Originally published by IG Markets
We closed out the past week on a particularly strong footing with US equities. Friday’s rally for the S&P 500 and Dow was the largest since April 10 and raised bull’s spirits that this may finally be the dip buying effort that finally raises inspiration.
Wall Street makes another unconvincing rally effort: Yet, the performance came off as fundamentally suspect on a generally in-line employment report and the drain of liquidity for the weekend would give investors plenty of time for introspection on whether they are willing to hold on with this go after so many false starts. Opening the day with a strong DAX and CAC performance before it – with London offline for the bank holiday – US investors were inspired to the first bullish gap in five trading days. Yet, that initial move seemed to expend much of the enthusiasm on tap. An upper ‘wick’ was forming in the retreat from the session highs – which just so happened to test and hold resistance for the Dow in the form of a trend line stretching back to the January 31 high. President Trump’s announcement that his decision on the nuclear deal with Iran would come Tuesday afternoon provided no optimism. That is another instance of “restraint on bullish news” that calls into question the underlying bias we are dealing with in this market.
US President Trump says tune in for Tuesday 18:00 GMT decision on Iran: Ever the showman, President Trump released a statement Monday afternoon that he would deliver his decision on the nuclear deal with Iran that was facing a deadline for Saturday the 12th. Given the leader’s penchant to make policy through Twitter with no warning, this comes as something of a surprise. Further, the fact that this decision is coming well before the deadline; the natural expectation would be that the outcome will be favourable – an extension of the existing agreement or some negotiations that will allow for sanctions and nuclear development to remain off the table. When the discussions are going poorly, the standard approach for negotiations is to give it more time for something more fruitful to be achieved – whether through level heads or pressure. Yet, the market response to this announcement seems to come with a heavy dose of scepticism. The energy market responded with the natural ‘positive’ supply side response, but capital markets and risk assets clearly didn’t register the same expectation. The frequency of surprises to come out of the Trump administration has created an understandable air of caution when it comes to important events. Diplomacy does not operate in the norms that it has in the past. This is further evidence that the markets are not willing to default to a state where any and all news with even a modest bias of ‘bullishness’ will translate to rally.
Crude oil rally fizzles as Trump readies Iran deal decision: Crude oil prices plunged after President Donald Trump said a decision on US participation in a multilateral nuclear disarmament deal with Iran will be announced on 8 May. The benchmark WTI contract rose to the highest level since 2014 earlier in the session amid speculation that re-imposed sanctions following a US exit will amount to a substantial supply disruption. News of its imminent arrival may have spooked over-extended bulls and triggered an unwinding of short-term exposure, with traders opting to wait for the passage of event risk before offering further directional commitment.
Will China trade balance offer up sufficient sympathy for negotiations?: Aside from President Trump’s scheduled announcement in Washington, the top event risk on the global docket Tuesday is China’s April trade update. This is an indicator that carries even greater significance now with so much focus troubled trade negotiations threatening to spiral into formal trade wars at any bad turn. This update from China will carry greater significance than any before it in this era of protectionism as it will stand as a reflection on how early tariff threats and actions have impacted China. That said, exports are expected to have rebound from the 2.7% drop (in dollars) registered in the year-over-year pace for March to a 7% percent climb for the most recent reading. The balance is seen swinging up from its $4.98 billion deficit back to a $27.5 billion surplus. The problem is that with the US watching so closely and dead set to read such data at face value, a positive report can just be turned into more motivation for the US to pursue its tariffs.
US dollar marks time before Powell speech: The US dollar attempted to return to the offensive having backtracked from a four-month high on Friday after official labour-market data revealed softer wage inflation than expected. The fresh foray to the upside was scuttled by cautious comments from Federal Reserve officials, however. Richmond Fed President Tom Barkin noted the absence of “outsized wage pressure” while his Atlanta counterpart Rafael Bostic said he is comfortable with some overshoot of the central bank’s 2% inflation target. The benchmark currency would end the day essentially flat, with today’s much-anticipated speech from Chair Jerome Powell at an SNB/IMF event in Zurich now in focus.
Australian dollar desperately seeking motivation: There was a very modest but generally promising effort to start a recovery for the Aussie dollar through the end of last week. Encouraging trade data helped to counteract concerned RBA forecasting to encourage FX speculators to take the risk in taking a shot with the discounted currency. That effort hasn’t carried over to the new trading week. The slip in the April construction activity reading from AiG and robust reading from the NAB’s business confidence report Monday roused little enthusiasm. The currency sunk across most counterparts – though without marking pace on new break lows. Given how deflating this currency is and a considerable range of support on many pairs, progress lower may be difficult to mount. That may prove one of the few saving graces for this currency in the near term.
ASX may shrug off retail sales data as Powell, Trump loom large: Australian share prices turned higher after Friday’s selloff snapped a five-day winning streak. Another foray above the 6100 figure on the S&P/ASX 200 index failed to find follow-through, however, with prices retreating into the close to settle within the range carved out over the preceding two sessions. Materials names led the way higher, adding 0.75 percent. That might have followed on from a broad-based pickup in commodities in North American trade on Friday as April’s US jobs report weighed on the US dollar, offering a de-facto lift to raw materials prices mostly denominated in terms of the go-to reserve currency on global markets. Local retail sales data is in focus today, with expectations pointing to a slowdown. That may prove to be a fleeting catalyst however as US Fed Chair Powell’s speech and President Trump’s Iran decision loom large for the financials- and mining-oriented Australian equity benchmark.