Originally published by AxiTrader
Market Summary (7.44am Friday, May 4th – Happy Star Wars Day folks)
Stocks bounced back from some acute weakness early as both the S&P 500 and Dow recovered from a collapse below their 200 day moving averages to close well off the lows.
In the case of the S&P 500 it had been down 1.6% at one point before recovering to close down just 0.22% at 2,629. The Dow, which had fallen more than 400 points at one point, closed up 5 points, 0.02%, at 23,930. The Nasdaq dipped 0.02% to 6,643. Worth noting though after the bell Twitter (NYSE:TWTR) has said that 330 million users passwords have been exposed.
Time to change your passwords folks.
Turning to Europe then and unlike the local market where the S&P/ASX 200 just keeps powering ahead, it was a day of red with the DAX, CAC and FTSE down 0.88%, 0.5%, and 0.54% respectively. But, unsurprisingly if you’ve been watching the ASX fo the past month SPI traders have actually added another 12 points after yesterday’s 48 point surge to 6,098. So it looks like another good day on the local bourse.
Elsewhere, on forex markets, the US dollar lost a little ground as buyers of it – and sellers of everything else – showed some exhaustion. That means the US Dollar Index is just below resistance at 92.50 siting at 92.44 this morning. A close above this level on the week would be bullish. Euro is higher as a consequence of that even though the inflation data last night (EA 0.7% mom, 1.2% yoy) was a miss to the downside. EUR/USD is at 1.1987 up 0.33%. The pound is flat at 1.3571 and USD/JPY is a full 0.6% lower at 109.20.
Of the commodity bloc the kiwi has done best with a 0.69% gain while the Canadian dollar is up 0.28% with USD/CAD down at 1.2850. The Aussie dollar is around half a percent higher on the back of the US dollar move and some residual positivity from what was a very solid trade report yesterday with a much higher than expected surplus which came with upside revisions to the two previous months as well. AUD/USD is sitting at 0.7531, up 0.48%.
Bonds are poised to react to tonight’s non-farms with the 2's at 2.48% while the 10's are at 2.94%.
Oil is higher again as tensions build as the world awaits President Trump's decision on what he’s going to do about the Iranian nuclear deal. The Iranians have said no negotiation, but reports are Trump has already decided to pull out. So naturally oil is higher this morning with WTI continuing to close the gap with Brent rising 0.77% to $68.45. Brent is up 0.48% to $73.71.
Gold is still trading with the US dollar and with the latter a little weaker over the past 24 hours XAUUSD is up at $1311. Copper popped higher again too with a gain of 0.82% to $3.0725 a pound in what was a mixed night for base metals. Iron ore looks like it dipped after a decent run and is off around 2.5%.
On the day nothing really matters except for non-farm payrolls in the US tonight. The Reuters survey says the market is expecting 192,000 jobs and an unemployment rate of 4%. But after that wage cost data last night average earnings (0.2% mom and 2.7% yoy expected) might be the big datapoint to watch.
Before that though we get the RBA’s quarterly SoMP this morning. If governor Lowes speech Tuesday night is any indication it is likely to be reasonably upbeat on the outlook even though it will address concerns about households. That might help the Aussie dollar. New motor vehicles are out as well.
And of course we get the Caixin services and composite PMI’s in China with many other nations also releasing their services PMI’s.
Here's What I Picked Up (with a little more detail and a few charts)
International
- We aren’t hearing much from the high level talks between China and the US. But the good news is that former US Treasury Secretary Hank Paulson who has a close personal relationship with President Xi – not to mention with China more broadly - has apparently been with Xi this week. It doesn’t mean we’ll get a resolution but at least we know that with this relationship – and the one between the US’ Chinese Ambassador with President Xi – mean that the positions of each party will be clear. Indeed I’m not sure enough credit is being given to the Trump Administration for the genuinely high-level delegation they have sent to Beijing to try to sort this out. Ross, Munuchin, Kudlow, Navarro, and Lighthizer. Basically, everyone who matters except the President himself.
- Macquarie Bank’s Ric Deverell agrees with me that what the Fed was communicating yesterday is that “inflation’s about to go above 2 per cent and they won’t react too strongly” the AFR reports this morning. Couldn’t agree more. But Deverell believes that might be a problem because as wages and inflation lift he believes “the Fed is finally falling behind the curve and I think they’re going to have to pick things up”. HE also says the market’s narrative that inflation is “very low” is “the wrong narrative”. The implication is that the Fed will need to raise rates to catch up. My sense is we’ll end up with a 4th hike this year and then the question is how high do rates go? The Taylor Rule suggests rates should now be above 4%.
- Should that kind of move enter traders and investors consciousness expect more volatility in stocks as bond rates rise to meet a surging front end. The US dollar would likely get a further boost as well.
- ECB chief economist Peter Praet channelled his inner Dr Pangloss overnight when talking about EU growth and inflation. Despite the miss of EU inflation to the downside and the continued underperformance of core inflation Praet said “Our monetary policy measures are bearing fruit, and the growth outlook confirms our confidence that inflation will converge towards our aim of below, but close to, 2 percent over the medium term”. Ironically he said “We cannot yet declare ‘mission accomplished’ on the inflation front, but we have made substantial progress on the path towards a sustained adjustment in inflation”!!! Really, many would beg to differ as this tweet from Holger Zschaepitz shows. Maybe the ECB should end QE for no other reason than it's not working.
- And on the growth front the EC said last night that growth will slow this year and next from 2017’s peak. From 2.4% in 2017 the EC said it expects 2.3% growth in 2018 and 2.0% in 2019 with “the risks to the forecast have risen and are now tilted to the downside”. EURO BULLS, take note.
Australia
- I posted that tweet yesterday and the reality is the performance of the local market is genuinely remarkable recently. Macro outlooks are of course also built from the ground up and it seems that when the banks fell toward the bottoms of recent years ranges last week the buyers entered the fray. Yield plus a buy at the bottom of the range seems to have been compelling. Likewise with the Aussie lower are many companies which will benefit from the increased receipts. So that’s good news. But if the chart above shows anything it is that the ASX has a more volatile uptrend than the S&P 500 but that that trend is directionally similar.
- So unless the S&P 500 breaks lower again perhaps these prices are sustainable. I’m not on board though, I missed this boat when it broke the downtrend from the recent highs. But it has been a powerful technical move.
- That’s something you can see in the SPI chart below where there have only been 6 down days since April 4. The question is whether the high in January can be broken or if this is the range top. Either reaction is a powerful signal. All I can say is I never trust market moves when they go vertical as the SPI has over the past 3 days.
- Yesterday in my AUD/USD daily note I said that while the 0.7470/80 region held there is a chance of a decent bounce. The trade surplus yesterday certainly helped, but so to did the pause in the US dollar buying. So far we are only at 0.7530 and the high overnight was around 0.7424 but the technical suggest further topside gains could be made with the 76 cent level the 38.2% - garden variety – retracement of the recent move lower from the last drop from above 78 cents.
- Of course, this is dependant on non-farms tonight and what wages and unemployment say about the economy and the path of Fed tightening. I’m a US economic bull so on that front I guess I’d expect more strength. But labour data can often be volatile so it’s not something I’d like to guess at or punt for the Aussie.
- But the RBA’s SoMP this morning might be positive for the Aussie though. I say that because governor Lowe seemed more upbeat than I’d expected in his speech Tuesday. We’ll know this morning when the report is released.
Forex
- I’m writing this section last so I’m running out of a bit of time this morning. But the key thing I want to highlight is that the US dollar should continue to make gains against currencies across the board if fundamentals and central bank policy divergence matters. I believe it does and I can see a clear slowdown in growth globally at a time when the US seems to be the standout in terms of continuing in an upward trajectory for growth. And with inflation accelerating in the US but lagging elsewhere we have a clear policy divergence between the Fed and many other central banks. For me that means that whatever happens with non-farms tonight – should it be weaker than expected and thus the USD fall – we are at the start of a big turn in the US dollar.
- Quick chart – USD/JPY. Is this the canary in the coalmine that suggests the first wave of this US dollar rally I am expecting has ended? It might be. USD/JPY needs to break 110.30/50 to kick on. At present it looks like the rally is in hiatus. If 108.86 breaks then it’s 107.95/108 is the target. Note the USD/JPY has held below the 200 day moving average. 107.20/30 might be an interesting target too.
Commodities
- Oil is higher again as tensions build toward the crescendo that is the next week and President Trump's deadline of May 12 to decide what to do about the Iranian nuclear deal. Iran has said it will not renegotiate, the White House has won European agreement that Iranian ICBM development will now also be targeted and sanctions imposed if development takes place. So it’s clear something is going on in the background. But what’s not clear is what the end game is likely to be. But with sources telling Reuters that President Trump has all but decided to pull out of the agreement – just not sure in what form – oil has stayed bid again overnight.
Have a great day's trading.