Originally published by AxiTrader
What You Need To Know
North Korean missile tests, but more likely Donald Trump’s weekend tweets sapped a little bit of strength from stocks in Europe and the United States overnight with all the major indexes registering falls. The Dow Jones Industrial Average is back below 21,000 and the S&P 500 is slowing walking back from 2400 at 2377 as I write.
That didn’t hurt the US dollar, which is a little – tiny bit – stronger this morning. Euro is back below 1.06 after Alain Juppe said he won’t run as Francois FIllon’s replacement in the French presidential election. USD/JPY is becalmed around 114, GBP has lost half a percent. The Australian dollar is at 0.7578 after an aborted run above 76 cents last night as traders await the RBA today.
On commodity markets gold has lost $7 an ounce, crude is down a little after a mixed night as OPEC mulls extending its production cut – a sure sign it will take longer to work. Copper is down in an example of what can’t go up ultimately scares traders into position squaring.
On the docket today besides the RBA we should get Chinese FX reserves for February this afternoon before German factory orders, EU GDP, and in the NFIB sentiment and trade.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -5 (0.20%) 2378 (8 am Sydney)
- Dow Jones Industrial Average -51 (0.24%) 20954
- Nasdaq 100 -14 (0.24%) 5,856
- SPI 200 -5 (0.1%) 5,723
- AUD/USD 0.7577 0.22%
- Gold $1225 0.7%
- WTI Oil $53.21 -0.2%
International
- South Korea’s missile test caused a lot of chatter in Asia yesterday but it is Trump’s tweets that to me are the reason why stocks are off a little around the globe. I say that because after a spectacular pe4rformance addressing the joint sitting of Congress put the trump presidency back on track the weekend Tweets reminded everyone that this Russian question needs to be addressed and answered. It also reminded investors that there are distractions which could slow down the execution and implementation of the tax and infrastructure spending plans they have put so much faith in recently.
- And of course, there is spectacular overhead resistance in the S&P 500 around 2400. My system went short last night - :S – on the break of Friday’s lows. But the extended nature of this rally, and the long term resistance is best viewed in weekly terms.
- President trump has signed his new executive order on immigration. Iraq has been left off the list this time and it has apparently been drafted more carefully.
- US Factory orders for January were up 1.2% in January as expected. But that's solid and follows the previous month's 1.3% increase. In year on year terms factory orders are up a healthy 5.5% over the past year.
- The CME FedWatch tool shows another increase in expectations of this month's Fed hike to 86.4% from a little under 80% at the close of business Friday. 2 year notes in the US are trading at 1.31% and 10 year treasuries are at 2.49%.
- Reuters reports this morning that China will stick to its managed floating exchange rate framework to keep the yuan currency basically stable, a deputy governor of the People's Bank of China (PBOC) said on Monday. "We will maintain the framework of a managed float, which is based on supply and demand and the yuan's value against a basket of currencies," PBOC Deputy Governor Yi Gang told reporters.
- Surely this is a sign Germany, if not Europe, is experiencing relative healthy growth. A pay dispute in the Steel industry is likely to see German steel workers strike according to reports overnight. Having been offered a 1.3% pay rise the IG Metall union is holding out for a 4.5% rise.
- In a similar vein it's worth noting that the Sentix measure of EU investor optimism rose to 20.7 in March from February's 17.4. What's important about that is it means EU investor sentiment has hit a 10 year high. 10 yeah high folks, 10-year high. Amazing!
Australia
- The market was a bit wobbly early yesterday but managed to climb back into the black with the S&P/ASX 200 finishing up 17 points at 5746. It was the mining sector that lead the charge with the banks following close behind. Overnight though with only the energy and utilities sectors in the US in positive territory price gains may prove more elusive for the local market.
- That said however SPI traders overnight aren’t too worried with the front contract only down 5 points at 7.30am this morning. But the fact that only energy is in the black of the S&P 500 sectors suggest the local market may fall a little further in trade today.
- There’s still a huge gap in performance between the S&P and the ASX but given the S&P has rejected 2400 – and the old trendline that sits around that level – perhaps this is one of those occasion where the Australian market is leading the US move with a little bit of realism rather than euphoria.
- Yesterday’s release of retail sales for January showed a solid print of 0.4%. That’s a solid result after the recent weakness and while it doesn’t prove consumers are out of the woods it’s at least a positive step in the right direction. Worth noting my favourite indicator cafes and restaurants continues to do well relative to other sectors of retail sales
- The chances of an RBA cut today, or in coming months, are as close to zero as they can be in Australia right now. That’s for two main reasons.
- First the RBA believes the September quarter 2016 fall in economic growth was an aberration and sees Australian growth accelerating back toward potential of around 3% later this year. Last week’s Q$ GDp (1.1% qoq and 2.4% yoy) supported the RBA’s initial case.
- The second reason the RBA will be in no hurry to cut is rampant house price appreciation in the two major population centres of Sydney and Melbourne. That’s something the RBA governor highlighted two Friday’s ago when he appeared before a parliamentary committee and said (my paraphrasing) that some sectors of the economy could probably do with some help from lower rates but on balance all it would do is push house prices up, provide marginal net benefit to the economy, and increase financial fragility across Australian households.
Forex
- Today is one of those days where there is no point over egging the moves in forex markets. The euro suffered after Juppe said he won’t run as a replacement for François Fillon in the French presidential election. Of course that abstracts the reality he is losing ground and Emmanuel Macron is likely to face off, and then beat (at least according to the polls) Marine Le Pen. That suggests with the ECB meeting this week to highlight the policy divergence between it and the Fed traders are positioning for a lower Euro. It was trading recently at 1.0585 down a third of a per cent.
- USD/JPY hardly moved and has slipped back below 114. It’s stuck in a range for the moment. But traders still believe on balance that the Yen will weaken as the Fed tightens rates this year. I agree with the serntiment expressed by Deutsche bank in a note I saw at ForexLive that as the Fed raises rates three times this year DB expects “USD/JPY to move in line with our interest rate forecasts: it should try ¥115 with the March rate increase, solidify at ¥115-118 with the June hike, and burst through ¥120 with the September increase with discounting some additional hikes into 2018”.
- Sterling is still under pressure. It’s at 1.2237 this morning. That’s not quite a complete give up of Friday’s gains but it’s close. If 1.22 breaks then it’s 1.2150ish to test old resistance.
- For the Aussie dollar a run above 76 cents ran into selling with a high at 0.7609. That’s likely a reflection of a market still long at recent highs as much as anything else. The RBA today is likely to be relatively upbeat I think which should provide support. But overall a move back toward 75 cents still seems on the cards.
Commodities
- The debate about the outlook for crude is getting interesting. If you look at the shape of the curve for WTI out for the next year it doesn’t look like traders thing prices are going to rise the way many – me included – thought they would a few months back. Throw in a market which is showing the first cracks to the bulls resolve – in terms of positioning and open interest – add in a rejection of the range top and we have a market vulnerable to a downside test.
- So it’s no wonder OPEC got its jawbone working overnight. The Russian and Saudi oil ministers met overnight with Russian newsagency TASS saying they viewd the production deal’s progress positively. And Iraqi oil minister Jabbar Al-Luaibi said the production cuts will likely need to be extended into the second half of 2017 according to Bloomberg. As I have highlighted before I see this as an admission things aren’t going to plan.
- But a report from the IEA on US shale oil production – its rising - was probably the key reason for the volatility which has ended with crude down mildly this morning. WTI is at $53.13 , down 0.36% while brent is largely unchanged at $52.89.
- When a market doesn’t go up on bullish news – like a big supply disruption – its usually a sign the market is long and the bull trend is struggling. That’s the situation copper traders find themselves this morning with the lack of rally on the Escondida and Freeport-McMoran Copper & Gold Inc (NYSE:FCX) disruptions resulting in questions about the outlook.
- That’s certainly the way the price action looks with copper down 1.6% to $2.64 this morning. It wasn’t the only base metal to fall. But it may need to test lower to find real support.
- Gold has slipped back below $1230. As I wrote yesterday $1219/22 is the key level to watch. I’m not fundamentally bearish in the current uncertainty but a break of this level would likely see sellers pile in. It’s trading at $1237 as I write and my system is short.
Today's key data and events (all times AEDT)
- Australia - RBA Interest Rate Decision, RBA Rate Statement (2.30pm)
- New Zealand - Nil
- China - Foreign Exchange Reserves (MoM) (Feb) (12pm)
- Japan - Nil
- Germany - Factory Orders s.a. (MoM) (Jan), Factory Orders n.s.a. (YoY) (Jan) (6pm)
- EU - Gross Domestic Product s.a. (YoY) (Q4), Gross Domestic Product s.a. (QoQ) (Q4) (9pm)
- UK - BRC Like-For-Like Retail Sales (YoY) (Feb) (11.01am); Halifax House Prices (3m/YoY) (Feb), Halifax House Prices (MoM) (Feb) (7.30pm)
- Canada - Imports (Jan), International Merchandise Trade (Jan), Exports (Jan) (12.30am); Ivey Purchasing Managers Index (Feb), Ivey Purchasing Managers Index s.a (Feb) (2am)
- US - NFIB Business Optimism Index (Feb) (10pm); Trade Balance (Jan) (12.30am); Redbook index (YoY) (Mar 3), Redbook index (MoM) (Mar 3) (12.55am); IBD/TIPP Economic Optimism (MoM) (Mar) (2am); 4-Week Bill Auction (3.30am); 3-Year Note Auction (5am); Consumer Credit Change (Jan) (7am);
Have a great day's trading.