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On Saturday, news broke that France, the United States, and Britain conducted “precision strikes” on Syria. The heightening of new geopolitical developments may cloud the data releases from the week ahead that included RBA minutes, Federal Reserve speakers, Bank of Canada’s Rate announcement, and a heavy Chinese economic calendar that includes GDP, industrial production, retail sales and fixed asset data. The difficulty for markets tends not to be pricing risk, but rather not knowing when risk needs to be priced as geopolitical concerns put traders and investors at the whim of various headlines, and not the economic calendar where we’re more comfortable.
S&P/ASX ends week higher, set for uncertainty on Monday: The headline Australian stock index finished the week higher at 5829.10, good for a gain of +0.7% over the course of the week. Receding concerns over a US military strike in Syria proved to be a positive driver for global equities, but the catalyst appears to be short-lived: the US, UK, and France carried out airstrikes against Damascus early-Saturday morning in Syria. Now, with the prospect of geopolitical tensions ratcheting higher between the US and Russia, volatility in global financial markets seems likely to reappear and drag down the S&P/ASX at the start of the week.
AUD/USD posts a strong week, eyes local data: The Australian Dollar posted a lofty gain of +1.15% versus the US Dollar, its first weekly gain since the week of March 5. Much of the gains were due to a general improvement in risk sentiment, with both the S&P/ASX and Wall Street indices trading higher last week. But with the prospect for the downside to emerge after the US, UK, and France launched military strikes against Syria over the week, the Australian Dollar may be dragged down as investors shift to a more cautious mood. Local data should draw focus as well, with the RBA meeting minutes due out on Tuesday and the March employment report due out on Thursday. Expectations call for a gain of +20K jobs and for the unemployment rate to drop from 5.6% to 5.5%, which may prove to be a buoy for the Australian Dollar in more turbulent conditions emanating from abroad.
Wall Street was mixed as the big banks topped analyst’s estimates of earnings, but shares still fell after JP Morgan Chief, Jamie Dimon said that the bank was seeing fierce competition and the lending portfolio showed no growth. On a negative note, the University of Michigan survey miss caused the Citigroup Economic Surprise Index for the US to fall to the lowest level since October. However, growth remains above trend.
Thanks in large part to a large decline in trade war fears, all major global stock indices were higher for the week, minus Brazil’s IBOVESPA.
Goldman Sachs said this week that the case for owning commodities has rarely been stronger, which aligns with a jump in Crude Oil trading to the highest levels since 2014. Crude Oil was at the epicentre of the geopolitical risks turning into market gains.
Adding to fundamental support for energy was the OPEC data point that production among members was at the lowest in a year. Meanwhile, Venezuelan production has recently fallen to the lowest levels since 1949. This confluence of events helped Crude Oil see its best week since July, and Hedge Funds per the CFTC increased their net-long position to the largest on record. Good timing!
Not to be outdone, Aluminum had its best week since 1987 as the owner of Russian mammoth company, United Co. Rusal was put on an updated US Sanctions list effectively removing the world’s largest non-Chinese Aluminum supplier from the market.
The flattening US Yield Curve may be partly to blame for the disappointing bank earnings. This week, both the spread between the US 5- and 30-year Treasury yields and the 2- and 10-year Treasuries were the flattest since before the last recession began in late 2007. While the rising yields on the front-end and LIBOR are exciting and helping profit margins, the longer-term prospects are discouraging though their balance sheets have likely rarely been healthier. At the same time, initial reports from JP Morgan show they’re firing on all cylinders
Move over Apple, Saudi Aramco looks to be the global-leading company when it comes to first-half 2017 net income after financial data was reviewed by Bloomberg. Aramco’s profit for H1 2017 was $33.8B, topping Apple’s $28.9B and Samsung’s $14B. Currently, the large valuation is likely to set to remain elevated with Brent Oil above $70/bbl helping the Saudi Finance Ministry fund the ambitious social agenda of Crown Prince Mohammed Bin Salman.
As the Aramco IPO nears, it has become obvious that the encouragement from Saudi to extend the OPEC production curbs, which is working magnificently, has its motives in pushing oil prices higher and thus the valuation to help the state more than investors.
Volatility in FX markets set to increase after Syria strikes, packed calendar ahead: Geopolitical tensions have ratcheted higher following the US-led military intervention in Syria over the weekend. But a saturated economic calendar will also lead to additional volatility in FX markets in the week ahead. Q1’18 Chinese GDP on Tuesday will likely have a spillover impact onto Australian stocks and the Australian Dollar. On Wednesday, April UK CPI, the Bank of Canada rate decision, and the Q1’18 New Zealand CPI report will impact GBP/AUD, AUD/CAD, and AUD/NZD, respectively. Thursday’s Australian labour market report will hit all AUD-crosses, while AUD/JPY will move on the March Japanese CPI report. Finally, on Friday, AUD/CAD will be back in focus upon the release of the March Canadian CPI report.
Markets Data :
SPI futures moved 13.55 or 0.23% to 5829.08.
AUD/USD moved 0.0014 or 0.18% to 0.7768.
On Wall Street: Dow Jones -0.14%, S&P 500 0.06%, Nasdaq 0.03%.
In New York: BHP 1.71%, Rio 1.47%.
In Europe: Stoxx 50 0.12%, FTSE 100 0.09%, CAC 40 0.11%, DAX 30 0.22%.
Spot Gold moved 0.64% to US$1343.42 an ounce.
Brent Crude moved 0.99% to US$72.73 a barrel.
US Crude Oil moved 0.66% to US$67.51 a barrel.
Iron Ore moved 0% to CNY450 a tonne.
LME Aluminum moved 3.33% to US$2325 a tonne.
LME Copper moved -1.86% to US$6821 a tonne.
10-Year Bond Yield: US 2.83%, Germany 0.51%, Australia 2.74%.
Written by: Tyler Yell, CMT and Christopher Vecchio, CFA, DailyFX