Tech To The Rescue As Stocks And The US Dollar Rise

Originally published by AxiTrader

Market Summary (7.38 am Friday April 27)

It’s a close run thing this morning whether it is the continued surge in the US dollar or the resurgence in tech stocks that is the big story of the day.

I’ll go with the US dollar first because, hey, this is my note and I prefer currency markets above all else. Last night’s move came as the ECB and Mario Draghi, its President, failed to ignite even the hint of hawkishness that the euro needed to regain lost ground. Sure Draghi was pretty sanguine on recent data and thus the outlook for the EU, he even said the governing council didn’t talk about the exchange rate. But he was cautious still, and so was read dovishly on balance.

Dovishly enough that is for the euro to be sitting at 1.2103 down another half a percent. That in turn helped the US dollar in index terms rally to 91.585 up 0.45%. USD/JPY is largely unchanged however at 109.36, the British pound is down about 0.1% at 1.3917 and the Swissie moved with the euro. USD/CHF is at 0.9890.

The Aussie is lower again down 0.2% at 0.7550 as base metals dipped a little further and despite the surge in stocks. This is a US dollar move. The kiwi is down 0.1% at 0.7061 while the Canadian dollar lost 0.31% despite oil moving higher again. USD/CAD is at 1.2879 – this is a US dollar move and the bears are getting crushed right now.

Jobless claims last night were the lowest since 1969, durable goods missed and US GDP tonight will be interesting though a weakish number seems baked into the cake.

Looking at stocks and tech lead the market higher with the Nasdaq 100 rising 2.08% as Facebook (NASDAQ:FB) roared back after solid earnings after market the previous day. It will be Amazon's (NASDAQ:AMZN) turn tomorrow it seems with its own aftermarket earnings-related surge likely to give our own, and US markets, a kick.

The S&P 500 rose 1.04%, 27 points, to 2,666 with tech naturally the best performer. But energy and consumer cyclicals showed good gains as well. The Dow rose 0.99% to 24,322.

And of course that all means – along with solid gains in Europe and despite Chinese weakness yesterday – that the local stock market is likely to have a solid day today. That’s certainly the bet SPI traders have taken adding 47 points – NOT A TYPO – to where things close down yesterday afternoon. Resistance, in SPI terms is up at 5,985 – 45 points above this morning’s level on the SPI.

Turning to commodity markets now and the aluminium reversal continued with another 3% drop. This dragged copper a smidge lower with a dip of just 0.2% on the US contract I watch to $3.125 a pound. Gold suffered under the US dollar’s weight and is back at $1317 now. Crude continued to rally but the massive US supply seems to be opening the gap between Brent and WTI again. WTI finished up 0.18% at $68.17 while Brent rose 1% to $74.72 a barrel.

And in bond markets, the 2-year Treasury is at 2.48% and the 10-year at 2.985%. So down a smidge but crucially – if indeed the 3 is that important – 10's are back below 3%.

Looking at the day ahead tonight’s GDP in the US is the clear highlight. 2% annualised is the number that Reuters says the market is expecting. Q1 is notoriously weak over the past decade so it’s likely a weak number will be looked through. But a strong number would get markets moving.

We get PPI in Australia, industrial profits in China, and of course the BoJ is out with its latest decision and statement this afternoon. French (and UK) GDP and inflation is out as is German import prices and unemployment rate. Euro area sentiment will also be released.

Here's What I Picked Up (with a little more detail and a few charts)

International

• Mario Draghi was downbeat last night, though on balance he was dovish I guess. I’ll get to what he said in a bit but I wanted to highlight that today both the stock market is strong and the US dollar surging again because of the growing recognition that the US economy is strong. That doesn’t mean the stock market is out of the woods but there is little doubt that if investors focus on where the economy is not whether the “high water mark” for the year has past they’ll be as confident as US consumers about the economic outlook. Anyway, that might sound a little divergent from recent writing I’ve done. But it’s not because this morning I want to highlight the relative performance of the US economy and – yes – bang on about policy divergence between the Fed and other central banks, and that policy divergence and economic outlooks are again a thing for forex markets – at least for the moment.

• Let's look first at last night’s jobless claims data. The print of just 209,000 was the lowest since 1969 as Pension Partners Charlie Bilello pointed out in a tweet.

Source: Twitter Screenshot

• It really is an amazing stat when you think of it on a population adjusted basis and speaks volumes about the tightness of the US labour market. It helps explain why even though tonight’s Q1 GDP in the US is expected to print weakly – Atlanta Fed and Reuters Poll say 2% - the Fed and most economists are still pretty positive on the outlook. And even though Durable goods last night were on the weaker side you can see the divergence in growth between the US and the rest of the world both in the CESI’s where only the US and China are in positive territory at +39.3 and +46 respectively. Europe’s economic surprise index is at -84.4, Australia is at -32.3, the UK is -33.1, Japan is -46, and Canada is -66.4. Emerging markets are net positive with a CESI score of +9.1.

• Nordea markets had a great chart which summarises the actual data and outlook as well, rather than just the economic surprises.

Source: Twitter Screenshot

• Can I write one word folks, DIVERGENCE. But not everyone is impressed. Glushkin Sheff’s David Rosenberg – not exactly a perma-bear, but certainly with some traits of same – wrote on Twitter overnight, “last time jobless claims were sitting at 209k was back in December 1969. A recession started the next year, typical of a late-cycle hitting the capacity wall. It was a surprise then, and it will be a surprise now”. On Durable goods he said, “Nice tax cut, shame about the capex. Core orders/shipments declined in March and atop downward revisions”. And that folks is what many believe. The US economy got a sugar hit from tax cuts it didn’t need, the Fed needs to tighten, and recession is just around the corner. It’s why it has taken so long for the US dollar to catch a bid, and why many think this is just a euro long (US dollar short) capitulation not something more.

• And here’s what a strong economy and a tax cut is doing for earnings – thanks again to Charlie Bilello for making my life easy. Pictures are far better than words. The question for stock investors is whether or not this is the high water mark. Ellen Zentner, Morgan Stanley’s chief US economist told Tom Keene on Bloomberg Surveillance two nights ago that the economy is not the stock market when asked that very question. Many folks seem to be thinking the same thing right now.

Source: Twitter Screenshot

• Finally to Mario Draghi and the ECB. Just a couple of highlights:
• The statement from the ECB was the same as last time with the bank asserting that the time has well passed for QE.
• Still upbeat on growth, “Incoming information since our meeting in early March points towards some (economic growth) moderation while remaining consistent with a solid and broad-based expansion of the euro area economy”.
• And inflation, “The underlying strength of the euro area economy continues to support our confidence that inflation will converge towards our inflation aim of below, but close to 2 percent over the medium-term”. BUT, “measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend”. Marie Antoinette anyone?
• Forex, “The Governing Council will continue to monitor developments in the exchange rate and other financial conditions with regard to their possible implications for the inflation outlook”. But again, he also mentioned the meeting hardly discussed forex or the euro.
• On balance the above read cautiously and thus he was taken as a dove.

Australia

• A downgrade to Westpac Banking Corporation (AX:WBC) by broker UBS hurt it, the other banks, and the ASX 200 yesterday. If you’d like to read up on that Sam Jacobs has a great wrap over at Business Insider. UBS was being specific about Westpac but the most important point is that the big four plus Macquarie (AX:MQG) and AMP (AX:AMP) make up around 26/27% of the ASX200’s market cap. The Royal Commission and new APRA rules for the banks are putting more than a quarter of the index under regulatory pressure. Indeed even though APRA relaxed the 10% investor limit yesterday as David Scutt wrote over at Business Insider, “it’s now even harder to get a home loan in Australia”. Indeed that’s the whole point of the APRA rules such as APG 223 which looks specifically at lending standards, ability to service, and expenses. It predates the Royal Commission and I believe is a document capable of causing a credit crunch in Australia – if that isn’t already happening.

• Why am I banging on about this? Because even though the SPI is up strongly last night and even though the ASX 200 is likely to open strongly today a quarter of the market cap of the ASX 200 are facing real headwinds which means the local market may lag any global recovery in stocks if that is what is occurring. And I fear it suggests on any dip we underperform to the downside as well. Behaviourally it just puts a negative tone into a fair chunk of the market. The next question, eventually, will be whether the dividends which support valuations will be sustainable in the new environment our financials will face. It’s something I’ll be watching closely in my SPI and Cash CFD trading.

• In the meantime – here’s the chart of the SPI 200 with obvious resistance. S,985 is the level of the downtrend line. While support on the uptrend is around 5,875

• The Aussie dollar is under the pump this morning down at 0.7550 and just a few ticks of the overnight low of 0.7546. This move is all about the US dollar and there is little to support the Aussie at the moment now that both the US dollar is on the march and the trendline from the 2016 low has been broken. GDP tonight in the US is obviously going to be important to the outlook in the short term. But any rally into the 0.7609/49 region is likely to find more sellers while a move above 77 cents is still needed to change the outlook.

• That’s unlikely at present. Certainly stocks are higher which is good for risk appetite. But that’s just one of the 5 primary inputs I use for the Aussie dollar. The other inputs, things like interest rate differentials, commodity prices, and global growth are currently weights on the Aussie – as is the US dollar's surge.

Forex

• I’m going to lead off with a tweet from Marc Chandler of Brown Brothers Harriman in New York which I think neatly summarises what exactly is going on at the moment.

Source: Twitter Screenshot

• Reading from the bottom its about long liquidation. But I also like his comment about the never Trumpers. It’s a point I’ve made – and taken flak from readers for – when I called it out as a misguided reason to sell US dollars a while back. All of the above verbiage I’ve burdened you with about US growth and Mario Draghi this morning fairly screams further US dollar strength and euro, among others, weakness. My sense is this US dollar move is only just beginning. A US Dollar Index target of 92.50 seems to me to be straight forward and increasingly I’m looking for the move toward 95.20.

• That would imply euro down toward the 38.2% retracement level of the big rally which comes in at 1.1700/20.

• You’ve seen that euro chart a lot lately so I wanted to give you a look at the GBPUSD as we await Q1 GDP tonight. It’s a big deal because it’s seen as a big input into the BoE decision next month. It’s a decision BoE governor Mark Carney recently suggested might be to hold rates. The Reuters poll says economists aree forecasting 0.3% qoq and 1.4% yoy. That’s hardly worth tightening for folks though, is it? But it may not matter. I say that because British PM Theresa May seems to stumbling around under pressure from her colleagues on Brexit, with EU negotiator Barnier getting aggressive with the UK over negotiations, with Irish Prime Minister Varadkar saying things need to move on the border by June but the Telegraph reporting the DUP may bring the government down if May doesn’t do as the DUP wants things are still messy for Brexit.

• To the chart then. 1.3820 and then 1.3700/20 seem on the cards.

Commodities

• The market continues to look toppish to me for oil right now. And the big risk is that President Trump doesn’t repudiate the Iran nuclear sanctions deal by his deadline of May 12. Certainly that’s what the French President likely pressed him on during his state visit this week. And certainly the Iranians are making aggressive noises should the President withdraw support for the deal.

• But the situation is not as straightforward as having John Bolton as NSA might suggest. It’s clear with the President’s tweet a week back that he is now aware of the impact the oil price rise will have on the pocket books of his constituents and possibly the impact it would then have on the economy. Equally the impact on the recent Russia sanctions on Rusal and the aluminium price might also give him pause in terms of unintended consequences. At least that is part of the mix now with WTI at $68 and Brent at almost $75. Also in the mix though is that president Trump has been an assiduous prosecutor of his campaign agenda and promises of which this Iran deal was one if I recall correctly.

• Anyway, for the moment the bulls have it. But as I noted the price action is stalling and looks toppy to me. Here’s the chart, where I’m wrong is obvious. And I’m not yet short, just waiting for a signal.

Have a great day's trading.