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Wall Street slides but the trend is hardly set: If the US markets were in recovery from the stumble through the second half of last week, it would have to be earned on its own fundamental merits. That wouldn’t happen, however. Notably, the S&P 500, Dow and Nasdaq all gapped higher on the open Monday, but the optimism seemed to be reserved just for the opening move. Headlines for the day seemed to be more shaped to given an easy explanation to the market’s uncommitted bearing rather than to honestly reflect on speculative appetites. With the indices in the middle of the volatile range of the past three months, it is simply a market awaiting its next ‘fix’. Perhaps that catalyst will be a Trump tweet, a revival of the trade war, key economic indicator (like Friday’s 1Q US GDP) or one of the key earnings reports due this week.
Dollar bullish reversal, where is the motivation? The Dollar is putting serious pressure on a range it has spent most of 2018 reinforcing. Logically, the ICE’s Dollar Index provoking move on 91 represents the natural milestone in a large reversal in 2017’s clear decline and the subsequent consolidation this year. As appealing as this next stage may be, it is important to weigh our conviction not against the potential for a ‘break’ but rather in ‘follow through’. Speculators no doubt recognize a pattern and will respond accordingly. Yet, the liquidity of this benchmark currency is so deep that there needs to be participation by central banks, financial institutions and funds to facilitate a meaningful trend. Data to open the week was on balance an improvement. The Markit PMI figures for April offered significant improvement and existing home sales rose 1.1 percent in March. The Chicago Fed’s national activity index slowed more than expected, but was still positive and comes off the highest reading in many years. Much has been said about Fed intentions and the US 10-year Treasury rate just a hair off 3.00% through this past session’s high. That is normally encouraging for bulls, but why would this only register now – both have charged higher for months without the Greenback. If you’re enthusiastic for a break, make sure you have a backdrop that truly convinces you of the view.
US earnings season heats up with FANG round out this week: The earnings report by Netflix last week was the highlight of the news run. It earned the indices’ their biggest advance through the period and offered the strongest boost for general risk trends we had seen for some time. Yet, the infusion of optimism clearly didn’t last very long. Perhaps there just wasn’t enough of a tech run to establish a true foundation on. If that is the case, perhaps updates from the rest of the ‘FANG’ clique will satisfy. Google numbers after-hours Monday, Facebook Wednesday and Amazon Thursday will give us the overview of a group of stocks that have become a measure of pace for risk trends that have stretched well beyond their traditional confines of comfortable valuation. Of course, these leaders can guide higher and they can guide to a retreat. Are investors operating with a natural bullish or bearish bias? Will enthusiasm leverage a strong showing or concern undermine it and gain traction on any shortfalls?
Key commodity prices diverge: Crude oil prices returned to the offensive, buoyed by escalating conflict in the Middle East, an outage in Libya and signs of strong Chinese demand. Clashes between Saudi Arabia and Iran-backed Houthi rebels in Yemen claimed a top commander of the latter group, signalling an uptick in hostilities may translate into supply disruption. Meanwhile, an attack on a pipeline supplying Libya’s largest export terminal is expected to cut output by at least 80 million barrels per day until repairs are made. Meanwhile, official customs data showed China delivered record gasoline and diesel exports last month, pointing to what may be a lasting pickup in crude demand. Gold prices continued to sink, however, as swelling Fed rate hike bets undermine the appeal of non-interest-bearing and anti-fiat assets.
Aussie Dollar versus the AUD/USD: AUD/USD has taken a dive to start this week with the largest single-day loss in a month and the steepest three-day plunge since December 2016. In the process of this collapse, the pair has tentatively fallen through a trendline floor that has guided the pair generally higher since the beginning of 2016. The speculative implications are clear. However, is this a case of the Aussie Dollar falling apart, the swell from the Greenback or a mix of the two? If you look at the AUD’s general performance, the currency was lower against most Monday (the exception being the Yen), but its progress was far more measured and there weren’t any other critical technical milestones. AUD/USD commands considerable authority over the crosses owing to its liquidity, but there is no guarantee that the Greenback can offer sustained momentum. Perhaps the 1Q CPI update coming up can change that mix, but that is a big ‘if’.
S&P/ASX 200 buoyed by financials, materials names. Australian shares started the week in a chipper mood, adding 0.3 percent. Over-represented materials and financials names – which account for 19 and 34 percent of the overall ASX index respectively – drove the rally with gains of over 0.7 percent. The gains may reflect signs of stabilization in Hong Kong money markets, where the HKMA’s efforts at sustaining a currency peg pressured by US rate hike speculation appear to be bearing fruit. Turmoil there has been treated as a referendum on Chinese financial stability at large. The East Asian giant is Australia’s top export market, making performance there a key factor in shaping the latter country’s economic fortunes. Bank earnings prospects amid a Fed-led upshift in global borrowing costs probably factored in as well.
Australian CPI may be a more potent catalyst for strong vs weak result: Official statistics are expected to show that Australian inflation accelerated to 2 percent on-year in the first quarter, the highest in a year. Prices have found their way higher as earlier Aussie Dollar depreciation factored into calculations while the economy perked up, with PMI surveys pointing to robust momentum in manufacturing- and service-sector activity growth. The RBA has remained sanguine, however, and markets have taken notice. The priced-in policy outlook has steadily deteriorated since the beginning of the year, with no tightening expected until early 2019. A disappointing outcome may do little to inspire volatility given such a modest baseline. An upside surprise that hints the central bank’s hand may be forced sooner than is currently accounted for might bring fireworks, however, sending the Aussie Dollar higher. The implications for local share prices are tough to difine given financial names’ hefty representation in the ASX benchmark.
SPI futures moved 17.24 or 0.29% to 5886.01.
AUD/USD moved -0.0069 or -0.9% to 0.7603.
On Wall Street: Dow Jones -0.31%, S&P 500 -0.22%, Nasdaq -0.47%.
In New York: BHP -1.01%, Rio -1.78%.
In Europe: Stoxx 50 0.54%, FTSE 100 0.42%, CAC 40 0.48%, DAX 30 0.25%.
Spot Gold moved -0.86% to US$1324.81 an ounce.
Brent Crude moved 1.03% to US$74.82 a barrel.
US Crude Oil moved 0.54% to US$68.77 a barrel.
Iron Ore moved 0.95% to CNY476 a tonne.
LME Aluminum moved -0.64% to US$2469 a tonne.
LME Copper moved 0.11% to US$6992 a tonne.
10-Year Bond Yield: US 2.97%, Germany 0.64%, Australia 2.87%.
Written by: Ilya Spivak, Senior Currency Strategist and John Kicklighter, Chief Strategist, DailyFX