Originally published by AxiTrader
Market Summary (6.46am)
Stocks in the US are down slightly this morning after Walmart (NYSE:WMT) surprised forecasters with a big earnings miss which has knocked close to 20 billion in market cap off the stock. That’s dragged the S&P 500 and Dow into the red and they are currently down 0.3% and 0.636% respectively. The Nasdaq on the other hand is up 0.6%.
Europe too was higher with the continent posting solid gains as the DAX closed up 0.83% and the CAC 0.64% higher. The FTSE was more circumspect closing flat.
The washup currently is that after a very good day on the S&P/ASX 200 with the late flurry getting it back to close pretty flat at 5,941, SPI traders have had another guess at a weaker day today and knocked 24 points off prices from the close yesterday.
On forex markets it is a day of US dollar strength as the recovery from last week’s test of the important 88 zone – US Dollar Index terms – continues. The Aussie is now breaking down through support and trading 0.7882 – a weaker than expected WPI could easily knock it another 50 points today. Euro is down 0.6% at 1.2339, and the yen has lost about the same amount with USD/JPY at 107.25. Sterling has done well given some soothing words about “special status” for the UK into the EU after Brexit overnight. GBP/USD is at 1.3993, roughly flat. The kiwi is at 0.7346 and the Canadian dollar has lost 0.6% and is at 1.2634.
On bond markets the 10-year rate is back at 2.91% and 2-year at 2.23% after reasonable debt auctions last night. The curve is back at 68 points.
On commodity markets Brent dipped but WTI rose a little – they sit at $61.85 and $65.32 respectively. The UAE oil minister was on the hustings overnight with the main message that it’s too early to be talking about exits from the production deal. Gold is weaker this morning – down a whopping 1.25% to $1329 while copper has fallen even more dropping 1.75% to $3.18.
Anyone get a sense algo’s are hunting markets at the moment, running to range highs and then reversing off them? It certainly feels like someone or something are running prices up AND down. It’s a path of least resistance play and it’s working.
Anyway. On the day ahead the Wage Price Index in Australia has been – for the first time in its life – raised to the pantheon of economic statistics. I say that because the RBA has focussed so much on wages. So traders in all markets – bonds, stocks, and foreign exchange – will be watching closely when the Q4 data is released at 11.30 am AEDT this morning. The market is expecting 0.5% for the quarter and 2% for the yoy number.
Construction work done, which feeds into Q4 GDP, is also out at the same time as the WPI. A big fall of 10% is the consensus expectation.
Offshore it’s “flash” PMI day where Markit gives a sneak peak at where the actual manufacturing PMI will print when it is released early next month. Yes, me neither. Why bother. Extra marketing value though folks. Enough of my cynicism – housing starts are also out in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- EU data dipped back a little last night with consumer confidence dipping back to 0.1 from 1.4 (which was a 17 year high) while ZEW economic sentiment for the region fell to 29.3 from 31.8. In Germany there was also a drop in the ZEW conditions and sentiment indicators which fell to 92.3 and 17.8 from 95.2 and 20.4 previously. Though they were both down they did beat expectations.
- And while I’m in Europe, bond investors are getting a bit tetchy as they start to think about who will replace Mario Draghi when his term ends later this year. The front runner seems to be the hawkish Jens Weidmann from Germany’s Bundesbank. Given the ECB’s clear independence from political interference that has some traders worried that Weidmann would oversee a complete regime shift from Draghi’s accommodative “whatever it takes” attitude. Some thing to watch.
- Trade wars – news over the past 24 hours is that the South Koreans are readying a claim at the WTO over Trump’s Tariffs while EU has warned it will retailiate if it gets hit by the touted tariffs on steel and aluminium. European Commission spokesman Margaritis Schinas told a news conference that, “we would be taking appropriate measures to defend EU industry and we stand ready to react swiftly and appropriately in case our exports are affected by any restrictive measures by the United States”. Optimistically he added, “no, we are not in a trade war”. But has to be the risk doesn’t it? EU, China, Japan, South Korea all being hit potentially by Wilbur Ross’ sanctions.
- Here’s something for all the Trump haters and for the rest of us a good indication how the US economy is working through increased levels of the population. Apparently the Michigan consumer sentiment survey contained a stat which showed favourable references to US government policies hit a record high. Here’s the tweet from Christophe Barraud where I noticed it. Intersting.
- Great article in the FT about the mess in Syria and the Middle East I have been highlighting as something to watch. To me this has a real 1914 feel about. Not that a war is inevitable but certainly the risk of the great powers positioning themselves such that one may eventuate seems high. As I said yesterday, the US, Russia, Turkey, Iran, Israel, Syria itself, and the Kurds. What could go wrong? Anyway here is a link to the FT article - Israel and Iran edge closer to conflict.
- Oh, and as Bitcoin (BitfinexUSD) keeps rallying - having broken the cluster of Fibo resistance - BoE governor Marl Carney declared it a failed currency experiment yesterday. I agree with him wholeheartedly for developed markets. But I'm not sure that's the point really.
Australia
- ANZ consumer confidence data pulled back yesterday and folks attitude to their finances deteriorated for the second week in a row. That’s very interesting and something to watch. Though it is also worth noting both confidence and attitudes to finances are still above long run averages.
- I highlight that this morning as a stepping off point for a discussion about household debt and risks to consumption. I’m at the end of a series of presentations in Sydney and Melbourne over the past couple of weeks focussed on the outlook for the economy and just where Australian consumers are in a behavioural sense as a result of that and what the key motivations or handbrakes on them are. So it was interesting to read Michele Bullock’s, RBA assistant governor, speech yesterday on household indebtedness and mortgage stress. In a nutshell, Bullock doesn’t appear too worried. She said “my overall interpretation of these myriad pieces of information is that, while debt levels are relatively high, and there are owner-occupier households that are experiencing some financial stress, this group is not currently growing rapidly. This suggests that the risks to financial institutions and financial stability more broadly from household mortgage stress are not particularly acute at the moment”. That’s something I’ve been telling my audience as well – otherwise how do you explain why Australian are buying so many expensive SUV’s these days to drop the kids at school?
- To the markets now, where the ASX showed resilience yesterday. That’s the second day in a row that the market did better than I expected. And now, this morning, the second night in a row that SPI traders have knocked a decent slab of points off the ASX. Now down 28 points on the back of weakness in the US perhaps we’ll see the ASX lower after all today. A close below 5,890 on the physical would be nasty. For the SPI the price action keeps faltering at and around this 61.8% retracement level – so my sense is we are heading lower. Potentially substantially so.
Forex
- The US dollar is getting it’s mojo back. It is still way too early to say the worm has turned. But the very solid bounce from around 88.11 to the current 89.71 in US Dollar Index terms coming after Friday’s key reversal day is encouraging. But it still has a lot of wood to chop and I still need to see a break up and above 91 to be confident that a low is in place and a sharper rally is afoot. A big part of that is what happens to US yields. Counterintuitively my sense at the moment is US bond rate stability is good for the US dollar because it doesn’t spook the heck out of traders that everyone else getting the heck out of dodge because of the size of the US deficits.
- Looking at the euro now and it’s clear it has made a double top and is heading back to test again the top of the previous uptrend level. If it breaks back lower, 1.2270, and then takes out Fibo support around 1.22 then we can start to think about EUR/USD in the high teens.
- USD/JPY is also testing the break down level from 107.30 which is the previous low of the range and also around the trendline it broke down and through last week.
Commodities
- BP (LON:BP) reckons that oil demand is going to peak in the late 2030’s. Sounds like a long way away doesn’t it. But – incredibly to me – we are already almost 20% of the way through this century. So the global oil giant is planning for what an electric vehicle future will look like. But Spencer Dale, BP’s chief economist said that even though “we expect to see in the 2030’s a huge growth in shared mobility cars,” any “suggestion that rapid growth in electric cars will cause oil demand to collapse just isn’t supported by the basic numbers — even with really rapid growth”. One interesting forecast is that BP assumes renewable energy will increase from 4% of global consumption to 14% by 2040. Dale said “40% of the overall increase in energy demand is met by renewable energy” by 2040.
- Clearly that’s too far in the future to impact prices overnight, or this week, month or year. But the battle between the competing production cuts – and jawboning - of OPEC and the reality of increased and increasing US oil production is the key driver. Bloomberg reports US deputy energy secretary Dan Brouilette said that US oil output is on track for “phenomenal” growth and that the Administration is “optimistic about 2019 and 2020”. Countering that was the UAE energy minister Al Mazrouei said, “We have seen a remarkable year in 2017 -- the market of crude has been restored and went to healthy numbers” adding “ahead of us this year is the balance of supply and demand”. That’s jawboning folks – on both fronts.
- So, as I highlighted above WTI and Brent are on balance mixed. Looking at the Brent chart I retain the view that unless the 61.8% retracement level at $66.79 gives way – noting that Brent is stuck below the 50% retracement – then a move back toward $61 possibly lower is probable.
- And here is a good story on Bloomy explaining how OPEC is moving the goalposts to try to keep the cuts going
Have a great day's trading.