Trader thoughts - the long and short of it

The US indices started off this week with a clear sense of hesitation with extending the robust recovery forged last week.

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Source: Bloomberg

Wall Street stall turns into a clear retreat: Through this past session, restraint turned into genuine loss. The S&P 500, Dow and Nasdaq (speculative favourite, blue chip stalwart and leveraged tech index) all gapped lower on the open and went on to lose further ground as the session wore on. The retreat highlights in US shares markets is not presenting as a wholesale risk aversion – as European and other regional equities weren’t party to it – but there was certainly a wider concern than just those found in the local markets. The US 10-year Treasury yield charged above 3 percent to a near 7-year high while the Dollar rallied and emerging market currencies suffered an intense retreat. Usually these factors align in monetary policy from the Fed – concern that ‘free money’ is being reined in and higher returns are to be found in foreign investment in the US – but it is too early and uneven to project a trend out of this theme.

Fed-speak continues with the regular calls and new voices: One of the more populous forms of scheduled event risk on the global economic docket this week is a steady flow of the scheduled speeches from Fed officials. While the odd remark from this group can spark volatility and a swing in the Dollar, there is a growing sense from the market that it already has the line on where all the members stand in the dovish-to-hawkish scale. This past session, San Francisco Fed President John Williams suggested three or four rate hikes in 2018 was still the appropriate pace – a familiar view from him and an offset to Bullard’s suggestion that hikes should be throttled with a threat of inverting the yield curve. New in this mix though were two nominees for open FOMC seats: Clarida and Bowman. Both played the standard track of supporting Fed independence, but there was also a hawkish lean to arise from their responses with a further clear scepticism about the effectiveness of QE. Two more hawks in permanent voters seats can significantly change the tempo of this key central bank.

Gold sinks amid another hawkish shift in Fed policy expectations: Gold plunged as building Fed rate hike bets sent the US dollar higher alongside front-end bond yields, undercutting the appeal of anti-fiat and non-interest-bearing assets. The spread between rates on two- and ten-year Treasury bonds steepened, seemingly reflecting bets on a more aggressive tightening cycle ahead. The 2019 policy path implied in Fed Funds futures also reflected a hawkish shift in the markets’ expectations. Prices are now within a hair of breaking chart support guiding the trend higher since December 2016. A daily close below this barrier – now at 1286.32 – threatens to unleash a major reversal. The first layer of support to follow is in the 1260.80-66.44 area.

UK jobs disappoints and pulls the Sterling closer to breakdown: GBP/USD made a threatening move Tuesday between the Dollar’s broad rally and a retreat from the Sterling. The latter currency was prompted the April round of labour data which fell short of forecasts where it counted. The net change in jobless claims for the month grew more than three times the forecast with 31,200 new filings. At the same time, the claimant count rate ticked up to 2.5 percent while average weekly earnings for March slowed to 2.6 percent as expected. The Cable is bouncing round between 1.3450 and 1.3600 looking for a spark.  Meanwhile, the range of Sterling pairs are making a questionable attempt to revive their GBP-favourable climb from EUR/GBP to GBP/AUD; but that will be difficult to achieve with this data undermining BoE rate forecasts and headlines like Scottish Parliament refusing its consent for Britain’s EU withdrawal bill.

Australian Dollar recovery has been called off: Much as general risk trends in US equities stalled Monday and started a retreat on Tuesday, the Aussie Dollar has seen its own effort to recover scuttled. The same general motivation is likely behind this slip: a risk orientation that simply doesn’t have solid ground to stand on. However, there was also the questionable update on Chinese data through this past session. Perhaps the local 1Q wage inflation will turn things around for the RBA and in turn interest rate forecasts to cater to the currency’s carry appeal, but that is asking for far too much. Keep an eye on AUD/USD, AUD/JPY and EUR/AUD as the primary benchmarks to track the currency’s listing.

ASX 200 double top may be forming at 2018 highs: Australian stocks declined, with tech names amounting to the only sector showing gains in yesterday’s session. A disappointing full-year forecast from Telstra Corp seemed to remain a headwind, with telecoms suffering the steepest. The overall decline of 0.6 percent marked the largest one-day loss in seven weeks, although it comes immediately after the benchmark S&P/ASX 200 index rose to retest the highs of the year established in January. Looking ahead, a negative lead from Wall Street might make for continued weakness. Technical positioning bolsters the case for a downside scenario, with a bearish Engulfing candlestick pattern and negative RSI divergence on the daily price chart hinting a reversal to probe back below 6050.00 may be on horizon.

Euro may fall further on dovish comments from ECB President Draghi: The Euro is back on the defensive after a brief corrective upswing from four-month lows put in last week. The single currency suffered the largest daily drawdown in eight weeks against the US dollar as swelling Fed rate hike bets stuck a sharp contrast between it and the decidedly more timid ECB. An upcoming speech from the latter central bank’s President Mario Draghi might compound selling pressure. He may hint that a string of economic data disappointments since the beginning of the year and base effects from last year’s Euro gains amount to sufficient disinflationary hurdles to delay the end of QE asset purchases. Breaking below 1.1825 would set EUR/USD on a path to test the next layer of chart support at 1.1713.

Market’s Data:

SPI futures moved -37.48 or -0.61% to 6097.82.

AUD/USD moved 0.0002 or 0.03% to 0.7474.

On Wall Street: Dow Jones -0.78%, S&P 500 -0.68%, Nasdaq -0.81%.

In New York: BHP -1.02%, Rio -0.57%.

In Europe: Stoxx 50 -0.04%, FTSE 100 0.16%, CAC 40 0.23%, DAX 30 -0.06%.

Spot Gold moved 0.03% to US$1290.98 an ounce.

Brent Crude moved -0.19% to US$78.08 a barrel.

US Crude Oil moved 0.06% to US$71 a barrel.

Iron Ore moved -0.62% to CNY484 a tonne.

LME Aluminum moved 1.35% to US$2319 a tonne.

LME Copper moved -0.82% to US$6885 a tonne.

10-Year Bond Yield: US 3.07%, Germany 0.65%, Australia 2.83%.

 

Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX

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