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Wall Street’s strong earnings half-life growing shorter and shorter: Before the New York open this past session, report that Twitter had turned profitable again earned an initial jump in the stock before it quickly dove. The lifting capacity of this popular social media company earned little enthusiasm for the Nasdaq or S&P 500. We are still facing more FANG responses over the next 24 hours (Facebook reports after the Wednesday close and Amazon at the end of Thursday), but the market’s expectations have already been shaped. Earnings simply cannot inspire this market and/or there is a building anxiety amongst investors that is too imposing for accounting engineered returns to offset. With monetary policy and trade wars still drumming in the background, there lingers a considerable risk that bears may be incited to act. Should the S&P 500 drop 2,600, the Dow fall below 23,400 or Nasdaq clear 6,400 traders should be on high alert. Technicals will not secure the turn of a nine-year trend, but it can open a rift through which fundamental fears escalate.
US Dollar progress comes to a point of real decision-making: We have been keeping tabs on the acceleration of the Greenback’s rally through the second half of this past week and into the opening stage for the current week. We have registered clear, favourable breaks for the benchmark currency for pairs like USD/JPY, GBP/USD and AUD/USD. However, as technical traders well know, the opportunity is in the follow through and not the technical break. That said, the ICE’s trade-weighted DXY Dollar Index is in something of an ambiguous position. Monday’s close was the highest since January 17, so it could be said that we’ve witnessed a break. The trendline of lower highs stretching back to March 2017 and the former support from February 2015 through January 2018 (having turned to new resistance) have also been cleared with the recent charge. And yet, Tuesday didn’t rouse the expected follow through on a break for the index (there is another confluence of resistance around 91.20) and EUR/USD never made its critical break having held 1.2175/35. To clear up any ambiguity for bullish intentions, we need a clear fundamental motivator. Data like the US consumer sentiment stats on Tuesday, another test of 3.00% on the 10-year Treasury yield and President Trump’s optimism for trade deals to alleviate the pressure he has arguably instigated are not enough to drive the bulls.
The ECB’s policy decision is important for the Euro and the global markets: There is little doubt that the European Central Bank (ECB) rate decision later today will be a particularly important event for the Euro. The markets have gone to remarkable lengths to speculate on the timing of the inevitable first step to normalize its extremely dovish policy mix with either a rate hike or asset sale from the balance sheet. Those moves are far off – mid-2019 for the former and two years out for the latter on optimistic time frames – but the markets operate on a speculative basis. We price in now what is expected with a certain degree of confidence will be realized later (the ‘buy the rumour’ aspect of the famous saying). Recently, reports have leaked from the ECB that have tried to steer the markets to a more dovish view while President Draghi has made an explicit concerted effort. This is likely due to concern over the height of the Euro. If the group decides to take up that battle, it will be a precarious fight with a market that recognizes their limitations. Even if you don’t trade the Euro or invest in European assets, this event is still important to keep tabs on. This is one of the most dovish central banks in the world; and in that role, it props up speculation built on years of stimulus. When they eventually signal the end, it can ripple back up the speculative stream.
The numbers behind trade wars in earnings and economic data: Though ‘trade wars’ headlines have slowed in the global news rotation, it is still very much a risk to financial markets. The US President’s recent optimism notwithstanding, there are still open concerns about the United States’ economic ties to its immediate neighbours (NAFTA), the economic behemoth that is China and even the quiet simmering with the EU which Trump lamented with his recent off-handed comment. We will see if there are any repercussions to the early days of these efforts to right perceived wrongs with the US reporting March trade figures and the 1Q earnings from US Steel. If we see both come across weak, the market will start to grow more concerned about the risk-reward of the US pursuing protectionism.
US currency stunts the Aussie Dollar: The Australian Dollar failed to get relief from the selling on Wednesday thanks to the fast money crowd chasing the US Dollar higher recently. AUD/USD is pushing closer for a test of the December 8 low of 75.02 US cents per AUD. Currently, the fundamental background forces look favourable. Since February, a key correlation has been the spread between the AU/US 2-year sovereign yield spread that turned negative earlier this year with the US now offering a premium to Aussie benchmark rates.
Currently, the yield spread is -0.384 percent which poses a risk should the correlation hold. Traders who look at technical studies will note that AUD/USD is closing in on the -1 standard deviation level of the 12-month average of 77.48 at 75.68 US cents per AUD.
Protectionism winds roll back in for commodities: Commodities supply chains have come into focus the last few weeks thanks to tariffs, sanctions, and cartels causing sharp moves in asset prices. One such influence comes from the US sanctions against United Co. Rusal, where an unwind period through October has pulled aluminium prices lower. Aluminium has fallen by 7.4% on the LME 3month rolling contract over the last week to 2,477 USD/MT after trading as high as 2718 USD/MT on April 19.
Crude has seen its own sources of volatility as some world leaders work to uphold the Iran Nuclear deal that US president Trump threatens to disown. May 12 is reportedly the cut off date for deciding the future of this deal. Expect the energy market to remain on high alert as the clock winds down.
An ASX optimism was not shared by the rest of the world: The S&P/ASX 200 rose to close above its 50-day moving average after coming back online post-Anzac Day. The index rose 35.5 points or 0.6% to 5,921. The celebration did not spread to other indices on Wednesday with many global indices dropping around 1% concern surrounding growth and corporate performance. The index may also be finding lift from Monday’s Q1 headline inflation miss and a weaker AUD/USD, but that tailwind will likely soon die down. Implied data from overseas show that both BHP & Rio are set to open lower by ~0.5% each.
SPI futures moved 35.54 or 0.6% to 5921.55.
AUD/USD moved -0.0041 or -0.54% to 0.7563.
On Wall Street: Dow Jones 0.08%, S&P 500 -0.07%, Nasdaq -0.08%.
In New York: BHP -0.55%, Rio -0.64%.
In Europe: Stoxx 50 -0.71%, FTSE 100 -0.62%, CAC 40 -0.57%, DAX 30 -1.02%.
Spot Gold moved -0.64% to US$1321.9 an ounce.
Brent Crude moved -0.15% to US$73.75 a barrel.
US Crude Oil moved 0.27% to US$67.88 a barrel.
Iron Ore moved -1.28% to CNY464.5 a tonne.
LME Aluminum moved -2.96% to US$2227 a tonne.
LME Copper moved 1% to US$7013 a tonne.
10-Year Bond Yield: US 3.03%, Germany 0.63%, Australia 2.84%.
Written by: John Kicklighter, Chief Strategist and Tyler Yell, CMT, Currency Strategist, DailyFX