Originally published by AxiTrader
Market Summary
Friday’s selling in the US tech sector continued at the start of the week with the Nasdaq 100 losing another half a percent. That pulled the S&P 500 and Dow Jones Industrial Average down 0.1% and 0.17% and has changed the discussion about the outlook for stocks a little.
The US market weakness also hurt stocks in Asia and Europe while the FTSE outperformed as the pound came under pressure again.
Here at home the selling has knocked the SPI 19 points lower in a reversal of Friday night’s gains.
On forex markets the euro is hanging tough around 1.1210, the Aussie is higher at 0.7540, the yen is gaining with USD/JPY back under 110 and the Canadian dollar is the winner on the night after a senior policymaker said the BoC would need to rethink the interest rate outlook.
Crude is a little higher as traders start to wonder if the EIA stock build last week wasn’t an aberration while gold is lower and sitting on important support. Copper reversed a little of last week’s gains and iron ore gave back some of yesterday’s gains overnight.
On the day in Australia, we get the NAB business survey while the offshore highlights are the ZEW survey in Germany along with inflation data in the UK and Germany as well. I’ll be watching the NFIB business optimism index in the US along with PPI data.
Oil traders will be watching the API data to be released at 6.30am tomorrow AEST.
Here's What I Picked Up - in a little more detail
International
- British prime minister Theresa May has apologised to her Conservative party colleagues and vowed to get the party out of the mess she got it into. And what a mess it is with a Hung Parliament and a sort of coalition with the Northern Ireland DUP. With the deal yet to be finalised there is chatter that the Queen's speech next Monday may actually be postponed. We’ll see.
- But the political uncertainty is unhelpful given Brexit talks are about to begin in the next week. On that front, it seems the Brexit minister David Davis isn’t using the election result to soften the tone on Brexit. Overnight David Davis said there is no change to the UK’s approach to the talks while a spokesman for PM May said “Our position is clearly set out, it is clearly set out in a number of places and there has been no change to that”. Sterling came under renewed pressure as a result. Why the government wouldn’t use the election for a reset I just don’t know. Anyway, we’ll see on that too in time I guess.
- And the pressure is being felt in the economy as well. The Citibank economic surprise index for the UK is now down at -22.3 which is the lowest level in a year. Indeed, a survey by the UK Institute of Directors showed that 57% of respondents are quite or very pessimistic compared to 20% who were optimists. The survey, taken in the post-election environment, saw a 34 point swing in confidence from the survey the IoD conducted in May.
- Across the channel it was a different political story as Emmanuel Macron’s party, En Marche, doing well in the first round of voting over the weekend. It looks like Macron could secure a majority in the French parliament at this weeks second round election.
- Also on the continent, Beppi Grillo’s %-Star movement in Italy appears to have suffered a setback at local elections held over the weekend which could suggest that it’s not just France that is eschewing the anti-European forces. European bonds rallied as a result.
- US bonds were a little higher though with the two-year Treasury back up near the high for the last month or so at 1.3550% as the market awaits this week’s Fed meeting, interest rate decision, statement, chair Yellen press conference, and the “Dot Plot”. US 10’s were also a smidge higher at 2.2127% after an overnight auction. A move above 2.24% might be a signal last week’s lows were the nadir for a while. The 10’s have to get there and break first though.
- The Bank of Canada is going to look at its interest rate settings in the wake of the recent GDP data. That’s the message from Senior Deputy Governor Carolyn Wilkins who said in a speech overnight that Q1’s growth had been “pretty impressive”. She added “As growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required”.
Australia
- Australian stocks were closed yesterday and Saturday mornings bounce in the SPI has been washed away with the weakness in US and other stock markets to start the week. The SPI is down 23 points this morning at 5669. In SPI terms prices would need to trade above 5702 for things to turn back to a more positive technical outlook.
- Looking at the physical S&P/ASX 200 the key topside level traders will be watching remains 5680/5700. A break above here, but especially if it can stretch to 5,720 would rebuild confidence after last week's nascent recovery.
- But it's a question of how the US selling hurts the local market. That the chat is about a rotation away from the tech stocks which lead this rally, the so-called FANG or more lately FAAMG group of companies, may help the local market. The problem for the local market today is that the two worst performing sectors in US trade were technology with a 1.15% drop and – Danger Will Robinson – basic materials which dropped 0.59%. So we may not be able to count on that rotation. And US financials were only up 0.22% on the S&P 500. SO maybe SPI traders have it right.
- My favourite data point of the month is out today when the NAB releases its monthly Business Survey. May’s survey will be out at 11.30am this morning and it will be interesting to see if Business sector is as upbeat as the April survey showed with confidence and conditions up at or near post-GFC highs.
- I really like this survey for two reasons. It surveys businesses about how things are actually doing in the economy and what the outlook is and then goes into the granular detail of how rtading, profitability, orders, employment and so on are tracking. So it gives a good read on economic activity. Secondly though I use it as an indicator of what employees will be hearing from their managers and the businesses they work in. Of course over recent years wages growth has been awful. But it’s no real surprise that households have run down savings when they are hearing that things are looking good for the businesses they work in.
- The question is can it last?
Forex
- The Canadian dollar is sharply higher against the US dollar to start the week after oil rose a touch and a BoC official said it was time for the bank to reassess the need for low rates in the wake of recent GDP data. That's seen USD/CAD break down and through x-month trendline support. It's now at 1.3340 this morning down 140 points.
- Euro is still hanging in there this morning only marginally weaker even as the US-German 10 year bond spread is contracting. That and the rally in French and other European bond markets in the wake of Emmanuel Macron's showing in the first round of the French parliamentary election should weigh on the single currency. But for the moment at 1.1203 its doing well.
- The pound is under pressure again this morning against the US dollar, Euro and many pound crosses. At 1.2655 the pound is now down and through the 1.2680 target I had last week as the garden variety pullback and has lost 0.67% to open the week. The pressure on the pound is likely to remain as uncertainty grows. There’s even talk of the Queens speech next Monday being postponed while the government sorts itself out.
- The Aussie dollar is hanging tough this morning. Not a lot of reasons for traders to have done anything with public holidays in the two big markets of Sydney and Melbourne yesterday and no real catalysts for a move. It's at 7540 this morning against the USD – up 0.2% - while against the pound it's stronger with GBP/AUD at 1.6781, the lowest level for the pound against the Aussie since mid-April
Commodities
- Oil is up a little this morning with WTI up 0.5% to $46.06 while Brent is at $48.29, up 0.3%. There has not been a lot going on but the commentary I’m reading and hearing suggests that traders fell the reaction to the EIA inventory build last week was overdone. That’s possible but we won’t know until we see what the API says tomorrow morning and then EIA Wednesday night.
- But as I’ve written a lot over recent weeks, now that OPEC has shot its bullets where oil prices go will be determined by the flow of inventory data and where the stockpiles head. It’s the only statistical proof the market can get to confirm or deny OPEC’s claim the market is heading back toward balance. Oh and on that front the EIA said shale production for July will rise 127,000 barrels to 5.48 million.
- Gold is down at the 38.2% retracement level of the recent rally sitting at $1265 this morning. I’m a little surprised gold is not doing better given all the uncertainty and when I look at my charts gold has to hold the 50% level at $12.55 and some recent lows at $1258 to avoid a big dip lower.
- Copper is off a little today and back retesting the recent trendline breakout. It’s off 1.22% to $2.62 a pound.
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