Originally published by AxiTrader
Market Summary (7.37am Friday March 16 – 10 years since Bear Stearns!!!)
US import and export price rises of 0.4% and 0.2% respectively have reminded traders overnight that inflation is likely rising in the US and the FOMC next is almost certain to hike rates and signal at least 3 more rate rise this year in its dot plot.
That’s hurt US stocks a little, helped US 10's drift a little higher again to 2.82% and gave the US dollar a little of its swagger back.
Indeed the US dollar's rally was with some vengeance when it comes to the commodity bloc currencies of the Aussie, kiwi and Canadian dollar, which are down 1%, 0.86% and 0.8% respectively overnight. In particular the Aussie has fallen completely out of bed and is currently trading a little below 78 cents at 0.7797.
Some of that Aussie weakness can be slated home to the more than 1% fall in copper and the 2% drop in Dalian iron ore. But for the most part this is a US dollar move. And the buck is up half a percent against the euro which is back down at 1.23, its gained 0.2% against the pound which is trading at 1.3932. The yen hasn’t moved too far from 8am yesterday morning but at 106.21 it’s up 40 points or so from the lows in the 105.80’s yesterday.
Turning back to stocks now and it is a mixed day in the US after a reasonably positive day in Europe where the DAX gained 0.88%, the CAC was 0.65% higher, while in Milan the volatility in Italian stocks continued with the FTSE MIB up 1.16%. London missed the memo with a 0.1% increase in the FTSE.
Perhaps some of that is the continuing imbroglio over the poisoning of the former Russian spy, accusations about Russian involvement, and expelling of diplomats. But it’s also got a little worse for Russia with the US imposing sanction on more Russians over cyber attacks and election meddling. So far Russia has been bellicose and belligerent but is yet, YET, to hit back.
And of course, there was news that Special Prosecutor Robert Mueller is seeking documents from the Trump organisation.
The wash up is that the S&P 500 has had its fourth down day in a row as it again struggles to make headway. At 2,747 it is only down 0.06% though. If it falls below 2,740 the risk is it falls to the 38.2% Fibo support of the most recent rally which comes in at 2,698. The Dow is currently up half a percent and the Nasdaq 100 is down 0.11%.
The corollary of all that is, strangely, that local traders on the SPI have added 14 points to the June contract overnight. That feels like a stretch given the moves in copper and iron ore and the fact that gold is down under the weight of the US dollar and trading at $1316 off 0.6% - though I guess Aussie gold is slightly higher. Equally intriguing on the SPI is the fact the big global miners reversed their previous night’s rally in trade. We’ll see.
And oil is higher this morning. Not materially so, but it has again shaken off forecasts of excess production outweighing supply. Of course, WTI and Brent are simply trading this recent narrow range but perhaps they have caught a little geopolitical bid which is hold price up at $61.18 and $65.10 respectively. Just a few minutes ago the Saudis said if the Iranians get the nuclear bomb they develop one and earlier tweets broke that Israeli PM Netanyahu told his security cabinet that the US will pull out of the Iran nuclear deal.
And thus the last day of trade for the week begins. It’s been interesting with many competing forces. It’s trite to say, but where the S&P and US 10’s finish tonight is very important to the outlook as we head toward the FOMC next week. Levels below 2,740 and 2.80% respectively spell trouble to me. For markets broadly.
On the day here at home its quiet but EU CPI data tonight might be a little interesting. In the US it’s industrial production, Michigan sentiment, and the JOLTS survey that will have the most interest.
Here's What I Picked Up (with a little more detail and a few charts)
International
- I led off with import prices today because the sense after that on the money – but not higher than expected - CPI this week seemed to be that inflation in the US is all quiet. That takeaway misses the base effect coming in the March number from Tech changes last year which will likely kick inflation higher. And Ii saw a graphic from Mike Shedlock which really highlighted the impact the weaker dollar is having on US import prices which I thought was worth sharing this morning. Inflation in the US will be something the Fed knows is rising and on that basis they’ll hike next week and talk hawkishly about the outlook I reckon – or at least the dot plot might reflect hawkishness.
- Russia. I won’t write too much on this today save to say that we need to keep an eye on this. One of the realities of the way humans see things with hindsight is that outcomes become obvious because, as Annie Duke says in Thinking in Bets, all the alternative branches of potential outcomes have been chain sawed off. It’s why WWI is so obvious to us looking back but wasn’t to the protagonists 104 years ago. So as the UK accuses Russia, as the US and others join in and as Putin’s spokespeople become more bellicose the risks are rising again in geopolitics. Throw in the comments mentioned above by the Saudis and Israeli about Iran and this is an unstable time. Lets hope the North Korea summit goes well. At least that might be one theatre we can close off. I’m holding some gold – and getting killed presently – as well as some short USDJPY a just in case.
- And speaking of Russia, the Trump organisation is apparently complying with some requests for documents from Robert Mueller’s investigation.
- Trade wars. Apparently, the US can unilaterally target nations with tariffs and bully them but a trade war won’t eventuate. That’s the message at least from President Trump’s trade attack dog negotiator Peter Navarro. Reuters reported this morning that Navarro said the president is soon going to go after China for intellectual property infringements, something everyone on Wall Street will agree with he said. But on the topic of the altruism of the Administration’s trade approach Navarro said, “we can obviously do it in a way that can be good for the American people and good for the global trading system. We can do this in a way that is peaceful and will improve and strengthen the trading system. ... Everybody on Wall Street needs to understand: Just relax”.
- Credit folks – on the 10th anniversary of Bear Stearns going under it is timely to again think about what credit can do to markets. In the US we have Libor spreads blowing out, we had banks hitting the Fed window for reverse repos apparently and as this chart from Bloomberg’s Tracey Alloway shows, ” The sell-off in credit is picking up momentum”.
Australia
- Since the December high on the ASX 200 around 6,150 the local stock market has now made three lower highs on ever weaker bounces after each dip. That is not the greatest sign ever of strength in a market. It is a sign, as is the price action on the S&P 500, of a subtle change in the fashion of investors from a buy the dip fad to a sell the rally movement. Of course the ASX, and hence the SPI, moves are driven by the overall global backdrop and the fall in risk appetite recently.
- But at least we can say that the past 24 hours has seen the bulls have a small victory in the SPI. You can see that clearly in the candlestick below. But the question is whether of not we’ll see that bounce from the lows continue in trade today. The perfect scenario for the bears would be a bounce back to the trend line (remember this a continuation chart after the switch from the March to June contracts for the CFD) and then a rejection of that trend. MY sense is the sellers will be lurking. Here’s the chart.
- Synchronicity resolved. I know, I know, I’m tempting fate here saying I’m back in synch with the Aussie dollar after it fell overnight. But tempt the gods I will this morning. As readers know I got knocked out of my short the other night on the e=inexplicable – at least on fundamentals – rally in the AUD/USD. But I sold some yesterday morning and some more as the Aussie traded down through 0.7867 yesterday afternoon. Obviously the only difference here this morning, as opposed to the last couple, is that traders paid attention to the fall in copper and iron ore. But the reality is they didn’t. They took heed of the US dollar’s move and the falls in commodities simply helped. I’m watching 0.7770 now. If that breaks things could get very interesting for the Aussie.
Forex
- One of the reasons I sold the Aussie again yesterday was that I felt the US dollar was going to make some headway against the euro. That was because Draghi, and the cabal of ECB speakers, have made it clear the ECB still leans dovishly when it comes to that first move in interest rates after the end of QE in the next 6-12 months. That was clear in the statements this week and it was also clear in the continued – very subtle nd gradual – fall in the euro 2 year forward 2-year rate expectation. It’s been a good indicator for EUR/USD over the past 6 months and it’s slipping. I expect it to continue to slip.
- Throw that into the mix with the chance of a pretty hawkish Fed next week and we have the preconditions for some strength and stability in the US dollar. At 90.15 in US Dollar Index terms it is still simply consolidating its downtrend and would need to break up and through 91 to push higher. It could do this if the euro’s fall accelerates as I think it might. But EUR/USD is still 150 points from a big break low. For that it needs to take out 1.2150. But if it does watch out – 1.1700 anyone?
Commodities
- Oil traders are watching the Middle East I reckon and they are also trying to figure out exactly where this supply demand balance is. It’s a moving feast at the moment with even OPEC suggesting this week that the lift in production outside the cartel can offset the growth in demand. But then overnight even though the IEA was upbeat on growth we saw it also warn about the threat to Venezuelan production.
- So nothing has changed for me folks – still trading the range in Brent and WTI and likely to go with the break.
Have a great day's trading.