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Trader thoughts - the long and short of it

Many of the US headlines looking for motivation for the session attributed the rally to a carry over from last week’s employment report.

Source: Bloomberg

Wall Street starts off strong but draws out the skeptics: The benchmark US equity indices kicked off the trading week with an impressive bullish gap higher. Enthusiasm after that strong start however was uneven. Many of the US headlines looking for motivation for the session attributed the rally to a carry over from last week’s employment report. The May jobs report was certainly strong, but there is rather little reason why the news would continue to earn the markets significant tail wind. Labor health in the US is certainly robust – even if we could nitpick particular elements like participation rate – but the financial implications for forward-looking markets have already translated into forecasts of economic growth as much as they have for steady rate forecasts.  Sentiment itself can manufacturing its own momentum, but the foundations for strength that we have seen lately is not a particularly inspiring wellspring. The United States’ announcement of metals tariffs on key trade allies – and those allies’ quick declarations of retaliation – spell a greater concern for market trends. Furth more, the concentration of the ‘FAANG’s performance relative to the tech-heavy Nasdaq relative to the broader Dow and S&P 500 suggest we are operating more on speculative reach than genuine conviction. Unless something inspiring comes along, this run could quickly fizzle.

Has recent global market volatility affected the RBA’s outlook? That question and more should be answered ahead with the RBA rate decision on tap. The group is expected to hold its benchmark rate unchanged at 1.50%. Traders began to discount the probability of a 2018 hike following last week’s fear response to Italy’s political drama. Global investors worried a European crisis was brewing which could which could compound global implications of trade wars. That put jeopardized both confidence that the RBA could be so bold as to lift rates given the external headwinds and leveraged issue with seeking out such anemic yield advantages given these risks. With that backdrop, Tuesday’s decision will hit the wires at 2:30 PM local. Any unexpected hawkish rhetoric signaling an earlier hike than mid-2019 could lead to further gains in the Australian Dollar – much as it did with the Bank of Canada’s surprise hawkishness and the Canadian currency’s response. Then again, the closer policy cousin RBNZ signaled through its last update that its next move is as likely to be a cut as a hike. It is monetary policy context that will leverage the market’s attention even if the RBA holds its course of status quo.

An update on trade wars: This past week the US re-ignited trade wars when its announced that it was moving ahead with the steel and aluminum tariffs it had initially floated in March against the European Union, Canada and Mexico. Since then, each of those countries directly in the line of the global leader’s sites have announced their intentions to retaliate along and some have even given the specifics. Over the weekend, the meeting of G-7 finance ministers and central bank heads rendered its own collective rebuke against US Treasury Secretary Steve Mnuchin. However, there wasn’t an official statement to come from the six other members of the group to indicate their collective dissatisfaction. That will likely come from the leaders who are scheduled to meet this coming Friday and Saturday. The relatively sanguine bearing for the markets to start off this week gives off an air that this conundrum simply isn’t important. More likely, it is just more complex than standard drivers of late, there is reticence to take a stance ahead of the Summit and there is perhaps lingering hope that this will be another situation whereby the US President suddenly reverses his position.

Fed rate forecasts are dependent on risk trends, not the other way around:  With the Dollar’s recovery the past few months, FX traders have had to find a foundation for this renewed confidence if they were to reasonably project its continued gains. One of the leading explanations adopted followed a familiar line of logic: interest rate expectations are more favorable for the US and now the Dollar is looking to catch up to that implied yield differential. As far as fundamental motivations go, this is a sound one. However, the assumption that it is suddenly more important – particularly amid a rise of speculative uncertainty whereby low yield is not particularly attractive – remains dubious. Regardless, if this is the motivation for the Dollar, currency traders should keep in mind that the interest rate forecasts for the US have eased materially over the past few weeks amid concern over growth, financial market vibrancy and trade war fallout. If full-tilt risk aversion kicks in, we have something else to guide the USD higher; but rate forecasting alone is a questionable guide moving forward.

Australian dollar Monday’s best performing major currency: Once again, the Australian Dollar was the top performer amongst the most liquid currencies Monday. It seems to win this designation frequently, though we have not registered the kind of significant performance over time that it would entail. From these wide gains to start the week, we already know not to immediately assume a more prolific trend is already underway. This past session, the charge was funded through an active economic calendar. First quarter corporate profit soundly bested expecations to warm growth and income forecasts. That data carries far more heft than the retail sales and inflation reading from the Melbourne Institute, both of which also improved. With the RBA decision dead ahead, however, any long-dated growth enthusiasm could be quickly upended. The same is also true of GDP on Wednesday. In short, don’t position for any trends until we get out of the fundamental weeds.

Commodities appear set for a tricky June: Despite posting gains in May, commodities like crude oil and precious metals may have a difficult month ahead if the past two trading days are any indication. Markets are naturally focused on global trade tensions that could disrupt order flow of steel and aluminum as US President Trump continues to stoke the fires of trade wars. China pushed back saying any progress made previously through negotiations could be undone by the pressure. Trade tensions are giving a short-term premium to base metals as aluminum has climbed higher for the third day on the LME. For oil, the biggest concern is the growing rumors that OPEC can no longer hold back production. WTI crude oil broke below the 100-DMA in overnight trade for the first time since September and further sliding below $65/bbl for the first time in two months.   

Australia’s S&P/ ASX 200 rose 0.6% Monday, but futures are pointing to a lower opening: Monday’s climb was the best day of trading for the ASX since May 3 when the index climbed 0.8%. However, the encouraging data recently could in turn lead the RBA to adopt a less accommodative stance, leaving investors cautious. The leader for Monday’s strong performance was CBA which rose 1.4% after the company settled a $700m penalty for failing to abide by anti-money laundering laws.

Market’s Data:

SPI futures moved 35.16 or 0.59% to 6025.55.

AUD/USD moved 0.0082 or 1.08% to 0.7651.

On Wall Street: Dow Jones 0.63%, S&P 500 0.4%, Nasdaq 0.57%.

In New York: BHP -0.22%, Rio 0.13%.

In Europe: Stoxx 50 0.46%, FTSE 100 0.51%, CAC 40 0.14%, DAX 30 0.37%.

Spot Gold moved 0% to US$1293.34 an ounce.

Brent Crude moved -2.01% to US$75.25 a barrel.

US Crude Oil moved -1.63% to US$64.74 a barrel.

Iron Ore moved 0.87% to CNY463 a tonne.

LME Aluminum moved 0.57% to US$2305 a tonne.

LME Copper moved 0.64% to US$6896 a tonne.

10-Year Bond Yield: US 2.93%, Germany 0.42%, Australia 2.73%.


Written by: John Kicklighter, Chief Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX

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