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Trader thoughts - the long and short of it

What initially looked like a period of calm for frayed nerves Friday in the US session ended up a painful extension on a threatening bear trend.

Source: Bloomberg

Wall Street’s Friday puts global markets on high alert Monday: Depending on how you are marking your trend lines (through tails or at their extremes), benchmarks like the Dow 30 and S&P 500 stand on the cusp of critical reversals or have tentatively pushed to the other side. For a scale of last week’s pain, the S&P 500 closed out its worst week for losses since the start of 2016 and the second-worst performance in six years of the bull trend back to the late 2011 swoon. Though the full suite of tariffs the US initially threatened to let loose was avoided – a steep import tax on steel and aluminium against the EU would likely have put us on a direct trade-war-to-recession path – the steep intellectual property theft-motivated tariffs against China will lead to inevitable global complications. How clear is this path towards restricted global growth and curbed investment? We will find out about how readily Asian and European markets pick up the selling pressure Monday.

Australian shares caught in global market rout: The benchmark S&P/ASX 200 equity index would not be spared the brutal bloodletting afflicting global markets Friday. It shed nearly 2 percent, with the heavyweight Financials and Materials sectors leading the way downward. They suffered losses of 2.2 and 2.7 percent respectively. Perhaps most worryingly, the index breached support guiding the uptrend from February 2016 lows on a weekly closing basis, warning that a significant reversal is at hand. Australian shares have yet to respond to selling in the final hours of Wall Street trade last week. If that translates into sustained downside follow-through after the opening bell Monday, sellers may have all the confirmation that they need for protracted liquidation.

Commodities attempt to defy risk trends: Broad commodity indices have inched up through the close of this past week, yet the outlook for global growth that would power demand for these natural resources looks increasingly at risk. Softs such as wheat and live cattle are attempting to recover from the slide over the past few months, but market conditions are not backing up the questionable technical picture for a recovery attempt. One of the only genuine gains through Friday among metals was gold’s 1.4 percent charge back towards a well-established resistance another $10 higher around $1,360. Meanwhile, silver and platinum are struggling to mirror the same sort of safe haven appeal the yellow metal is catering to, and industrial versions like copper and iron ore are trading at their lowest levels on the year. As has been the case often recently, the most motivated contradiction has come on the behalf of oil. US-based WTI rallied into the close this past week to fully recover Thursday’s lost ground and close out the best week since the period through July 24.

Australian dollar slides to an 18-month low: While AUD/USD is still holding its volatility to a relatively controlled range, the Aussie Dollar is dropping to remarkable lows against many of its other major counterparts. In fact, an equally-weighted index of the AUD versus its most liquid pairings showed the currency drop to a fresh 18-month low through Friday. That acute weakness is familiar in individual pairs like EUR/AUD, GBP/AUD and AUD/JPY. The fundamental pressure behind this weakness is the same ill wind that is sweeping over the global markets. While Australia seems to have dodged the United States’ steel and aluminium tariffs with an exemption, the engagement between the US and China is troubling for a country whose GDP and recent exceptional growth has depended heavily on its exports to the relentless consumption of raw materials in China. Trade curbs will inevitably carry over to other relationships directly or indirectly, and the collective slide in global growth will naturally curb the wealth that has poured into Australia.

US Dollar offers muddled response to market turmoil: The greenback seems to be of two minds about its response to the market turmoil sweeping global bourses last week. At times, it adopted the haven role it played during the 2008-09 crisis and its immediate aftermath, benefitting from “risk-off” capital flows. These forays to the upside have been promptly checked as markets weighed the probability that a sentiment meltdown will derail the Fed’s rate hike ambitions. The way forward probably depends on the severity of further liquidation. Aggressive, broad-based selling akin to Friday’s price action will probably boost the benchmark currency as liquidity is prized above all else. A slower grind that leaves open the possibility that markets can muddle through without derailing the global recovery altogether might keep yields in focus, sending it lower.

China warns US debt purchases may slow amid trade war: China may slow purchases of US Treasury bonds in retaliation for US President Trump’s decision to impose up to $60 billion in tariffs on the country last week. The administration claims the move is punishment for alleged intellectual property theft. The threat was made by China’s US Ambassador Cui Tiankai in an interview with Bloomberg News. When asked if Beijing would consider scaling back purchases, he said policymakers are “looking at all options”. China is the US’ largest overseas creditor, accounting for close to 20 percent of debt held by foreigners. A slowdown in purchases – particularly at a time when the Federal Reserve is reducing its holdings of Treasury securities – might push up borrowing costs faced by US businesses and consumers, a headwind for economic growth.

Kiwi dollar may fall further as Orr takes the reins at RBNZ: The New Zealand dollar seems to be once again recoiling from resistance near the top of the choppy 0.68-0.75 range confining price action since September 2016. Last week’s dovish RBNZ policy statement warning that “CPI inflation is expected to weaken further in the near term” has reinforced the likelihood that rate hikes will be delayed for a while yet. The meltdown in risk appetite was almost certainly unhelpful for a currency whose main appeal rests on higher interest rates and sensitivity to the global business cycle. Newly minted Governor Adrian Orr officially takes the reins this week. His arrival might mark a further dovish tilt as policymakers begin the process of adopting a Fed-like dual mandate that targets employment in addition to inflation. Comments suggesting this may take tightening off the table for still longer might inspire further selling pressure. 


Market Data:

SPI futures moved -116.42 or -1.96% to 5,820.73.

AUD/USD moved +0.0011 or +0.14% to 0.7704.

On Wallstreet: Dow Jones -1.77%, S&P 500 -2.10%, Nasdaq -2.43%.

In New York: BHP -0.02%, Rio -0.55%.

In Europe: Stoxx 50 -1.50%, FTSE 100 -0.44%, CAC 40 -1.39%, DAX 30 -1.77%.

Spot Gold moved +1.69% to US$1355.70 an ounce.

Brent Crude moved +1.54% to US$70.45 a barrel.

US Crude Oil moved +1.58% to US$65.88 a barrel.

Iron Ore moved -4.28% to CNY447.5 a tonne, SGX Iron Ore moved -0.70% to US$69.98 a tonne.

LME Allumnium moved -1.18% to US$2050.50 a tonne.

LME Copper moved -0.52% to US$6660.0 a tonne.

10-Year Bond Yield: US 2.81%, Germany 0.52%, Australia 2.65%.


Written by: Ilya Spivak, Market Strategist, DailyFX

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