Originally published by AxiTrader
Key Takeaway
There is an ugly sea of red across global markets this morning – unless you’re a bond, euro and yen bull that is – as traders finally succumb to their fears that the positive benefits of Trumponomics are going to be delayed. It’s not a surprise really because as I wrote Monday this was the week for it to happen. A week when a lack of fundamental catalysts and stalled moves in the US dollar and stocks gave traders time to exercise hope or fear.
And it’s the latter they chose as the S&P 500 had it worst day of 2017 and broke its 100 day+ run without a 1% fall. A combination of the charts and a recognition that any positive economic and market stimulus is currently stalled behind the repeal of Obama care and an investigation into Russia’s attempts to influence the US election last year are turning sentiment.
Anyway, as I say stocks in the US and Europe are down and the SPI 200 is indicating a 48 point fall at the open of trade here in Australia.
On forex markets a much higher than CPI print in the UK, and a mini collapse in the US dollar shot the pound up and through resistance. That helped drag euro higher as well. The yen got the double whammy of a weaker dollar and the safe haven bid as well. But the Aussie and many EM currencies have been hit by the “risk off” tone in the overnight moves.
They’ve also been hit by falling commodity prices which sees base metals lower across the board. Oil has lost another 1.8%, copper is down roughly the same amount, and naturally gold is going the other way and has risen 0.9%.
I’ll probably write less than usual today – because, hey, things are moving the way I thought they would.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -29 (1.24%) 2344 (7.33 am Sydney)
- Dow Jones Industrial Average -237 (1.14%) 20668
- Nasdaq 100 -108 (1.83%) 5,793
- SPI 200 -48 (0.8%) 5,710
- AUD/USD 0.7693 -0.45%
- Gold $1244 +0.98%
- WTI Oil $47.34 -1.82%
International
- I’ll update my chart of the big long term trend for US stocks – but this reversal could be the start of a big move of 100 points plus lower in the S&P 500.
- So with the stalling in the rally of stocks and no fresh catalysts to take prices higher folks start to take a little cash out of the market, bets of the table. That makes the vote Thursday on the bill to replace Obamacare a big event for the market.
- It’s still early days yet, it is the first time since October that US stocks have fallen 1%. So I don’t want to over egg it too much. But what’s going on is the very thing I have been writing about for a couple of week’s now. Donald Trump is wasting political capital on repealing Obamacare in the same way that the 44th President wasted capital getting it in place. The impact of this is that the tax and infrastructure policy and implementation the market has been aching for looks set to be delayed.
- So as the equity trade gets tired the Bond market is rallying with US 10's at 2.42% and 2's 1t 1.26%.
- And it's worth noting the BAML survey of big global institutional investors records that more than 80% of respondents say US stocks are over valued. To put that in context it helps higlight that its retail money that has been feeding this rally.
- Talking to Tom Keen and David Gura on Monday Jack Bogle from Vanguard said that while the fund flow from retail last year was around $40 billion a month it had accelerated to $64 billion a month for the first two months of 2017.
- FOMO folks, FOMO. I'm always leery of pinging average investors for getting in and out late - but that could be what is/has happened recently.
- Elsewhere, Macron’s performance in the French presidential debate may not have been spectacular but it was enough to get the voters – according to polls – and pundits thinking he could beat Marine Le Pen in both rounds of the election. That helped euro.
- In the UK the inflation data last night showed at 2.3% print for headline CPI in February and a 2% print for core. They are number s that are big enough to reverse the BoE’s easing.
- Other than that it’s really just about the price action. That’s as important as fundamentals and even though it's only one day's trade lower in stocks as I wrote recently the time for a longer term pullback is at hand.
Australia
- It’s likely to be a rough start to trade on the ASX this morning. That’s both because of the offshore lead – which has knocked the SPI down 40 points now to 5718. The pressure is likely to be broad based given it’s only the defensive utility sector in the S&P 500 which is up this morning. The big losers are the financial and basic material sectors which are down 1.38% and 2.11% respectively.
- The big banks in the US are getting absolutely hammered in the US which doesn’t bode well for the local sector this morning.
- Naturally they are the big sectors on the ASX so they’ll weigh on trade. And that means the S&P/ASX 200 is likely to break down and out of the little wedge pattern I highlighted yesterday.
- 5727, maybe 5673 are in the frame.
- Looking at the economy it was clear in the RBA’s minutes yesterday how conflicted it is right now. While they highlighted the improvement to global growth and inflation they also warned that the uptick in commodity prices probably wouldn’t persist the way it has recently. They are worried about wages growth and employment, and clearly also housing prices. As I noted a couple of week’s back and again yesterday these minutes would support a market expectation of a cut being on the table if it weren’t for the surge in Sydney and Melbourne house prices.
- But naturally the risk inherent in that fear – and the lack of ability or willingness from the RBA to cut - is that the consumer sector of the economy may disappoint in the year ahead.
Forex
- Risk off is great for the yen which has moved into the 111.50/112.00 region which has been the bottom of the range for some time. A break would be a clear sign that the US dollar bull worm has turned.
- Indeed the break higher in the Pound is a sign, but we need to see the euro up and through 1.0820. Or in other terms we need to see the US Dollar Index below the 99.20/50 level I’ve been talking about for some time. If it breaks we could see a big cascade lower. The chart suggests the head and shoulders could turn into a ghost with a very long train.
- The Aussie and EM currencies have reversed a little strength over the past 24 hours. That’s not unexpected in there own right as I wrote in my AUD/USD piece yesterday morning. But if stocks are going to swoon and if risk appetite is going to fall – remembering this is day one of a sell off only – then the rallies might stall. But if the US dollar swoon becomes a rout, its still a crowded trade, expect the Aussie and EM pairs to continue to find support but lose ground on the EUR
- Speaking of GBP it was the big 2.3% print for yoy CPI which suggested again to markets that maybe Kristin Forbes is right. Recall she was the BoE member who voted for a rate hike last week. And recall that a number of her colleagues said it wouldn’t take much for them to also change their stance. Mark Carney said we shouldn’t get too excited about the uptick – he’s clearly still worried about the Brexit cliff once Theresa May hits the Article 50 trigger next week. But traders can only trade the market in front of them.
Commodities
- Goldman Sachs (NYSE:GS) agrees with me. Reuters reported this morning that in a note to clients the bank said “OPEC's decision in November 2016 to cut production was rational, in our view, and fit into its role of inventory manager of last resort. However, the unintended consequence was to underwrite shale activity through a bullish credit market at a time when delayed delivery of the 2011-13 capex boom could lead to record non-OPEC production growth in 2018."
- That is the signal OPEC is sending is that shale can continue to invest in productive capacity because OPEC is going to underwrite the price. That’s something I have been writing for a while now. But you know that.
- The result is that WTI has rejected overhead resistance is back near last week’s low and a real chance of heading toward the $45 level I targeted a week or so ago. WTI is at $47.34 and Brent is trading at $50.96.
- Copper is trading nicely in a technical sense. It’s at $2.61 as traders worry that Freeports resumption in Indonesia and talks at Escondida will get production going again. Reality is though that it is more than that. Base metals and iron ore are all off. This is a bit of a Trumponomics euphoria liquidation across markets.
- And as a result gold’s rally continues. In my video yesterday I highlighted that gold looked biased higher if $1237 gave way. It’s at $1245 this morning and looks set to head above $1250, perhaps to the recent high around $1264 if this fear trade takes off.
Have a great day's trading.