are trailing behind him trying to smooth over the ructions he creates.
Economic Adviser Larry Kudlow, who’s credibility with the market has already been shot by the President’s announcement on Friday, admitted on Bloomberg that negotiations with the Chinese had not really begun. Treasury Secretary Mnuchin, said a trade war is not the objective, but it is possible. And over the weekend President Trump himself tweeted, “President Xi and I will always be friends”.
Perhaps, but I wonder why, fresh from just securing President for life, do the Americans think Xi would back down on his first test over tariffs? Possible but seems unlikely. Especially when Peter Navarro said these are not negotiating tactics on Sunday.
Sleep walking toward battle seems the optimal way for me to put it this morning. And to extend that analogy a little further, news broke over the weekend that incoming US National Security Advisor Bolton is going to further poke President Xi by visiting Taiwan in June. As I tweeted over the weekend – this is getting beyond poking the bear. Oh, and now we have a possible face off with Russia and Iran in Syria as well.
Oh, and non-farms were quite weak with only 103,000 jobs in March with negative revisions to the previous months numbers of more than 50,000. UE was 4.1%, the part rate dipped a smidge to 62.9%, and hourly earnings are running at a 2.7% rate.
Anyway, back to the markets now and the S&P 500 dropped 2.2% to finish the week 2,604, off a low of 2,586 and above the 200 day moving average of 2,592. That fact, and the VIX of just 21.49 suggests investors still haven’t given up just yet – though the intra-week volatility suggests growing uncertainty.
At the close the Dow was down 572 points, 2.34% to 23,932 while the Nasdaq fell 2.435% to 6,433.
Europe’s physical markets will have some catching up to do when they open this afternoon as might Asia when things kick off in a few hour’s time.
Here at home. the SPI traders knocked 33 points off the June contract which closed at 5,739 on Saturday morning. That kind of a fall would suggest the S&P/ASX 200 dips toward 5,750. Last week’s low around 5,724 is key for the ASX 200 this week. That and 5,696 which is the bottom of the channel from the Q4 2015 low, and then 5,650 are the big levels to watch.
To forex now where the combination of fears of the trade war and a materially weaker than expected US non-farm payrolls knocked the US dollar for four, not six. Euro closed the week still below 1.23 at 1.22798, USD/JPY finished at 106.94 and the pound shot back up toward 1.41 to end at 1.4087. The kiwi was higher at 0.7278. But the Aussie and Canadian dollar came under pressure. The Canadian dollar is at 1.2780 as oil slipped again while for the Aussie the big risk is that the growing narrative around the slippage in global growth starts to undermine the US dollar weakness which has supported it recently. We’ll see how things play out this week – especially President Xi’s speech Tuesday. It ended the week at 0.7675. THERE ARE NO MAJOR CHANGES SINCE 5AM THIS MORNING TO OPEN THE WEEK ON FOREX.
To bonds now and the wash up of all of the above was that both 2’s and 10’s slipped a little to 2.27% and 2.775% respectively. It will be interesting to see what they do after one of the Fed’s biggest doves, Charles Evans, said Saturday the 2% inflation goal is close and rates in the US still need to rise. :S
On commodity markets oil slipped more than 2% with Brent closing the week at $67.11 and WTI finishing at $62.06. Gold is at $1332 – still stuck in the middle of this $65 dollar range. Copper lost 1% to $3.03 and like the Aussie might become vulnerable to a reweighting towards pessimism about growth.
On the day today it’s pretty quiet – besides the price action and potential moves that is. We get Japanese consumer confidence this afternoon and then German trade this evening. Us consumer expectations might be interesting tonight.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Where to start? I guess the reality is the ball is Chinese President Xi’s court now that the Americans have upped the ante with Trumps instruction to the USTR to “consider whether $100 billion of additional tariffs would be appropriate”last Friday. Those with an optimistic, need I say Panglossian, outlook highlight the word “consider” and the fact that President also says in his release the US is “still prepared to have discussions in support of our commitment to achieving free, fair, and reciprocal trade…” as evidence this is just another negotiating tactic. But President Trump’s chief trade adviser Peter Navarro said on NBC’s meet the press that the tariffs threat is not a negotiating tactic.
- Which brings me back to President Xi and his talk at the Asian Davos at the Boao Forum on Hainan. This is the event of the week for traders, investors, and markets. Will Xi crank the handle on rhetoric or will he strike a more conciliatory tone? That’s the key. The question is whether President Trump’s clear – to my mind at least – signal to Xi that he’s keen to deal resonates. Here’s Trump's tweet:
- And there is some chat about China and face insofar as folks say China won’t negotiate because it can’t lose face. To me that’s bunkum. President Xi might react differently depending on what the outcome of any negotiation means for China’s growth outlook but he’s first and foremost a politician and that will make him a pragmatic, if very tough, negotiator. And Trump is clearly trying to not make this personal.
- And just briefly on China and Taiwan. There was a story in the Taiwan News over the weekend saying John Bolton could visit Taiwan in June. It’s a story based on an Economist story. But TN gets it right when it says, “If Bolton does indeed attend the opening, it would represent what appears to be a tilt in favor of Taiwan by the U.S., after years of adhering to an ambivalent "one China" policy”. Given President Xi mentioned Taiwan recently in his speech to the National Parliament this might be more of a medium term worry than tariffs should it come to pass. I know I promised not to overegg the Thucydides references, but gee whiz. At least there is some good news insofar as the North Koreans are happy to put de-nuclearisation on the table reports this morning confirm.
- Oh and some news from the Washington Post President Trump may not see as fake, Fareed Zakaria writes that Trump is right, China is a trade cheat. This is important folks. Six or eight weeks no one in the press, or academic circles, would usually say this. Now it seems they accept it as gospel but still question the president’s tactics. Can you have it both ways? It seems with this president you can. Ignore his strengths and successes and focus on his weaknesses and flaws. That’s what us behavioural folks would call confirmation bias right there. That’s important because I strongly believe it is one of the things ailing the US dollar. The hurdle for folks to get bullish dollars is so much higher than usual because they dislike the President.
- Equally interesting this week though likely with less market impact, is where the US heads with regard to Syria, in the wake of the latest chemical attack which has been sourced to the Assad regime and which the President also tweeted about. He tweeted, “President Putin, Russia and Iran are responsible for backing Animal Assad. Big price to pay”. Also Friday the US put new sanctions on Russian oligarchs hitting President Putin’s closer allies this time.
- Anyway to the data and what a disappointing set of number the March non-farms turned out to be. The gain of just 103,000 was much weaker than expected but, as I saw on Twitter just before the announcement Friday night, about the usual 80,000 undershoot many were saying is usual for March’s numbers. That’s interesting and might help explain why Charles Evans was still upbeat over the weekend about inflation hitting 2%. What’s remarkable about his is Evans is usually seen as a dove. Jet he thinks inflation will rise and rates must move with it. This week’s CPI release Wednesday night (when the big Telco fall is due to washout) may be important for the fed outlook. Indeed the market is looking for an acceleration in core CPI from 1.8% to 2.1% and headline to 2.4%. Whether or not that matters in many ways will depend on what stocks do in the interim and what President Xi’s response is. If the market is right though it is a big shift.
Australia
- The S&P 500 finished off it’s low Friday. But what is important to know on that is the low was actually made in the very last hour of trade. So I’d still say the close was pretty week. Could have been worse, but pretty weak nonetheless. That’s likely to put downward pressure on the ASX today, particularly given every sector of the S&P 500 finished lower Friday. Even utilities lost 0.71%.
- So as I highlighted above the SPI’s fall would suggest the ASX200 dips toward 5,750. Last week’s low around 5,724 is key for the ASX200 this week. That and 5,696/5,702 which is the bottom of the channel from the Q4 2015 low, and then 5,650 are the big levels to watch.
- And rather than show the SPI this morning I wanted to highlight our CASH CFD for the ASX200. You can see the trendline I’ve mentioned. But you can see just why 6000 (5,594) beckons. It’s the simple 38.2% retracement of the 2017/2018 rally. Key also is the Feb low for the S&P 500 at 2,530/35.
- To the battler now and I sense the worm might be well and truly turning for the Aussie dollar against the US dollar and especially on the crosses. I say that because there is a new narrative taking hold about the turn in the global growth outlook. Whereas recently the trade tensions haven’t threatened sentiment about the outlook now that may be difficult given the slide in economic surprises. I picked up this chart via Zerohedge of that changed narrative. It’s an amalgam of the CESI’s I talk about all the time and have been highlighting have been slipping. For the first time in 8 month’s global economic surprises are – when aggregated – back in negative territory.
- That, and a weaker than expected US non-farms, and a changing narrative about the growth outlook is a risk to the Aussie dollar. But I don’t want to overegg it just yet, at least against the US dollar, because the Greenback’s weakness and the proximity of the trendline from the 2015/2016 low is providing some support. Likewise the NAB’s business survey and Westpac consumer sentiment this week should also provide support. But the risk’s are rising of a break below 0.7640 and a test of the trendline around 76 cents. A break of that would open the way to 0.7475/0.7500.
Forex
- Last week I shared a chart of the Libor-OIS spread which suggests that the US dollar could be in for a surge very soon. I went back and checked this against history because it was such a short run chart. You can see the result below. What I’d say is that it’s a correlation which comes and goes. It looks like a short run correlation with a much weaker long term correlation through time. It’s worked during periods of stress in the Financial Crisis and then again in 2010. It has also worked reasonably well since 2016.
- What that means to me at present is that if this period of Libor-OIS spread expansion morphs into genuine worries about credit the US dollar could materially benefit. But without that, the linkage is not guaranteed. Then again they never are.
- So for the moment the key in forex is that we are still trading the range. Whether it is the reversal off the break of 107.30/50 in USD/JPY, the continued respect of the 1.2150/1.2550 range for the Euro, or the Kiwi continually bouncing off the bottom of it’s current range, the reality is forex traders are still waiting for the next shoe to drop. Catalysts this week include President Xi’s comments in Boao and the US PPI and CPI data. We could end up with a more constructive US dollar outlook should Xi be conciliatory and CPI print where it is expected. Of course there are many other permutations possible. Which is why price action is the best indicator right now.
- Here’s the euro, it’s range is clear and indicative of so many US dollar pairs.
Commodities
- Oil continues to trade within its wedge. It will be interesting to see the battle between the geopolitical bulls and the more circumspect players who are taking account of equity market weakness and the turn in the flow of global data. How it plays out only time will tell. But for the moment the price action tells us everything. Both Brent and WTI are in a wedge at the moment with a clear top and clear upsloping trendline of the pattern. For Brent a break of $65.85/90 would be a signal of a deeper fall. Here’s the chart.
Have a great day's trading.