Originally published by AxiTrader
Market Summary (7.44 am)
I get a sense the price action overnight is just tooing and froing with no one singular driver.
I say that because everything I’ve read tries to find a reason - North Korean talks or US walk back on tariffs - for stocks doing a little better. But then at the same time the US dollar is materially weaker against a number of currencies when that narrative could, perhaps should, have helped it – at least against the majors.
There’s nothing wrong with a lack of singular narrative - indeed it’s usually the sign of a healthy market ecosystem when assets are marching to the beat of their own drum. But in this instance, my sense is traders and investors are just waiting to see how things play out and already have an eye on US non-farms on Friday.
So the wash up is that US stocks are a little higher with the S&P 500, Dow Jones Industrial Average and Nasdaq 100 currently up between 0.05% and 0.4%. Europe’s gains were small as well and the SPI is just up 7 points from where it finished yesterday afternoon.
On forex markets, the euro has busted higher and is trading 0.6% to the good at 1.2405. The Aussie has done even better with a 0.75% gain to 0.7822, while the yen is largely unchanged at 106.18. The kiwi is 1% higher at 0.7821 yet the Canadian dollar has only gained 0.56% despite US treasury secretary reiterating if NAFTA gets done Mexico and Canada will be exempted from tariffs. The narrative for this move is that risk currencies bounced when the North Korean move was announced. The pound looks vulnerable here at 1.39 given a big Brexit event tonight and leaks to the Guardian saying Theresa May is double cherry picking.
On commodity markets gold is up 1.07% to $133 – try and fit that to your narrative :S. WTI is up 0.13%, Brent 0.43% and copper, like gold, is up more than 1%. Copper and gold – opposite sides of the risk/growth trade…mmm.
On the day ahead we get Q4 GDP as the highlight here in Australia. The market is looking for a 0.6% increase for the quarter. Before that though RBA governor Lowe is speaking around 8.35 am. Tonight’s big event is the Bank of Canada decision and statements. But we also get Euro Area Q4 GDP and the US ADP employment survey.
Here's What I Picked Up (with a little more detail and a few charts)
International
- NORTH KOREA: What happens when acting crazy to get what you want runs headlong into someone prepared to be a little bit more crazy and a little bit more aggressive? We end up with the North Koreans talking to the South Koreans. That’s what we have seen this week with talks between the two nations and overnight the news is that the DPRK may even stop nuclear tests and has even discussed giving up its nuclear weapons. The leaders of the North and South will meet next month for a summit. Not many are going to want to credit him. But Trump’s aggressive posturing, supported by his movement of US military assets into the region has to get a fair chunk of the credit here.
- And the President has tweeted his cautious optimism over the talks.
- This is good news for markets. Ah forget markets, it’s good news for the people of the peninsula and the region. But it is important for markets for a number of reasons. It reduces a point of tensions between the US and China and could lead to more, or perhaps less, cooperation as President Trump seeks to rebalance the US-China trade deficit. Behaviourally though with the narrative around tariffs being a negotiation tactic for NAFTA, and perhaps an upcoming special election in the US, the fact that’s Trump’s bluster is in some part responsible for the thawing in relations reinforces that he does take extreme positions to manoeuvre his “adversaries”. Again behaviourally it’s a neat trick because he gets them to anchor on the worst possible outcome for them which means they are already moving in his direction. So if he backs off a little they feel like they are getting a good deal. Behavioural negotiating 101.
- And on tariffs, US Treasury Secretary Steve Mnuchin said he supports them. CNBC reports Mnuchin said “we’re not looking to get into trade wars. We’re looking to make sure that US companies can compete fairly around the world”. Specifically on China he said, “President Trump has been very clear: We want to make sure US companies have the same ability to do business in China as Chinese companies have here”. CRUCIALLY, on Mexico and Canada he said that they’ll be exempted if a new NAFTA deal can be negotiated. Yesterday I wrote a little piece suggesting the tariffs might be a negotiating tactic after all. You can read it here. BUT, NAFTA has to get done and the Canadian foreign minister said this morning that she, “we don’t see linking steel and NAFTA is going to help us get a better NAFTA agreement”. The Mexicans said they are preparing a list of products they’ll target according to the country’s economy minister.
- You don’t have to support everything Donald Trump is and has done to get the idea that fairer global trade would be a good thing. If for no other reason than it might end the labour arbitrage that has transferred jobs from one nation to another so companies can reap the profits. Now I’m not channeling my inner Lenin. But I’ve seen no pushback on President Trump’s tariffs that discusses anything other than companies and countries - sure it's implied that workers benefit if companies do. But the share of revenue going to profits over employee compensation in the last 30 years belies that. Here’s a great chart I’ve been sharing in my economic updates recently from Scott Galloway’s recent article in Esquire – a redux of his book FOUR.
- And then of course you get all these retaliatory threats - the EU’s bourbon, bikes and blue jeans for example - which fairly scream Donald Trump kinda has a point. Something I might have written a few times recently. Otherwise why aggressively retaliate to protect industry? And on the EU response, apparently it risks breaking WTO rules the FT reports.
- China is simultaneously signalling it will open up access to markets for foreigners while at the same time President Xi seeks to do for the Communist Party of China (CPC) what he’s done for himself. That is at this week’s congress the CPC is moving to increase its role in and oversight of a large number of sectors throughout the country. Bloomberg has a great article on President Xi’s plans to overhaul the government and entrench the Party at the centre of everything. Of course in doing that he also cements his own control over everything as well.
- The EU has dismissed UK PM May’s recent speech on Brexit as a call to internal party politics rather than any change in stance which was characterised as “double cherry picking” according to the Guardian this morning. Donald Tusk will map out more from the EU side this evening. So sterling could be hanging a little high up here at 1.39 presently.
- Dallas Fed President Kaplan said overnight that the US was either at or near full employment and that 3 hikes seem appropriate.
Australia
- The RBA was not the non-event I thought it would be yesterday. I say that because even though the market reaction was muted I read the statement as fairly dovish and uncertain. Others saw a bit of optimism on the outlook for wages, and most saw it as utterly consistent with what we heard from the RBA in February. Of note I thought the sentence “the Bank's central forecast is for the Australian economy to grow faster in 2018 than it did in 2017” felt like a step back from positivity. That’s particularly the case when you take into account that the sentence replaced a much more upbeat expectation for growth from the governor in his February statement when he said, “The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years”.
- Of course that less positive view certainly fits with the disappointing retail sales data for January which was released yesterday. The print of just 0.1% against a 0.4% expectation and after a fall of 0.5% in December suggests that Australian consumer remain very fragile. When you throw in the RBA’s continued concerns about low wages growth, and high levels of household debt, you can see how consumer might continue to be a handbrake on growth in the year ahead – even with solid employment.
- But the economic focus for the moment is on today’s release of Q4 GDP. The market is looking for 0.6% and a yoy rate of 2.5%. We have all the partials now. Net exports aren’t going to detract as much as thought, the government is going to add a little more than thought. We’ve had CapEx and Company profits as well so forecasters should be close. But that is not always the case with GDP release we often see a surprise. So traders will be on tenterhooks at 11.30 am this morning.
- Less tense will be SPI traders who have ridden a rollercoaster over the past three or four trading days. Prices are off their highs for the past 24 hours but are only around a point away from where they finished yesterday afternoon. So it should be a relatively quiet start for the day as long as the US markets don’t roar or collapse into the close. If you look at the 4-hour chart of the SPI you see the high overnight was around the 61.8% retracement level of last week’s selloff. So that’s the level to watch. A break would suggest a move back toward 6,058. But if 5,985/90 holds the focus is still lower.
Forex
- Are we back to the paradigm where the US dollar can’t take a trick? I know technically the US Dollar Index looks wobbly but the narrative fitting around everything being bad for the US dollar – even a possible walk back on the tariffs is curious. My sense is this is just path of least resistance hunting. And frankly that’s why many traders use technical exclusively. And on that basis the rally in the Aussie and euro makes sense. Likewise the dip in the US dollar and where it found support around the low from a couple of weeks back. 89.50 looks like a really important level in DXY terms.
- Looking at the technical for the euro it looks like a run toward the recent highs above 1.25 is now on the cards if 1.2429 gives way. The overnight high of 1.2419 is the level to watch short term with support at 1.2345.
Commodities
- Gold and copper. Opposite ends of the risk spectrum but both up around double the fall in the US dollar overnight posting gains of 1.07% and 1% respectively to $1334 and $3.1365. On my video earlier this week I suggested gold was a snip if uncertainty is rising. I still hold that to be true. But with stocks higher and general risk aversion not too bad overnight the move is an interesting one. The overnight high of $1338 was just below the February 26 high around $1340. This level and the $1343 level looks to be resistance for gold short term.
- Copper is still in its recent range and OPEC is out and about jawboning oil at the CERAWeek conference. I’ll do a separate piece on oil later this morning.
Have a great day's trading.