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The New York session took its cues from the European and Asian trade that preceded it to post a bullish gap higher on the open

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Wall Street
Source: Bloomberg

Wall Street stabilizes before key levels and bearish records broken: This past week ended with a check for speculative markets. The New York session took its cues from the European and Asian trade that preceded it to post a bullish gap higher on the open. Trade through the session was less than fruitful however as the fundamentals started to weigh confidence – but not enough to pitch the market back into its prevailing bear trend. For the Dow, the Friday advance prevented a ninth consecutive session decline which would have broken the record for the worst series of losses for the index since 1984. Instead, we would merely match the retreat. Meanwhile, the S&P 500’s bounce kept it above 2,740/45 support which has developed some moderate technical influence. Remarkably, the Nasdaq which represents the speculative-leading tech sector actually closed the week with a loss having pulled back from a record high on Wednesday. What makes the rebound through the week’s end so remarkable was the unmistakable charge in risk following a tweet from US President Donald Trump threatening a 20 percent tariff on imports of European autos. Both escalating the trade war and shifting it to the developed world bodes very poorly for growth and stability moving forward. We will see if time over the weekend promotes recognition of the greater risk the world faces or reinforces wait-and-see complacency.

US broadens the trade war to the developed world: The world has been engaged in a trade war for a few months now, but the actions taken thus far have left just enough room to retain some doubt that the threats are systemic. The actions between the United States and China still draw out belief that much of the escalation is bluster – though the application of the $50 billion in tariffs by the US and retaliation by China represents genuine traction. Furthermore, there is an assumption (whether reasonable or not is up for debate) that engagement between the US and China would not readily spill over to the rest of the global economy owing to the buffer the latter has maintained to the rest of the world. However, these assumptions of disconnect and restraint have materially diminished as the Trump administration has widened the economic conflict to critical developed world economies. Pushing forward with the metals tariffs against the Canada, Mexico and the EU was a critical change I tack. The retaliation from those counterparts was to be expected, but the real concern was what action would the US take from there. It seems the President will consult the same page of the playbook he is using against China with the twitter threat that he could introduce a 20 percent tariff on imported European autos. That is an enormous escalation with serious economic implications for both sides. If these warnings are followed by action, it is likely that an ineffective WTO would encourage the United States’ trade partners to coordinate a punitive response to the increasingly pugnacious country.

The second round Fed stress test that will release dividends, buybacks: It is theorized by some that the remarkable extension of the equity market’s climb these past few years in particular was funded by large corporations redistributing their large profits to shareholders (the market). It is time once again for one of the most ‘generous’ sectors to announce their distribution plans. Typically, the largest US banks announce their intention for paying out dividends and buying back shares following the release of the Federal Reserve’s annual stress test results. Their plans must meet capital requirements, so this is logical. The first round based on Dodd-Frank regulation saw all 35 institutions under review pass this past week as all had enough capital to withstand their worst-case scenario economic and financial test. If the so-called CCAR review results in the same score card, the banks will start to announce their plans after the bell Thursday. If those payouts are small or none-existent, assumptions will turn the event into a source of disappointment. If they are once again generous yet the markets restrained in their response, it will reinforce fears that the market is cultivating an unfavorable bias. It is far easier to disappoint than impress with this event.

New Zealand Dollar may overlook RBNZ rate call amid trade war worries: The New Zealand Dollar may find its directional bearings in the impact of trade war jitters rather than the RBNZ monetary policy announcement in the week ahead. The central bank is widely expected to keep the benchmark cash rate unchanged and the forward guidance in the accompanying statement is unlikely to break new ground. First-quarter GDP data registered in line with expectations and timelier PMI surveys suggest that broadly on-trend economic growth continues into the mid-year mark. The absence of a CPI update since the central bank’s last conclave probably reinforces the case for standstill. The latest installment – released in April – showed price growth slowed to 1.1 percent in the first three months of the year. Governor Adrian Orr and company seem unlikely to change tack at least until the next report crosses the wire sin July, and only in the event of an improbably dramatic upsurge. In the meantime, the US is due to unveil investment restrictions and export controls targeting China and an EU leaders’ summit may result in further pushback to President Trump’s belligerence. That may stoke risk aversion, hurting the sentiment-sensitive New Zealand currency.

AUD/USD trend still points lower after upswing: The Australian Dollar has managed a spirited recovery after touching a 13-month low against its US counterpart last week. Indeed, Friday marked the currency’s largest one-day gain in three weeks. Still, the dominant trajectory continues to be defined by a series of lower highs and lows set from double top resistance established in late January, favoring a bearish bias. A daily close below support in the 0.7315-35 area (50% Fibonacci expansion, chart inflection point) would mark resumption, paving the way for a test of the 61.8% level at 0.7230 and ultimately the double bottom in the 0.7145-65 area. Near-term resistance is in the 0.7413-52 zone, with a recovery above that opening the door for prices to challenge down trend resistance near the 0.76 figure.

Crude oil rallies despite OPEC agrees to raise production: There was a broad bounce in commodities to close this past week from ‘softs’ and ‘hard’ type. This was no doubt helped by a drop in the US Dollar as a common pricing instrument for the natural resources. That relationship stands out particularly prominent for gold which stands at the ready to play a unique safe haven in a world where global trade wars and an unstable monetary policy course bolsters risk in fiats. Nevertheless, the precious metal only finally managed its first positive close in five days after having dropped to its lowest point of the year. More headline-worthy was crude oil where traders were reacting to news that OPEC and important non-OPEC members had supposedly agreed to boost production at their regular meeting. Despite those headlines, the commodity surged. The US-standard WTI oil contract earned a 4.2 percent rally through its close first the biggest jump since July of last year while the European-baseline Brent contract closed with a 3.4 percent advance. The spread between the two has contracted from over $11 just a few weeks ago to around $7 in favor of Brent.

Australian stocks rally may resume as crude oil surge reverberates: Another strong day for the overweight financials sector was not enough to offset weakness elsewhere, with the S&P/ASX 200 benchmark edging lower Friday. Bank stocks added 1 percent but all of the other components of the index retreated. The similarly over-represented materials grouping shed 0.7 percent. On balance, the move seems corrective after a week of aggressive upside progress that brought Australian shares to a ten-year high. A dramatic surge in crude oil prices may send commodities-linked stocks higher after the opening bell on Monday, rekindling the rally. The surge followed an OPEC+ decision to boost output by 1 million barrels per day, an effective increase of about 600k barrels since some members of the cartel-led producers’ group are unable to shoulder their share of the increase in supply quota. That disappointed markets looking for a more dramatic boost advocated by Russia and Saudi Arabia. Wall Street offered a preview of the impact, with energy and materials names adding 2.2 and 1.4 percent respectively in Friday’s session.

Market Data:

SPI futures moved -6.91 or -0.11% to 6225.23.

AUD/USD moved 0 or 0% to 0.744.

On Wall Street: Dow Jones 0.49%, S&P 500 0.19%, Nasdaq -0.26%.

In New York: BHP 2.19%, Rio 1.35%.

In Europe: Stoxx 50 1.12%, FTSE 100 1.67%, CAC 40 1.34%, DAX 30 0.54%.

Spot Gold moved 0.27% to US$1270.56 an ounce.

Brent Crude moved 3.42% to US$75.55 a barrel.

US Crude Oil moved 4.64% to US$68.58 a barrel.

Iron Ore moved 2.86% to CNY468 a tonne.

LME Aluminum moved -0.18% to US$2175 a tonne.

LME Copper moved 0.04% to US$6789 a tonne.

10-Year Bond Yield: US 2.89%, Germany 0.34%, Australia 2.65%.

 

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

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