Originally published by AxiTrader
Market Summary (7.31 am Thursday April 12)
If it’s not a trade war it's now an actual war that has got markets in a funk – or again the threat of same.
Donald Trump’s aggressive tweet to Russia last night – in response to it saying it would shoot US missiles down – that they better be ready “because they will be coming” helped put a bid into gold and oil while it knocked stocks and the ruble a little once again. That the President then tweeted “our relationship with Russia is worse now than it has ever been, and that includes the Cold War,” only served to inflame the nervousness.
So the result this morning is that both Brent (+1.24%, $71.92) and WTI (+1.92%, $66.77) are up and through the range highs for the year. That opens up an $8-10 potential move higher on the back of a Fibonacci projection if we end the week around these levels.
Gold also caught a geopolitical bid but at $1350 it’s still in its range. Indeed it ran to $1265 and failed to break the top of the range overnight.
To stocks now and it’s been a down, up, down day on US markets with the S&P 500 finishing at 2,642, down 0.55%. But this is another inside day (range inside the previous days) suggesting continued indecisiveness among traders as earnings season is about to crash headlong into the current market maelstrom. Expectations might be hard to satisfy. That’s dangerous.
Elsewhere the Dow fell more than 200 points, 0.9%, to close at 24,189 while the Nasdaq 100 finished 0.49% lower at 6,583. In Europe, it was a sea of read with the FTSE down 0.13%, the DAX off 0.83% and the CAC down 0.56%.
Here at home, local traders are feeling the same disquiet US traders are. The S&P/ASX 200 lost 28 points yesterday, with a close at 5,829, and SPI traders have knocked another 15 off this morning. With all sectors of the S&P 500 off except energy overnight that seems fair.
On forex markets, the US dollar has naturally lost some ground against the safe haven yen (106.84, -0.3%) and the oil-related currencies of Norway and Canada which have both gained 0.3% also. It’s largely flat against the euro at 1.2360 but that is off the 1.2395 high overnight before the release of what were reasonably hawkish Fed minutes from the last meeting.
In that vane, the release of inflation data showed that there has been the expected acceleration of year on year core and headline inflation as the base effect of the wireless reductions last year wash out. Core printed 2.1% through March while the headline rate printed 2.4% - both were as expected.
The Aussie dollar and kiwi they are down around 0.1% at 0.7754 and 0.7352. Both are about 20 points or so off their highs.
On metals markets, the specificity of the Russia sanctions has seen aluminium continue to rise – sharply – in contrast to copper which fell 0.81%to $3.10. Iron ore was also a little lower.
Looking at interest rate markets and the US 10's are sitting at 2.78%, the 2's are at 2.3% and the curve is a little flatter again around 47 points when the absolute numbers are rounded.
On the day ahead the Bank of Korea makes its interest rate decision, we get housing data in Australia and EU industrial production tonight. In the US we get the release of import and import data while the Bundesbank President Jens Weidmann is giving a speech.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US inflation. You’d be forgiven for thinking that the fall of 0.1% in headline inflation in the US might be a sign things are a little overblown in terms of the upside expectations. But it is the rate of change of inflation of core CPI which is the key thing that is driving the Fed’s rather hawkish take on rates and the inflation outlook that was evident in the minutes overnight. What the minutes reflected was that fed members were upbeat on the economic outlook and inflation and you can see in this chart from SG Economics – via ZeroHedge – just how fast this acceleration is occurring. Importantly as David Rosenberg pointed out after the most recent NFIB small business survey a large number of respondents reported prices are rising across the US. For the moment with everything going on the fed seems likely to stick to the 2 more hikes it’s forecasting rather than the 3 I had previously expected.
- So, I’ve finally figured it out. Why we’ve got ranges in forex, stocks under pressure, bonds higher but not breaking higher yet, not breaking lower either as the global data pulse wanes, why markets are up one minute and down the next. It is as Charles Dickens wrote in the opening to A Tale of Two Cities – “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…”
- And folks I’m not trying to be facetious. There is genuinely something for everyone with so many cross currents running through markets right now. In the end that just means uncertainty has risen. That’s one of the reasons the VIX is in a materially higher range up here around 20 compared to 2017’s 10 or lower. And uncertainty is poison for traders and for an economy. That’s something I highlighted Nate Silver had written in his Signal and Noise book in my post last Friday in a similar vane. Silver wrote, “risk greases the wheels of a free market economy; uncertainty grinds them to a halt". Any surprise that the superb year of economic growth that was forecast for 2018 seems to be somehow morphing into something materially less spectacular as PMI’s and the data pulse fades.
- So while the setup is there for a powerful earnings induced pulse higher in US, and thus global, stock markets in the week s ahead, the reality is that with an 18.4% uplift in earnings expected for US companies there is plenty of room for disappointment. Or in other words, this news should already be priced in and assimilated by traders. We’ll see. But the risk is for lower prices again soon – because folks are once again looking the other way. But I won’t get all beared up unless 2,530 breaks in the S&P 500. But if it does I’ll be targeting 2,395, then 2,185 and ultimately 2,020/30. Equally though a break of 2,675/2,700 should see a 100 point, perhaps more.
- The trouble with the EU is writ large in the trouble at the ECB. There are 25 members of the ECB’s governing council with the makup being the 6 executive board members plus the 19 central bank governors. Sounds very much like herding cats given the differences of view about theory and practice of monetary policy and the divergent economic outcomes and situations that each governor finds his country in. We saw some of this earlier this week with the ECB slapping Austria’s Ewald Nowotny for his comments on rates which “did not reflect the views of the governing council”. Last night it was Estonia’s Ardo Hansson who came out to bat suggesting the ECB needs to get busy. Some people say err on the side of caution; let’s wait and wait…But the risk there is that you wait too long and you’re forced to do a bit of catch up,” he said in Frankfurt. Of course, he talked of gradualness as usual. But the ECB needs to get its messaging sorted. Otherwise, it will confuse the market and drive the Euro to levels that materially impact its growth and inflation outlook – if that’s not already happening.
- UK data last night suggested some caution may be warranted at the BoE in the months ahead. For the first time in around a year factory output fell in February.
Australia
- This isn’t the best environment for the AUD/USD right now but the Australian dollar retains its bid. It wasn’t able to build on with yesterday’s rally however – or should I say couldn’t hold the highs - as the combination of the reasonably hawkish Fed minutes and the rise in geopolitical tensions sapped the strength of the risk rally and with it the Aussie’s own strength. That copper didn’t continue to kick on, and actually fell a little, is likely the best indication that continued uncertainty about just where the market and growth shoes are going to drop in the months ahead can be a restraining force on any Aussie dollar strength.
- Of course there are many factors which drive the Aussie on any given day, week, or month. Many of those usual drivers have been subjugated to the ebb and flow of risk appetite and the machinations of the US dollar recently. That’s not going to change in a hurry. So for the moment, the Aussie looks to have solid support in the 0.7640/60 region and, it appears, resistance between 0.7780 and 0.7820. If either side of that range was to break the Aussie would like move sharply and swiftly.
- The ASX200 couldn’t kick on with it yesterday with the high of 5864 10 or so points below the start of the important resistance zone. That one day of reversal is likely to become a second today given the lead from the SPI overnight. Realistically though it’s what happens with Syria, the market’s reaction, and then how earnings season in the US tracks over the next few weeks starting tonight which will be the big drivers for the ASX and SPI.
- Two things are key. First the ASX/SPI is in a big old range at the moment and second, no point getting too bearish unless or until the S&P 500 takes out the February low at 2530. But if it does, look out. On the day for the SPI the level to watch is 5,764. If that breaks it could run lower. But that’s 30 odd points below where we are this morning.
- RBA Governor Phil spoke in Perth yesterday afternoon and I must say there were two things that struck me. First, he retains a pretty positive outlook for the Australian economy at the moment. “Increased investment and hiring, as well as a lift in exports, should see stronger GDP growth this year and next. The better labour market should lead to a pick-up in wages growth. Inflation is also expected to gradually pick up,” he said. The second is that even though he is positive about the pick-up in growth he doesn’t see economic growth shooting off. So while he warned “it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy” he also said the RBA Board, “does not see a strong case for a near-term adjustment in monetary policy”. So the status quo remains. The RBA retains its Panglossian view of the outlook, one which will helpfully see growth, wages, and inflation accelerate, but not enough to cause him to have to rush to hike rates anytime soon.
- Yesterday’s Westpac consumer sentiment index fell 0.6% in April from March’s level. But what struck me was the unease about finances and employment. Indeed the unemployment expectations index rose from 121.8 t0 125.7 reflecting quite a decent increase in job security concerns. It’s still above below the long run average (lower is better on this one) but it has risen in recent months. We’ll have to see if this has any impact on retail sales or new motor vehicle purchases in the months ahead.
Forex
- Ranges, ranges everywhere. That’s the key again in forex markets at the moment. I haven’t got a lot to add so I won’t fill column inches with needless words other than to say the best course of action is to continue to respect these ranges unless or until they break.
- Of course the Russian ruble and Turkish lira are moving around sharply which is proof traders can often cast a wide net in search of the action. But for me, as someone who trades neither of these pairs, they are instructive that when this current paradigm does break we could see the emergence of some powerful trends again in forex. When that is I’m not sure. In the meantime I’m breaking out the 1 and 4 hour charts.
Commodities – Oil
- Is this the break we’ve been looking for? Or is this a massive head fake as traders worry about geopolitics and the Whitehouse seems tentative about actually hitting Syria. Indeed it appears the British and French are likely to take a primary role in whatever punishment the west decides to meet out on the Assad regime. The point for oil traders though is that Russia is a materially interested party in this debate. It has decried claims of the gas attack, has said some lawmakers will be visiting Assad, and has directly threatened to shoot down US missiles. Vladimir Putin has been on the phone to Israeli PM the Netanyahu it seems as well with the latter telling Putin he can’t accept Iran gaining a long term foothold in the country.
- So the geopolitical bid is right to be back in oil markets. And if we end the week at these levels, above the recent range highs. Then that $8-10 target I put on WTI and Brent if the ranges broke becomes a real medium term possibility. Recall this is almost the perfect set up with the move to a high, pullback which found support above the 38.2% retracement level and now a break. Where we close the week is important. Here’s WTI
Have a great day's trading.