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Trader thoughts - the long and short of it

In the game of call and respond for global trade wars, the retaliations and troubled assessments following the US passage of the metals tariffs against the European Union, Canada and Mexico continue to come in. 

World Flags
Source: Bloomberg

Wall Street charges higher as confidence soars through US trade: Risk trends were generally heading higher through Wednesday’s session, but there was a notable acceleration through New York trade. The charge was particularly noteworthy considering the headlines were heavily circulating lament about the state of global trade – including the United States’ position at the center of the wheel. In contrast to the restraint measured in European shares, the benchmark US indices earned hefty gains. The Dow’s 1.4 percent charge was its best single-day performance since April 10 and launched the market to its highest close since March 13. And, while more restrained with a 0.7 percent advance, the tech-heavy Nasdaq Composite earned itself yet another record high close – the third trading day in a row. Despite the impressive highs from the Nasdaq, the strongest sector contribution to performance were banks. The financial group rose 1.8 percent with a commanding move from JPMorgan. There was some attribution to higher US Treasury yields and views of policy normalization behind other central banks (like the ECB) made in market headlines, but this offers dubious motivation for the broader market. Withdrawal of accommodative monetary policy threatens one of the pillars of the complacent speculative reach that has prevailed over the years. 

Trade wars seed broad economic concern: In the game of call and respond for global trade wars, the retaliations and troubled assessments following the US passage of the metals tariffs against the European Union, Canada and Mexico continue to come in. Mexico announced that it was imposing tariffs on US imports to the tune of $3 billion on key products. It was also reported that the European Union expects to add new charges on US goods in July. Attempting to illuminate its position, top US economic advisor Larry Kudlow said world trade had “broken down” and President Trump should not be blamed for responding. Meanwhile, the US trade deficit figures for April reported the smallest shortfall in 7 months on record exports. Removing the sovereign perspective, the World Bank warned tariffs could return the global economy back to state similar to 2008. Also notable was the UN’s revision to its global foreign direct investment assessment which now says it dropped by 23 percent in 2017. The G-7 leaders’ summit on Friday and Saturday is looking more and more interesting every day.

Pound concerns rise as pressure on Brexit progress heat up: Brexit is a constant concern even if it doesn’t dominant the financial headlines in the Britain. Every now and then, a threat or point of progression pops up to move the markets forward. This past session, it was reported that there is again internal tension in the cabinet with Brexit Minister David Davis reportedly aiming to exert pressure on Prime Minister May over a final backstop to avoid a boarder in Northern Ireland. There have been rumors that Mr. Davis could offer his resignation if his efforts do not work, which could further send the Brexit negotiations into tumult. It is difficult to see a balanced outcome to this situation with the UK struggling to form its own position to meet its EU counterparts at the negotiation table. So long as the dis-unity persists, the threat of a trigger to hard exit will always appear substantial. The Sterling has held up rather well in just the past few weeks, but the discount in the preceding two months speaks to the market’s assessment of the situation.

Australian dollar moves into position to flip trend with the Greenback: The Australian Dollar’s advance continued this past session, though it didn’t experience the same degree of enthusiasm found on Monday. Once again, traditional economic data was supporting the market’s bullish appetite. The 1Q GDP data crossed the wires with a notable beat with a 1.0 percent growth through the quarter that bested the 0.9 percent forecast and doubled the previous quarter’s pace. That pushed the annual clip of expansion to a 3.1 percent pace. Gains were registered against all major counterparts, but there were a few particularly remarkable technical patterns to arise from the likes of AUD/USD and AUD/JPY. The former is close to flipping a gradual bear trend should 0.7650 truly break. As for AUD/JPY, an inverse head and shoulders pattern has a ‘neckline’ in the 84.00/50 vicinity.

Base metals rally pulls Australian shares upward, offsetting bank losses: Surging energy and materials stocks pulled Australia’s benchmark S&P/ASX 200 index higher despite losses in the overweight financials sector for a second day. A bounce in crude oil prices probably helped but a surge in base metals appears to be driving momentum, with soaring copper prices particularly noteworthy. The metal added 6.7 percent in just four days amid concerns about supply disruption. The move started Friday after the labor union representing workers at the world’s largest copper mine – BHP’s Escondida site in Chile – announced the start of another round of wage negotiations. SPI futures are pointing higher ahead of the opening bell in Sydney, hinting more of the same might be in the cards today. Oil prices’ return to the defensive and de-risking ahead of the upcoming G7 leaders’ summit might cool momentum however.

Oil back on the defensive as US stockpiles unexpectedly rise: Crude oil prices turned lower again having briefly recovered after touching a two-month low Tuesday. Venezuela said it could boost output if the caps in place courtesy of the OPEC-led production cut accord are loosened. An unexpected surge in US inventories weighed as well. Official EIA data showed stockpiles added 2.07 million barrels last week, clashing with analysts’ forecasts calling for a 2.17 million barrel drop and an API estimate flagging a 2.03 million barrel drawdown. Gold prices marked time, torn between the conflicting influences of a falling US Dollar and rising Treasury bond yields. 

Euro soars on ECB QE cutback speculation, but this may be premature: The euro surged to a two-week high, enjoying the largest one-day gain in nearly three months against its major counterparts. The move followed reports quoting anonymous sources saying that the ECB will announce a decision on the trajectory of QE asset purchases at next week’s policy meeting. Chief economist Peter Praet echoed these sentiments, which the markets read as confirmation. The markets seem to be operating on the assumption that dialing back stimulus rather than expanding it is the way forward. Bond buying is now nominally scheduled to end in September, but traders have long anticipated that a gradual wind-down process will be used. That can mean tapering the size of monthly uptake – now set at EUR30 billion – into the September cutoff or starting that process thereafter. It may be premature to assume that the coming policy shift will be hawkish however. Base effects from last year’s politically driven euro rally will weigh on price growth, undermining progress toward the ECB’s near-2 percent objective. That may inspire delaying QE withdrawal.

Market Data:

SPI futures moved 30.23 or 0.5% to 6025.11.

AUD/USD moved 0.0004 or 0.05% to 0.7671.

On Wall Street: Dow Jones 1.4%, S&P 500 0.86%, Nasdaq 0.67%.

In New York: BHP 2.75%, Rio 3.66%.

In Europe: Stoxx 50 0.12%, FTSE 100 0.33%, CAC 40 -0.06%, DAX 30 0.34%.

Spot Gold moved 0.01% to US$1296.54 an ounce.

Brent Crude moved 0.42% to US$75.7 a barrel.

US Crude Oil moved -0.78% to US$65.01 a barrel.

Iron Ore moved 0.64% to CNY474 a tonne.

LME Alumnium moved -0.09% to US$2312 a tonne.

LME Copper moved 1.78% to US$7099 a tonne.

10-Year Bond Yield: US 2.97%, Germany 0.47%, Australia 2.76%.


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

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