Originally published by AxiTrader
Market Summary (7.44 am Thursday, July 12)
It’s not just the political playbook that’s been thrown out the window during this Trump Presidency. It seems that some of the long established linkages between cause and effect, market price action and reaction has broken down as well.
Take gold, for example. It used to be a safe haven and would usually be soaring amid all the current turmoil. Yet it’s on it’s recent lows again. Likewise the yen. Considered the forex traders safe haven in times of trouble, it should have rallied these past 24 hours, yet USD/JPY has risen almost 1% since 7am yesterday as it trades above 112 for the first time since early January this year. In fact gold and the yen collapsed in lockstep overnight with the shiny stuff now trading at $1242 down a little more than 1%.
We live in increasingly fractious and interesting times.
Anyway the big story, of course, is the trade war, the escalation by the US with the planned imposition of $200 billion in tariffs, the funk that caused in Chinese markets yesterday, the related funk in commodity markets, selling in stocks, and – for the first time this year – US dollar buying on the back of trade fears, NOT selling.
In many ways the US dollar's move restores my faith that markets aren’t completely broken. The US economy is in the best shape to withstand this trade battle, the Fed is in a different place to other central banks (US PPI accelerated to 2.8% yoy in June, and as a result the dollar has caught a bid. All makes sense, though I did think the yen might resist).
Besides USD/JPY’s big move, the Aussie and kiwi have both been caught in the maelstrom of market moves and lost 1.22% and 1.14% respectively to sit at 0.7366 and 0.6758 this morning. The Canadian dollar lost 0.72% with USD/CAD up at 1.3208 despite the BoC hiking rates 25 basis points overnight on upgraded economic and inflation forecasts. Euro and Sterling did best of the majors losing around 0.55% apiece to sit at 1.1674 and 1.3203.
And coming in for special mention is the Norwegian krone, which lost 1.1% with USD/NOK rising to 8.10 after oil collapsed 6% in Brent's case to $74.08 and a little under 5% lower in the case of WTI which is at $70.60 this morning. Those moves were despite a monster draw in US inventories of 12.6 million barrels. Libya is back on line though.
In other commodity news, copper collapsed 3.2% to $2.737 a pound in what’s been a tough day for industrial metals. Bitcoin is almost the paradigm of stability having lost just 0.5% to $6350.
To stocks and bonds then and the ability of US 2 and 10-year rates to hold in the face of all the stock carnage is interesting. The 2’s are at 2.57% while the 10’s are at 2.84% with the curve at 26 points. That stability is despite falls of more than 1% in China, most of Asia, and Europe where the DAX lost 1.5%, the CAC dropped a similar amount and the FTSE 100 fell 1.3% in London.
It was nowhere near as bad in the US with the S&P finishing down 0.7% at 2,774. The Dow was 0.88% lower at 24,700 and the Nasdaq 100 lost just 0.53% to 7,243. Here at home the SPI traders are their irrepressible selves subtracting just 6 points overnight suggest things shouldn’t be too bad here today on the ASX – I’m not convinced, especially if 6,209 breaks.
On the day it’s fairly quite with consumer inflation expectations in Australia, Japanese foreign investor data, a BoK decision, and then tonight we get German and French inflation along with Euro area industrial production and the minutes to the recent ECB meeting. In the US we get the CPI which will be a huge tell for the Fed and thus markets.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Donald Trump continues to be the hurricane blasting through the established protocols and niceties of global politics and markets. Fresh from badgering Pfizer (NYSE:PFE) to reverse some pricing decisions, from escalating the trade battle with China, his meeting with NATO partners shook things up a little further as he said Europe needs to increase military spending toward the 4% the US spends not the 2% the continent is aiming at – by 2030!. Tellingly he accused Germany of being captive to Russia and popped the nation for the new gas pipeline deal. Trump is like the Warners Brothers TAZ cartoon character. But as the Pfizer story tells us, he’s winning, he’s getting what he wants. So, I expect he’ll continue to prosecute his argument strongly on trade and with NATO. Things will probably get worse before they get better.
- China said it was “shocked” by the latest round of US tariffs. At first I was sceptical of that as just hyperbole the theatrics. But then I saw a quote from China’s foreign minister Wang Yi, via the folks at ForexLive, which said he doesn’t understand why the US quickly reversed course after a round of negotiations in May. “The talks went very well and secretary Mnuchin went on TV saying that that trade war was to be put on hold”. The Administration’s tactics have the Chinese rattled I reckon. We’ve even seen reports the State media has been told not to reference the President personally in its reporting but to refer to the US government.
- China has said it will hit back but it’s difficult to do that directly via trade. What we need to look out for, and be wary of, is the secondary boycott style arrangements we’ve seen on Korean and Japanese firms and products in recent years. That is probably something that could really hurt US stocks.
- It hasn’t happened yet and the strength of the US economy right now and path of Fed rate hikes may stop it from happening, but one of the most exposed markets right now is the US Treasury short trade. My database of CFTC positioning data which goes back to 2000 shows the current net short of 500,076 is a record. That implies that we could see one heck of a short squeeze if stocks actually fall sharply and risk goes offered. It’s a risk, not a certainty, and something to watch.
- Could Chinese markets bounce? Of course they could. That’s certainly the case given the convergence of support that is nearby in the Shanghai Composite. I saw the following chart from @chtrader on Twitter. In an accompanying blog he said (via google translate from Spanish), “From any point of view you look at it, kind of start over or go back to base from the beginning of 2016, it is not necessary to add much more, no ??” No it’s not – the level will either hold, or Chinese stock markets are about to break wide open.
Australia
- Yesterday’s release of Westpac consumer sentiment was really solid. Absent housing and it's a really neat set of numbers...economy, family finances, & unemployment expectations all point to a consumer mood better than I anticipated. Former ANZ chief economist Warren Hogan had it right when he tweeted, “The consumer is always right, or is that customer? We shouldn’t ignore this data which suggests the overlay of analytical gloom on the Australian economy is not shared by those actual operating in it. You simply do not get these outcomes when the household sector is weak”. I’m encouraged by the results. Throw in the solid NAB business survey and the outlook for the economy may be as positive as the RBA keeps telling us it is.
- The Australian dollar is right at the heart of concerns about the impacts of the US and China trade battle. Traders will be worried about global growth, we’ve seen copper and other industrial metals break down, thee are fears about Asia and China, and the Aussie stands as a deep liquid and available proxy for the worst fears to be exercised by traders through AUD/USD selling. That’s what we’ve see and with the RBA on hold for the foreseeable future there is no prospect of the interest rate support which is so important to forex traders.
- So this morning the AUD/USD is down at 0.7367 which is below the 38.2, 50, and 61.8% supports for the recent run from the lows near 73 cents. That suggests a full round trip is on the cards back to 0.7305. A break of 73 cents opens up a run toward 0.7170/7200.
- The selling on the ASX pulled up at an important trendline support yesterday. A break of 6,209 would take out the recent uptrend of the past few weeks and open up a run toward the trendline from the April run which comes in at 6,158. That’s a little above the level from which the last leg higher began. So I’m targeting a move into this 6,146/58 region.
Forex
- Unlike previous periods, earlier this year, the US dollar has gained on the back of the trade war escalation. In US Dollar Index terms the US dollar is up 0.6% to 94.71. That’s still below the recent high so it’s not as though the US dollar is super strong. But it’s interesting that the US dollar caught such a strong bid.
- No doubt part of that is the strong PPI last night which saw the yoy rate accelerate to 2.8% for core PPI. While it’s less important than the CPI release we’ll see tonight that increase in producer prices speaks to the concerns the Fed has about pipeline inflationary pressure. With regard to the CPI to be released tonight it’s worth noting what Glushkin Sheff’s David Rosenberg said on Twitter this morning. “The hidden gem in the June PPI was the +0.5% pop in the core consumer price segment. Folks, that doesn't happen every day. Best be braced for a +0.3% core CPI print and a replay of February-March,” he wrote.
- If we do get a number like that, one which stokes inflation concerns, it should see the US dollar further bid. How far is interesting to note. As long as stocks don’t fall out of bed, and now that USD/JPY has broken a three year down trend the Greenback could push sharply higher against the yen. I got stopped out of a short last night in USD/JPY so we’ll see what happens next.
- US dollar strength should also push euro, pound and other pairs lower as well.
Commodities
- A big fall in oil overnight with WTI hitting and falling below the target I’ve been talking about in my videos this week at $70.84. That the move in WTI came despite the 12 million draw in US inventories is remarkable. But oil was under pressure yesterday in our timezone as traders were clearly betting that the trade war will impact global growth and thus demand. That’s something OPEC seemed to give weight to overnight and then the lifting of force majeure in a number of Libyan oil fields relieve dhte pressure on prices. Likewise the US Administration tweeting that there were high level discussions with the Saudis about increasing production and the Indians again complaining about prices all coalesced in the selling capitulation we saw overnight.
- I’ll discuss further in today’s video - but here's WTI.
Have a great day's trading.