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The news from the weekend that US and Chinese officials had agreed to pause their escalating trade war was met with enthusiasm but not a significant bid in equities and other risk assets through the second day of active trade this week. Technically-speaking, the Dow, S&P 500 and Nasdaq all jumped higher on the open. From there, the market quickly found its ceiling and started to slowly retrace the modest gains. Resolving the trade standoff between the world’s two largest economies is certainly an improved course correction, but to what extent is the curb on a new threat a legitimate foundation for speculative appetite? Meanwhile, President Trump said he was still not satisfied with trade talks and that no ZTE deal had been finalized. It was also suggested by the White House that the summit between the President and North Korean leader next month could be delayed while another failed relationship with the US was finding Iran sceptical of an acceptable replacement deal with the remaining counterparts to the original pact. We’ll see Wednesday whether ‘regular’ growth and monetary policy updates have any sway over shares as US PMI data and the FOMC minutes are due.
Is the Dollar short-term overbought? Given the beating the Dollar suffered through 2017 – especially against the favourable growth and monetary policy backdrop – it may seem that there is a long recovery for the currency to make before it is deemed ‘overbought’. However, speculation can permanently de-emphasize themes and cast worry to other aspects of the market. Interest rate expectations still favoured the Fed and Dollar, but that modest yield advantage in a low-return environment where the reckless pursuit of yield was fading translated into more restrained value. Recently, the dovish shift for the ECB, BoE, BoJ and other central banks has levered a Greenback rebound. If contrast is more important than the Fed’s own bearings, how market-moving will the FOMC minutes due Wednesday prove? Furthermore, can the May PMIs activity reports for manufacturing and services hit a fundamental vein when there are such fluid conditions around political stability? One factor that will not readily skew is the scale of speculative exposure. Net positioning from large future speculators is still leaning to the extreme net-short behind the Dollar. This unwind can maintain a positive trend for the Dollar, but few trends unfold without temporary wobbles.
Euro selloff may resume in earnest as PMI data disappoints: The Euro struggled to make much of easing political jitters Tuesday. The spread between Italian 10-year government bond yields and German equivalents – a measure of the excess risk in lending to Rome versus Berlin – narrowed a bit after hitting a two-year high amid worries that the new populist coalition government will adopt a Eurosceptic posture. A rebound in the US Dollar that weighed down the benchmark EUR/USD exchange rate appeared to translate into broader downside pressure, much the same as the greenback’s slide echoing strength in commodity-linked and emerging market currencies on Monday nudged up the single currency by extension. In all, none of this churn amounts to a lasting directional lead so far this week. That may come from the preliminary set of May PMI surveys due today. Steady overall results are expected despite a slight slowdown in the pace of manufacturing activity. Persistent underperformance in regional economic data relative to consensus forecasts since late November of last year hints that analysts’ models are calibrated for a rosier worldview than reality has ratified. That opens the door for another disappointment that may dim near-term QE unwind prospects, punishing the Euro.
Crude oil drops as OPEC, Russia mull relaxing output curbs: An intraday drop in crude oil prices tarnished an otherwise rosy day for energy prices amid reports that OPEC may increase output next month. That was followed by reports that like-minded countries participating in a cartel-led supply cut scheme – notably Russia – would join in relaxing production curbs. Reuters cited unnamed officials airing concerns about a disruption of shipments from Venezuela and the re-imposition of sanctions on Iran as the reason for the change. Natural gas soared, however, rising over 3 percent. The NYMEX benchmark jumped to the highest level in nearly four months, with destocking in Europe and expectations of warmer weather in the US cited as catalysts. Gold prices edged lower, echoing a rebound in the US Dollar that undermined the appeal of anti-fiat assets as the spotlight turned to the upcoming release of minutes from May’s FOMC policy meeting.
BoE Governor Carney weighs in on explicit forecasting, CPI ahead will set market forecasts: The British pound was left without clear motivation this past session despite a rash of headlines being made by Bank of England officials. The rhetoric ran the range of sentiment and policy view. Governor Carney joined a few of his colleagues in supporting the decision not to project a more definitive forecast for interest rates like his Federal Reserve counterparts have in their Summary of Economic Projections (SEP). He defended the need for flexibility in dictating policy versus setting more explicit forward guidance for investors and Brits. Weighing in on another topic for which the Governor has established a very clear disappointment, Carney said that Brexit had cost British households approximately 900 pounds and that output is more than 1 percent below growth forecasts that were made before the vote to leave the European Union. The silver lining to the day’s central bank run was policymaker Vlieghe’s belief that the BoE would realize more hikes than what the market was pricing in. Lean from a hawkish central banker will not exactly overturn the otherwise bearish views from the past session, but it did earn the Sterling a pause. That balance will be put to the test ahead with the update for April inflation statistics. The CPI data, in particular, is a central bank favourite and should be high on FX traders’ threat assessment.
S&P/ASX 200 looks set to test below 6000 after largest drop in 2 months: Australian shares suffered the largest drop in two months Tuesday, shedding 0.7 percent. Losses were spread across nearly every sector, with real estate names the lone grouping that managed tepid gains. The drop in materials names is perhaps most interesting considering it comes on the heels of apparent de-escalation in trade tensions between the US and China. It might have been expected that mining stocks would celebrate the reprieve considering their sensitivity to Chinese demand and the global business cycle at large, but this was clearly not to be. That prices were unable to make good on supportive news flow seems telling of underlying weakness in the Australian equities space that paves the way for deeper losses ahead. A look at the charts reveals that the uptrend from lows set in early April has been broken, initially opening the door for a test below the 6000 figure.
Tentative Australian dollar breakouts starting to spin wheels: We are just a few days into a range of noteworthy technical breaks in favor of the Australian Dollar. AUD/USD clearing 0.7550 range resistance, EUR/AUD extending a channel break with the slide below 1.5600 and AUD/JPY confirming a head-and-shoulders reversal above 83.50 all carry considerable heft. These most liquid Aussie Dollar counterparts have moved into the initial phase of reversal, but there is a difference between break and trend. Either conditions need to continuously improve for the Australia currency’s backdrop or the appetite for its still competitive yield needs to materially improve. A risk run doesn’t seem immediately at hand, so perhaps the 1Q construction work done update can charge domestic optimism.
SPI futures moved -42.62 or -0.7% to 6041.87.
AUD/USD moved -0.0005 or -0.07% to 0.7577.
On Wall Street: Dow Jones -0.72%, S&P 500 -0.31%, Nasdaq -0.21%.
In New York: BHP -0.68%, Rio -0.34%.
In Europe: Stoxx 50 0.41%, FTSE 100 0.23%, CAC 40 0.05%, DAX 30 0.71%.
Spot Gold moved -0.08% to US$1291.51 an ounce.
Brent Crude moved 0.25% to US$79.42 a barrel.
US Crude Oil moved -0.15% to US$72.13 a barrel.
Iron Ore moved -0.54% to CNY457 a tonne.
LME Aluminum moved 0.44% to US$2280 a tonne.
LME Copper moved 0.35% to US$6879 a tonne.
10-Year Bond Yield: US 3.06%, Germany 0.56%, Australia 2.86%.
Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX