Trader thoughts - the long and short of it

Upbeat US labor-market data bolstered optimism, but a look at futures markets hints at an earlier positive lead from ebbing worries about Eurozone political instability. 

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Source: Bloomberg

Wall Street scores gains as Italy side-steps new election: US shares finished a tumultuous week in a chipper mood, with the bellwether S&P 500 index adding 1.08 percent. Technology names led the way higher with a gain of nearly 2 percent. Upbeat US labor-market data bolstered optimism, but a look at futures markets hints at an earlier positive lead from ebbing worries about Eurozone political instability. The spread between Italian 10-year bond yields and German equivalents – a measure of the excess risk in lending to Rome versus Berlin – fell for a third consecutive day. That followed a compromise between President Sergio Mattarella and the populist coalition of right wing League and anti-establishment Five Star Movement parties to move eurosceptic economist Paolo Savona from the Economy ministry to a post overseeing EU affairs. This avoided a new election that markets worried might have amounted to a referendum on Euro membership. Weighing up the examples of Syriza – a fiery Greek populist party ultimately cowed by pressure from Brussels – and the Brexit referendum, investors seemed to conclude that sidestepping another plebiscite is the lesser of two evils.

Broad measure of US unemployment hits 17-year low: The official set of US labor market statistics showed the economy added 223k jobs in May, topping forecasts calling for a gain of 190k and marking the largest increase in three months. The April reading was revised a bit lower – putting the addition to nonfarm payrolls at 159k versus the initially reported 164k – but the net two-month adjustment to previously released figures was an upgrade of 15k. The jobless rate unexpectedly ticked down to 3.8 percent, but a parallel decline in the participation rate hinted the improvement might not entirely reflect a pickup in hiring. Still, the broader measure of joblessness that accounts for so-called “discouraged” workers normally excluded from the headline gauge fell to 7.6 percent, the lowest in 17 years. The pace of wage inflation also surpassed consensus forecasts, coming in at 2.7 percent on-year to mark a four-month high.

Precious metals remain out of favor after positive US jobs data: Gold dropped for the second day and ended a week that disappointed its proponents as a “haven” asset. The yellow metal ended the week below the US$1300/oz threshold with a cumulative loss of 0.68 percent. Spot silver shed 0.6 percent. Investors may cheer the relative premium of base metals like aluminum, iron ore and copper over precious alternatives however as the latest round of US data bolsters global growth prospect.

Trade war tensions set to take the spotlight in the week ahead: The markets were surprisingly sanguine about a US decision to allow steel and aluminum tariff exemptions for Canada, Mexico and the EU to lapse. The statement from a G7 gathering in Quebec denounced the move and the target countries – all of them staunch US allies – swiftly announced retaliatory measures. Perhaps investors saw the tariff hike as a characteristic attempt by President Trump to throw his weight around in a negotiation, and thus as inherently temporary. The week ahead ought to demonstrate whether this rosy interpretation will hold up. A lull in top-tier economic data flow will put trade disputes front and center. Negotiators have struggled for progress so far, with US Commerce Secretary Wilbur Ross leaving Beijing empty-handed following another round of talks over the weekend. It remains to be seen if Mr Trump’s aggressive posture will make for settlement or escalation, with the former outcome likely to sour sentiment across financial markets.

Let the US tariff backlash begin: The European Union took their concerns about US metals tariffs to the World Trade Organization, with intentions to take legal action. French President Macron called the new trade barriers “an illegal act”. On Friday, the German Finance Minister Olaf Scholz said that his country wouldn’t be coming to the negotiating table with President Donald Trump with cap in hand. “The decision by the US government to unilaterally implement tariffs is wrong, and – from my point of view – also illegal,” Scholz added. China also weighed in on the newly imposed tariff, saying that major economies like the US should not be “shooting bullets around” or promoting protectionist policies.

S&P/ ASX 200 is set to rebound as the week opens: Australian shares closed with a poor showing last week, registering a 21.4 point or 0.36 percent decline. ANZ Banking Group was the largest contributor to the down move, falling 1.5 percent. Seven of the eleven sectors making up the S&P/ASX 200 benchmark index were lower, with financials leading the way downward. Materials continued to be a bright spot, and that trend may continue in early June. Metals like copper saw a nice boost after the US jobs report brightened global growth prospects. Wall Street’s rally on Friday may provide a positive lead when trading resumes in Sydney. BHP & Rio Tinto are expected to open 1.2 and 1.8 percent higher, respectively.

AUD/USD trend bias still firmly bearish after rebound: The Australian Dollar has managed a tepid recovery after hitting an 11-month low against its US counterpart but the dominant down trend remains firmly in place. Price action has been defined by a series of lower highs and lows since late January, with a break of the uptrend set from early 2016 reinforcing a bearish bias. Sizing up near-term positioning, a breach of counter-trend support guiding the recovery from early May and the appearance of negative RSI divergence on its subsequent retest hint bearish resumption may be imminent. Initially, a push below 0.7486 exposes downside barriers at 0.7446 and 0.7410 next. A sustained rally above the 0.77 figure is needed to invalidate the bearish tone.

Market Data:

SPI futures moved -21.49 or -0.36% to 5990.39.

AUD/USD moved -0.0015 or -0.198% to 0.7568 - Session High: 0.7593 Session Low: 0.7515

On Wall Street: Dow Jones 0.96%, S&P 500 1.15%, Nasdaq 1.49%.

In New York: BHP 1.23%, Rio 1.87%.

In Europe: Stoxx 50 1.38%, FTSE 100 0.31%, CAC 40 1.24%, DAX 30 0.95%.

Spot Gold moved -0.65% to US$1295.68 an ounce.

Brent Crude moved -0.66% to US$77.05 a barrel.

US Crude Oil moved -1.33% to US$66.15 a barrel.

Dalian Iron Ore moved -0.75% to CNY461 a tonne.

LME Aluminum moved 0.97% to US$2292 a tonne.

LME Copper moved 0.18% to US$6852 a tonne.

10-Year Bond Yield: US 2.89%, Germany 0.39%, Australia 2.7%.

 

Written by: Ilya Spivak, Currency Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX

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