Originally published by AxiTrader
Market Summary
A new high for the S&P 500 at 2403.87 gave way to a close at 2,396.92 after North Korea rattled its sabre at the US and global community. The Dow Jones Industrial Average finished down 0.17% at 20,975 but the Nasdaq 100 is climbing again up 0.29% to 6,120. European stocks had a positive tone as well with the FTSE 100 up 0.6%, the DAX up 0.43% and the CAC 40 0.3% higher.
But the big news has been in oil, forex, and in the past hour or so North Korea.
Oil is down either side of 1% and trying to cling to the $46 level as the EIA has both increased its forecasts for US production and simultaneously downgrade its expectations for oil prices.
On forex markets the US dollar was stronger across the board with USD/JPY above 114 before our friends in the Hermit Kingdom said they intend to hold another Nuclear test and rattled their sabre at the US once again. The Swiss franc is marking time with the 0.9% fall of the yen while the euro remains under pressure and is back below 1.09 comfortably.
The Australian dollar remains pressured and at 0.7338 is just a few points above the low for last night. Things are stacking up against the battler.
Likewise gold is out of favour as the price of volatility in markets continues to fall and US bond rates rise. It’s back in the $1218/20 region which has been both important support and resistance over recent months. Copper is fairly flat in the US although it was down on the LME.
On the day Chinese inflation data is going to be huge.
Here's What I Picked Up - in a little more detail
International
- US rates are higher once again - at 1.35 the 2 year note is now just 6 points from the highs of 2017 while the 10’s are sitting at 2.40%. That’s a little more than 20 points off recent lows for both rates as markets factor in a Fed hike and I think the implications of the start of the tapering of the Fed balance sheet.
- On that topic, Kansas City Fed president Esther George said overnight that she is a little concerned about the recent weakness in the dat but on board with the tapering of the Fed’s massive $4.5 trillion balance sheet. She said specifically that “the FOMC also must begin to adjust the size and composition of its securities holdings”. She also said once the Fed sets the path to reducing the balance sheet it should set it to autopilot and not revisit it at each FOMC meeting because that would “potentially complicate monetary policy and provide few benefits to the real economy”.
- North Korea got particularly bolshi last night saying it will conduct another nuclear test and that it could turn the US to ashes. Gold at $1220 anyone?
- Both president-elect Macron of France and president Xi of China have signalled they will stick to climate change agreement. Macron apparently told Trump on a phone call that he will defend the Paris agreement. Trump on the other hand will apparently make his decision at the next G7 meeting.
- US Inventories rose 0.2% in March data from the US showed overnight.
- Keep an eye on Syria again folks. After Turkey and Russia tried to carve it up with no fly zones in the past week the Pentagon announced last night they will arm Syrian Kurds. Mr Erdogan won’t be pleased.
Australia
- Yes there appear to be weather related issues with the unexpectedly weak retail sales result for March (-0.1% versus 0.3% expected) which followed the previous month’s -0.2%. But there is no denying that the trend in retail sales is a weakening one. And, as a behavioural economics and finance guy who is worried about the turn in house price growth in Australia’s two biggest cities I see this trend as a precursor for some real household consumption based problems for the economy going forward.
- Yes, I trust in the NAB business survey. Yes I’m encouraged by business conditions, confidence, and employment sub index. But I strongly believe we are in the midst of a focus transition by Australian households from wealth accumulation to debt consolidation and repayment. Banks are still raising rates out of cycle and that together with the focus on debt repayment will repoint cash from spending to saving and debt repayment.
- This chart from JP Morgan – via Business Insider – shows the collapse in discretionary spending.
- And this one from CP Economics shows retail sales are falling in many categories.
- I’m calling it now – rates in Australia are going to need to be cut again. Maybe not till 2018 but certainly to 1%.
OH AND THERE WAS A BANK ROUT YESTERDAY AND A BUDGET - we better talk about those as well
- And I’ll leave the specifics of the budget to others. But as a behaviouralist I think this is an important document in resetting the political climate in Australia. It’s a Macronesq document which jettisons the partisanship and shock which was the 2014 Liberal budget and goes for the vast middle ground that will likely pass the Senate. That’s important because if the more conservative elements of the government can be put to one side we can finally get a government that can look stable and build confidence for the first time since the Rudd-Gillard_Rudd years.
- That doesn’t mean I’m not worried about the outlook for consumers as they focus on debt reduction – indeed I think the assumptions on the savings rate in the budget are heroic. But this document means that for what feels like the first time this decade there is a chance that politics isn’t a drag on sentiment in the economy.
- Looking at the overnight price action in the SPI 200 I confess to being a little baffled. The SPI is up 22 points after yesterday’s fall and maybe folks are betting that the rout in banks overdid things given the fairly small impost the government’s funding tax has on their bottom line of around $1.5 billion in revenue collection per year. We’ll see because with oil down again, gold under pressure and base metals flat to down it’s the banks that will need to do the heavy lifting. Oh and naturally any stocks that are exposed to the big infrastructure spend.
Forex
- US Commerce secretary Wilbur Ross said this morning that it’s not that the US dollar is too strong it’s that other currencies are too weak. It’s an interesting nuance on the message that the administration thinks the US DOLLAR IS TOO STRONG. But it had little to no impact on the dollar which is climbing once again and starting to look good while US rates rise and traders focus on rates and balance sheet tapering.
- The euro is under pressure again as the bond spread moves against it. The importance of the bond spread is something I have written about this week for both the euro and yen so it’s no surprise to me both currencies are under pressure as US rates rise and German and Japanese bonds do not.
- North Korea has, and can continue to help, the yen but overall there is upside momentum continues and targets above 115 will be tantalising the chartists. On the euro 1.0845/50 is the 38.2% retracement of the recent rally. It’s a tractor beam and it needs to hold if a deeper retracement isn’t to eventuate.
- Just quickly on the Aussie dollar and the confluence of worries over China, disappointing domestic data, and commodity pressure is keeping downside pressure on AUD/USD. Around 73 cents is where it looks like it headed and where support lies. I’ll write more in my Aussie dollar specific piece a little later this morning.
Commodities
- Sentiment in the oil market is going from bad to worse for the Saudis and their colleagues in OPEC. While the news broke that the Saudis are cutting 7 million barrels of supply from Asian clients in June the EIA said that it was both upgrading its forecasts for US, Canadian, and Brazilian production and also downgrading its price forecast.
- Reuters reports "Higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018,” EIA Acting Administrator Howard Gruenspecht said in a statement. The EIA expects 2017 US production to increase 440,000bpd over 2016 with the outlook for 2018 of 9.96 million bpd an increase of 680,000 over 2018. For context 600,000 bpd is the non-OPEC contribution to the current production cut. So this is big.
- The result is that WTI has slipped 1% to $45.96 while Brent is off 1.1% at $48.81. As I wrote yesterday, WTI needs to get back above $47.00/20 to break this downside pressure.
LATE EDIT – a bigger than expected draw in API inventory data will please OPEC and has lifted WTI back to $46.19 down just half a percent now.
- Gold is down again. It’s off its lows at $1214 but the chart suggests we could be in for a round trip to the start of this rally at $1,194. Rising US rates aren’t good for gold and neither is the low level of volatility. I’m not sure fundamentally this lack of vol isn’t just a precursor to an eventual volatility expansion. So I’m watching my charts but looking for somewhere to sneak some gold in.
- It’s worth noting that Goldman Sachs (NYSE:GS), who were recently bullish on commodities, has had a rethink and issued a paper posing questions to its own outlook. That’s utterly correct, and a great way to handle things. But it’s also emblematic of the changed conversation recently about the outlook for commodities and commodity currencies like the Aussie and Canadian dollars.
Have a great day's trading.