Stocks down, US dollar and bonds a little higher, gold and oil under pressure: Markets Wrap

Market Summary

An interesting night across global markets with the Australian dollar unwind continuing. It’s down around 0.85% and under 75 cents this morning. Once again it’s about the worst performer of the big global currencies against what is generally a stronger US dollar over the past 12 hours or so.

The pound has naturally reversed some of its previous days strength and is at 1.2780, about 130 points off the high. The Euro has dipped ever so slightly to 1.0713, while the Yen is a little weaker at 108.86.

That Yen move is consistent with what we also saw in the reversal of gold which is neatly back below important resistance after losing about $12 in the past 24 hours to $1278 an ounce.  Roll period shenanigans and a big build in gasoline stocks hit crude oil hard with WTI and Brent both down more than 3.5%. WTI is back at $50.46 this morning.

Naturally the trouble in energy has a corollary in stocks with the energy sector down 1.4% which has helped drag the S&P 500 into the red. The Dow has been knocked down 111 points on stock specific news.

Bond rates were a little higher even though the Fed’s Beige book only spoke of moderate growth and continued quiet inflation.

What You Need To Know (with a little more detail and a few charts)

  • S&P 500  -4 (0.17%) 2338 (7.20 Sydney)
  • Dow -118 (0.58%) 20404
  • Nasdaq +14 (0.23%) 5,863 
  • SPI 200  -13 (-0.22%) 5,784
  • AUDUSD 0.7494 -0.80%
  • Gold $1278 -0.8%
  • WTI Oil $50.58 -3.50%

International

  • The Fed’s Beige Book was released this morning as Fed staffers prepare for the early May meeting. The analysis reflected mostly modest or moderate growth across the 12 Fed districts. But it did highlight the tightness in the jobs market noting “Labour markets remained tight, and employers in most districts had more difficulty filling low-skilled positions, although labour demand was stronger for higher skilled workers”. But the summary of economic activity was hardly strong.
  • That’s important for markets right now as the US economy hits a flat spot of growth relative to recent elevated expectations of the impact of a Donald Trump presidency.  As I highlighted yesterday the turn in the data flow maps nicely with the turn in the Citibank Economic Surprise Index for the US.  
  • His collegue from the Bosten Fed Eric Rosengren  said again the fed’s balance sheet should be shrunk sometime soon – “earlier” and gradually was the quote.  
  • Stanley Fischer, the Fed vice chair, has been speaking this morning and said there will be no repeat of the taper Tantrum. “A gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad” Fischer said. He also highlighted the pick-up in the global economy was becoming more broad based.
  • ECB chief economist Peter Praet said overnight that there could be more upside risks to the banks Q1 and Q2 economic projections. Like Fischer he too said that the global economy was doing better. But he also again reiterated it is too early for the ECB to be reversing policy any time soon.  That’s something his colleague Francois Villeroy said overnight highlighting he favours more concrete signs of economic strength before the ECB adjusts policy.
  • And keep and eye on Iran folks. US secretary of State rex Tillerson this morning really upped the ante as the Trump administration looks at the deal that was done to lift sanctions on Iran a few years back. He said that iran could go the way of North Korea. 

Australia

  • Australia is certainly out of favour at the moment. Watching the fall in the ASX and the Aussie dollar you’d swear some of that money that flooded in and drove prices higher for both a couple of weeks back has rushed back out again.
  • I’m not exactly sure but another 33 point fall yesterday and close at 5804 means the ASX200 is 140 points off the high last week. But it has – so far respected this tentative uptrend line from the Trumponomics low.

  • SPI traders have marked prices down another 12 points overnight. So the index looks likely to remain under pressure. Althouh the lift in iron ore will help the miners.
  • Looking at the economy I couldn’t agree more with Westpac’s Bill Evans about the risk Australia faces with regard to growth in 2018.  Even though Westpac’s leading index of growth points to reasonable growth in 2017 Evans highlights that the index is being driven almost entirely by offshore factors and as a result he says “Prospects for growth in 2018 look discouraging…Prospects for an offsetting boost from household spending and business investment are not encouraging given the ongoing negative feedback loop from weak labour incomes to consumption and final sales”. David Scutt at Business Insider has more here.

Forex

  • It’s not the most convincing recovery, but the US dollar is a little stronger this morning. The Pound’s reversal was entirely predictable after such a sharp move the previous night. Theresa May won the 2/3 majority parliamentary vote she needed to get this early election and it’s natural that even though she is expected to win easily traders recalibrate a little. Naturally also is the move back toward the 38.2% retracement level of the precious nights move. The 4 hour charts suggest we could see a little further consolidation – perhaps even to 1.2660/65.

  • USDJPY has given its first sign of a turn on my systemised approach for some time. A break of 109.17 would likely trigger me long. Euro is fairly quiet but the Australian dollar continues to come under acute selling pressure. At 0.7496 it’s just a few points off the low for the past 24 hours. A rise in risk aversion, increased uncertainty, relatively weak commodity prices, and a poor technical outlook are all combine to sap the Aussie’s strength. It is incredibly important on the charts it holds 0.7470 otherwise a run to 0.7390/0.7400 opens up. That’s likely my base case now.  
  • Worth noting is that the Aussie has been joined in its hammering by the Mexican peso, Brazilian real, Columbian peso, and Russian rouble. It all feels like an optimism unwind right now.

Commodities

  • WTI collapsed 3.85% to $50.39 this morning while Brent is down 3.7% to $52.86. This is not entirely unexpected given it’s the roll period, and given prices were already retracing after a very strong push higher recently the move had momentum as I noted over recent days.
  • But the key here is inventory levels and what they suggest about demand for product.  I’ve noted many times recently that crude oil traders in the US are looking closely at moves in gasoline inventory levels as a guide. So even though the EIA reported that Crude inventory levels fell 1.034 million barrels (-1.47 million expected) the fact that gasoline stocks rose an unexpectedly, and large, 1.5 million barrels, worried traders that demand is not as strong as many thought.
  • Looking at the price action WTI fell through the initial target I discussed last week around $51.00/20 which is where the 38.2% retracement level sat. That means $50.39 – the 50% retracement of the rally from $47 last month – is the level to watch.

  • Gold has rejected and reversed off overhead resistance again in the past 24 hours. After trying to best $1290 around this time yesterday the price is back at $1279 this morning as rates and the US dollar rise a little. No doubt traders are also eyeing this important level of resistance.
  • The sea of red in base metals continued and copper is down at $2.54 after touching a low around $2.50 a pound last night. Worth noting iron ore futures in the US have been marked a little higher last night up about 2%.  

Have a great day's trading

Greg McKenna

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