Trader thoughts - the long and short of it

Despite closing 0.3% off the intra-session high, the index managed a gain. The big event of the week was the Australian Treasuries budget announcement that undershot the already dovish RBA.

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Source: Bloomberg

The S&P/ASX200 found its footing to string together two winning sessions: Where the RBA sees the economy accelerating by 3.25% in 2018-2019, the Treasury’s key budget forecast is set at 2.75%.

A key announcement and relief from a recent concern for banks and the economy as a whole were A$14B in tax cuts over the coming years to help the over-leveraged consumer per the RBA’s Household debt to income ratio. The announcement of tax relief may also help the banks who would likely see the credit loss reserve reduced on such a development. Whatever the boost, the primary concern remains for financials, which is The Royal Commission on banking practices that is acting as a weight on the index’s highest weight sector.

Wall Street doesn’t sink on Iran deal but FAANG’s rise halted: The markets were waiting impatiently for the decision from US President Trump on whether he would withdraw the United States from the Iranian nuclear deal established by the previous administration and a group of key European countries, Russia and China. Yet, after Trump confirmed the various leaks that had come out through the day, risk-sensitive assets showed an initial concern over the negative political implications and the assumed pressure on global oil supply – or at least added difficulty in shipping – but concern never seemed to turn into outright fear. Volatility stepped up from Monday’s narrow range, but this past session didn’t register much more progress. This restraint may add to the struggle to revive the bull trend sidelined by February’s tumble. For example, the glimmer of hope in tech sector buoyancy to start the week succumbed to the same curb forced on the broader market. The FAANG index slipped Tuesday modestly from its month-and-a-half high set the previous day.

Australian Dollar dives as retail sales flag: The docket was concentrated for the Australian dollar the past session. Only the Mach – and 1Q – retail sales were due for release. The data ended up disappointing, but it was hardly a contraction that led investors to fear for the domestic economic health of the economy. Furthermore, the strength of the Chinese trade import figure and the steadfastness in general risk trends did little to stabilize the Australian currency. The AUD proved one of the worst performing major currencies this past session with losses registered against most counterparts. This further slide has put further technical pressure for breakdowns on the likes of AUD/USD and AUD/JPY.

Iran Deal poses another hurdle for strained political relationships: The Iran nuclear deal (Joint Comprehensive Plan of Action) agreed to by the US, France, Germany, the United Kingdom, China and Russia back in 2015 aimed to slow the Middle Eastern country’s pursuit of nuclear weapons with incentives offered in the form of lifted sanctions. When President Trump came into office, he vowed that this was one of the deals that would require re-negotiating or he would pull the United States out of the deal. Though the deadline for concession was set for Saturday, Trump decided to withdrawal the country Tuesday at 18:00 GMT. The implications for oil would seem pretty clear via the standard fundamental course: the return of sanctions will create difficulty in channelling the major OPEC producer’s supply into the system, thereby further working down the persistent oil glut. WTI crude did advance after the news, but mainly recovering ground lost in the lead up to the announcement. In general supply-and-demand factors for the crude market have offered mixed effect on the energy market for months. The greater concern is the additional political tension this adds to the world. A conflict between the US and Iran is nothing novel, but another break from a collective agreement with the United States’ European counterparts introduces further unwanted problems. This is also another fracture in the increasingly fragile relationship the US has fostered with China. Big picture, this is another important shift towards isolationism which undermines the global expansion of growth and wealth.

China trade surplus with the United States grew in April despite tariff threats: Despite the push by the United States to enact metals and intellectual property tariffs on China in March and into April, China’s surplus with the US grew last month. According to the recent update, the positive trade gap to the world’s largest economy grew to $22.19 billion from the previous month’s $15.32 billion surpluses. The country’s global trade figure returned to a surplus of $28.78 billion on a 12.9 percent increase in exports from a year ago and 21.5 percent rise in imports over the same period. This data will do little to soothe President Trump’s anxiety over the perceived unfair trade advantage he believes the Asian economic giant enjoys. The second round of discussions are due to start between the US and Chinese negotiators in the coming week; and after calling an end to the Iran nuclear deal, there will be greater concern that the President is will to buck diplomatic norms.

WTI & Brent crude oil was not able to escape the volatility caused by Donald Trump’s decision: Trump confirmed a rumour per the NY Times hours ahead of his speech that he'd withdraw from the Iran nuclear deal.

The key line from Trump’s speech was that the United States is set to reinstate all sanctions it had waived as part of the nuclear accord — and impose additional economic penalties as well. During the volatile morning, WTI crude oil fell ~4.5% from Monday’s high of $70.84/bbl. However, after it was announced that sanctions would be reimposed Brent and Crude rallied toward session highs. Iran has been one of the world’s largest oil exporters, and the market is already seen as overtightened by OPEC’s production curb measures.

Precious metals also got a boost with Gold and Silver trading higher on the session and bouncing aggressively off mid-day lows.

Markets are anticipating a dovish RBNZ that has NZD trading toward YTD lows:  In a statement from the NZ Institute of Economic Research, they anticipate the RBNZ to focus on pessimistic businesses regarding the economy.

The shadow board admitted that the tightening bias has marginally increased, but that overall inflation remains low and that local firms “may start to become more cautious about hiring later in the year.”

New RBNZ governor Orr has recently seen the New Zealand Dollar continue to slide along with the rest of the commodity currency bloc, but the bigger story continues to be the disappearing rate premium in relation to the US. Interest Rate Differentials, a key driver of FX rates are showing the 3-month interest rate forecast for the RBNZ at a discount to the US interest rate for the first since 2000.  

Market’s Data:

SPI futures moved 7.41 or 0.12% to 6091.89.

AUD/USD moved -0.0065 or -0.86% to 0.7452.

On Wall Street: Dow Jones 0.01%, S&P 500 -0.14%, Nasdaq 0.02%.

In New York: BHP -0.69%, Rio -0.41%.

In Europe: Stoxx 50 -0.18%, FTSE 100 -0.02%, CAC 40 -0.17%, DAX 30 -0.28%.

Spot Gold moved 0.03% to US$1314.6 an ounce.

Brent Crude moved -0.58% to US$75.73 a barrel.

US Crude Oil moved -1.4% to US$69.74 a barrel.

Iron Ore moved -0.74% to CNY469.5 a tonne.

LME Aluminum moved 3.57% to US$2350 a tonne.

LME Copper moved -0.01% to US$6826 a tonne.

10-Year Bond Yield: US 2.97%, Germany 0.56%, Australia 2.74%.

 

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

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