Trader thoughts - the long and short of it

US equities were already struggling to turn Tuesday’s remarkable technical breakout into a convincing move yesterday.

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Source: Bloomberg

Wall Street fully aborts lift off effort: Thursday’s session cemented the burden of scepticism that continues to plague this market after its bouts of February and March volatility. Thursday’s session marked the first bearish gap for the S&P 500 and Dow in six trading days and the session ended with a modest day-over-day decline through the close. There is little to give the market serious traction whether bulls or bears had any intention to make headway. The constant cloud cover from global political risks (trade wars, Syria, North Korea) remains but isn’t hitting the headlines with new updates. We are in a lull for the 1Q earnings session with the rest of the FANG members, US Steel (trade wars) and energy companies due to report next week. There is always the possibility of an unexpected speculative explosion – especially with the degree of lingering volatility in our markets – but best not to bank on that into the closing hours of liquidity for the week.

Top themes and events in the week ahead: Looking ahead to next week, the financial markets will hit upon a number of critical fundamental themes which can steer our markets on a different course or stir up acute volatility. For the likes of trade wars and cross-border political confrontation, there are few pre-scheduled milestones for investors to keep track. Sentiment indicators such as the US Conference Board consumer confidence survey and Eurozone array of readings will give important insight into how the rise of protectionism is influencing consumers’ and business leaders’ outlooks given the unique and abstract risks. Monetary policy will come back into view as well with the ECB and BoJ policy decisions on tap. These are the two most dovish central banks amongst the majors; and in that capacity, they can shape market conviction that is still heavily influenced by a holdover complacency from an extremely accommodative monetary policy. If either gives an indication of a planned tightening/normalizing move in the foreseeable future, it can impact risk rather than just the specific currencies. Finally, US corporate earnings season continues with Facebook, Amazon an Google as well as US Steel high on my list of earnings to watch given their position as either speculative/tech leaders or trade war barometer.

EUR/CHF closes a long-term and extreme gap: It has been a long time to hold the market’s head under water, but EUR/CHF has finally tapped the 1.2000 level again since the Swiss National Bank removed the floor as its primary policy tool back in January 2015. The move over three years ago had dramatic and far-reaching effects – the franc surged around 17 percent before it opened again which is unprecedented in liquid FX and the SNB permanently damaged its credibility. While this episode was painful for many FX traders and global investors, it has served as an atypical empirical reflection of how monetary policy can go awry with dramatic consequences. The world’s largest central banks have been notably more restrained in pursuing change and much more transparent with intention since that inauspicious turn.

AU employment data appeared soggy as the unemployment rate held at 5.5% as the net-employment gain of 4,900 after Full-time jobs fell 19,900 and part-time jobs rose 24,800. The RBA is looking to a tightening labour market for higher wages leading to inflation before the next policy change in the cash rate. Earlier this week, the RBA minutes announced that they are more likely to hike in their next move than cut, but after February’s 20,000 increase of full-time jobs, the hike may be a way off yet.

Aussie Dollar: The Aussie jobs figures claimed a victim in the Australian Dollar. Through Wednesday, the currency was the best performer amongst the majors and this past session it was one of the worst (after the British Pound and New Zealand Dollar). The slide, particularly for the AUD/USD, further builds pressure for technical traders as the broader bear trend of the past three months still holds sway and forces the market to confront a much larger – though gradual – rising trend stretching back to the beginning of 2016 and holding a trial for conviction around 0.7650. Meanwhile, keep tabs on AUD/JPY and AUD/NZD as the former weighs general appetite for ‘risk’ trends and digs into the nuance of local rate expectations versus a more comparable counterpart.

Commodities are stealing the show from energy to metals showing that it’s not just Aluminum that inflation watchers need to be concerned about. In a sign of the time, the correlation between the German 2-year Bund yield and the price of Nickel has had a strengthening correlation showing that fixed income traders are selling as commodity traders are buying. Since the April 6 sanctions were announced, the price of Aluminum has risen by over 30% on the LME while Nickel has risen by over 20%.

The ASX200 has now pushed above the 200-Day Moving Average as the index rose for the sixth straight day after climbing 0.3%, or 19.58 points to 5,8881 on Thursday. The level is the highest since March 22 that aligns with other indices like the MSCI AC Asia Pacific Index that are benefitting from the global rally in commodities.

Market Data:

SPI futures moved 19.58 or 0.33% to 5881.

AUD/USD moved -0.0069 or -0.89% to 0.7726.

On Wall Street: Dow Jones -0.71%, S&P 500 -0.95%, Nasdaq -1.06%.

In New York: BHP -0.46%, Rio -0.64%.

In Europe: Stoxx 50 -0.12%, FTSE 100 0.16%, CAC 40 0.21%, DAX 30 -0.19%.

Spot Gold moved -0.1% to US$1346.38 an ounce.

Brent Crude moved 0.64% to US$73.95 a barrel.

US Crude Oil moved 0.13% to US$68.56 a barrel.

Iron Ore moved 1.07% to CNY470.5 a tonne.

LME Aluminum moved 5.49% to US$2537 a tonne.

LME Copper moved 2.11% to US$7022 a tonne.

10-Year Bond Yield: US 2.92%, Germany 0.6%, Australia 2.78%.

 

Written by: John Kicklighter, Chief Strategist, DailyFX

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