Originally published by AxiTrader
Market Summary
President Trump walked back a little from his unilateral tariff announcement an hour or so ago with Canada and Mexico exempted from the steel and aluminium tariffs, while other nations have been invited to "negotiate exclusions" with the US. Markets have cheered up a little but exclusions are likely to come with caveats demanding reciprocity - that's the kind of guy the President is.
For the moment fears have been eased in the immediate term. But it's clear that China and to a lesser extent the EU, is about to come in for greater scrutiny. Something that has the potential to really rattle markets if, as Foreign Minister Wang Yi said yesterday, "China would have to make a justified and necessary response".
That's for later though.
At present stocks are better bid after another very solid day in Europe and after a positive day in Asia and here in Australia yesterday. As I write the S&P 500 is up a little less than 0.45%, the Dow is 0.4% higher as well and the Nasdaq 100 is up 0.53%.
Locally, after filling the "Cohn Gap" yesterday, but not going on with it, SPI traders have cheered the tariff announcement and swung from -8 a couple of hours ago to adding around 14 points to yesterday's close presently. That means prices are now through the gap and potentially targetting 5,988 in SPI terms.
On forex markets, the ECB meeting hit the euro hard after the bank dropped the language around easing because of the strength of growth but then downgraded the inflation outlook for 2019 to 1.4% in line with expectations of 2018. as a result, the EUR/USD is off 0.84% to 1.2307. Sterling went along for the ride lower as well with Brexit concerns finally reaching traders consciousness - GBP/USD is at 1.3806 down 0.68%. The swissie is also lower and the yen is around flat. So on balance, the US dollar is stronger against the European majors and the US Dollar Index is higher, up 0.6% to 90.16.
Of the commodity bloc the Aussie is the weakest with the downdraft of copper and iron ore taking its toll. That said though the fall of 0.4% to 0.7791 could have been, may become, much worse. The kiwi is at 0.7256 and the Canadian dollar is at 1.2950 in USD/CAD terms.
Looking at commodities and as noted copper is lower by 1.85% to $3.0565. Iron ore on the Dalian exchange has dipped as well with the July contract down 3%. And that is the story for the vast majority of commodities. Oil is also down sharply as supply concerns outweigh positive demand outlooks. WTI has lost 1.3% while Brent is lower by 1%. Gold is also lower as the US dollar makes headway falling 0.35% to $1320.
On the day today, there are two massive highlights. The BoJ meets and we'll be looking for governor Kuroda's vision after his recent reappointment for another 5 years. No one expects any changes of course, but what Kuroda intimates about policy will be important. The other highlight, of course, is the release of US non-farms for February tonight. The market is expecting another solid print of 200,000 jobs. But after the Beige Book, yesterday and last months jump in the jobs report its average earnings which will likely be the focus.
Chinese inflation data will also garner more than a passing interest as will German trade which, after last night's factory orders might disappoint. UK trade, inflation expectations, and industrial output will also hit the headlines.
Here's What I Picked Up (with a little more detail and a few charts)
International
- We might be able to say that a trade war has been forestalled after this morning's announcement, but it seems clear to me President Trump is serious about waging a tariff war. By that I mean he is serious about rebalancing American trade and while Commerce Secretary Wilbur Ross has told us that the US does not intend to start a trade war, the reality is it's too early to tell just yet. I really like the way Greg Valliere, Chief Global Strategist at Horizon Investments, frames the debate in his daily newsletter (which was published before the President's announcement and pressure but is still very relevant). Greg said (his bolding), "the real target in coming weeks is China, which is about to get hit – justifiably – with upcoming US sanctions because of its piracy of US intellectual property. This has nothing to do with steel and aluminum. China will retaliate this spring, and a nasty escalation of trade tensions between the two countries seems inevitable. The European Union's bureaucrats, who clearly loathe Trump, are preparing a long list of retaliatory measures that would target iconic US products like bourbon and blue jeans. Trump will retaliate, and the ultimate big loser could be US agriculture. In the imminent White House announcement, likely to be delayed today, there may be no "carve out" for Europe on steel or aluminum".
- The ECB dropped its pledge to buy more bonds in its statement overnight as the bank signals that the economy is on the improve and the time for emergency measures is well past. That helped the euro and hurt bonds a little on the initial announcement. But Mario Draghi's more reserved tones in his press conference and the downgrade to the inflation outlook for 2019 from 1.5% to 1.4% knocked the euro for six and saw bond rates fall. Rather hopefully Draghi said, "the outlook for growth confirms our confidence that inflation will converge toward our inflation aim of below, but close to, 2 percent". But then, likely hit with a bout of realism he also noted that, "at the same time, measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend". Which is the key point for an independent, single mandate central bank. That's something he noted saying, "our mandate is in terms of price stability. Victory cannot be declared yet". Nope, not even close. It's why the euro is lower.
- Interesting timing on the data front from Germany overnight with the release of factory orders which collapsed 3.9% in January much worse than the consensus expectation of a fall of 1.9% after December's 3% rise. This is something I've been highlighting recently folks - EU data missing to the downside. The Citibank ESI for the EU is now at -12.8. The US? +38!
- And while I'm on data, yesterday's China trade data was interesting showing a surge in exports and big trade surplus. China’s February exports rose 44.5 percent from a year earlier, a huge beat on forecasters expectation of a 13.6% rise. Imports grew 6.3 percent, undershooting forecasts for a 9.7% rise. It's data which is likely distorted by Chinese New Year but it is also data which will likely reinforce President Trump's tariff war.
- And from the US was some interesting services data which suggests an upward revision for Q4 growth. That's important for the US dollar, bond rates, and the Fed folks. Reuters reports that some economists have now upgraded their expectation of a 2.6% run rate for Q4 growth to "a 2.9 percent rate when the Commerce Department’s statistics agency, the Bureau of Economic Analysis, incorporates the data into its third estimate to be published later this month".
- A couple of apocalyptic warnings on stocks from different investment banks in the US overnight. Reuters reports JP Morgan's Daniel Pinto said we could see, "a deep correction ... It could be between 20 percent and 40 percent depending on the valuation". Bloomberg reports that HSBC's Steven Major is bearish because funding costs are rising. He doesn't put a number on it but Major wrote, "our view is that the correction in risky asset markets should be taken as a warning of what could follow,...Historical correlations between asset classes are unlikely to be stable as the global economy adjusts for the normalization of unconventional monetary policy".
- That's just another way to say what I've been saying recently - uncertainty is rising. That by its very fact means volatility rises and thus expected return horizons need to be adjusted and thus risky assets are usually reduced - at least for active managers. The big change these days is there is so much passive money. For that to run we need to see something that spooks retail investors in ETF's and index funds or institutional investors - or at least stops new money flowing into the market.
Australia
- The market had a good day yesterday with stocks on the up. That was as was expected. And the news this morning has turned the outlook SPI traders are betting on for today much more positive with a 20 point swing in the past couple of hours. The ASX, and SPI, really needs US stocks to kick on in the current environment if prices are set to leap higher.
- That's particularly the case today given the weakness in iron ore, crude oil, base metals, and gold is likely to exert a heavy downside drag on those sectors in trade today. At present SPI traders haven't factor too much weakness in. But I'm not convinced that's the right take for the local market. My focus today is to the downside. Levels to watch are the overnight high at 5,952. A break suggests a run toward 5,988. On the downside it's back toward 5,908 is 5,926 breaks.
Forex
- Business Insider had a neat chart showing over/under valued currencies via the ANZ's forex team yesterday. It's a long-term look which includes measures such as purchasing power parity (PPP) and behavioural equilibrium exchange rate (BEER). But it's still helps as a guide for other traders on where the big institutional money, and central banks, might be seeing exchange rates over the medium term and thus where policy and money may flow. To that end, the SNB and RBNZ would probably agree that the swissie and kiwi are the most overvalued. Here's the chart.
- Looking more immediately and there are signs as we await non-farms, that the US dollar may be getting its mojo back. That's against the euro and in DXY terms its back above 90 at 90.15 but it still needs to trade up and through 91.00 to be certain this is still not just a pause in the downdraft. The DXY is now back above the little trendline I've been watching. But the reality is non-farms are the key here. Levels to watch are 91 topside, then 91.70. On the support side it's 89.40/50 then 88.25/50 and if the lows break a move toward 86.50 is possible.
- Euro looks like 1.2265 is the key short term. A fall below that level would open a move back to 1.2150ish which for me is the neckline on a massive head and shoulders pattern I've been watching. Euro has been lifted lately by a subtle lift in the EU 2yr forward 2 year. The question however is whether that will be need to be repriced given Draghi's dovish tilt insofar as he highlighted inflation is still low and that there are risks to the outlook from a potential trade war. Don't forget German heavy industry can be collateral damage in any US-China trade war.
Commodities
- Supply considerations. That seems to be the shorthand version of what happened when it came to oil's collapse. Despite OPEC's jawboning, talking about underinvestment, the fact they are going to stay the course of production restraint, that the market is still not yet in balance, and so on the market is focussed on the continuing increase in US production and the belief it will more than adequately cover demand increases.
- That and the fact that WTI broke down and out of the little wedge formation I've highlighted this week in my notes and videos. Brent broke out as well but has managed to break back inside for the day. What's crucial here in WTI terms is that it traded below last week's lows before recovering a little. To me though the chart, and Brent, looks biased lower. A move to $58.00/40 seems on the cards now. If that happens Brent is likely to be dragged lower too.
Have a great day's trading.