Trader thoughts - the long and short of it

Wall Street’s tepid recovery fizzles: From there, the retracement of last week’s disjointed recovery began. The headlines for the day proved more fruitful for specific commodities or currencies that would benefit outside the strict ‘risk-reward’ evaluation that equities follow. US data offered encouraging consumer spending statistics for March, but that comes with an ominous inflation growth in the Fed’s favourite PCE deflator data. Meanwhile, trade wars uncertainty is at a simmer again with the midnight deadline for the metals’ tariffs that could still fall at the doorsteps of important trade partners like the European Union. If this is not resolved, the escalation could prove swift and destructive. Then there is the new front on political instability involving the US President’s threat to scrap the Iran nuclear. With this front of uncertainty, the retreat for the S&P 500, Dow and Nasdaq look rather restrained. If these issues grow, moderation may go out the window.

RBA statement in focus as inflation expectations build: The Reserve Bank of Australia is widely expected to keep the benchmark cash rate unchanged at a policy meeting Tuesday. In fact, markets do not expect to see an interest rate hike at least through the rest of the year. Local economic news flow has deteriorated relative to consensus forecasts since the central bank’s April conclave, seemingly reinforcing the case for a continued standstill. An upshift in market-based inflation expectations derived from swap and bond pricing open the door for a hint of optimism, however. If that shines through in the policy statement, the Australian dollar may trade higher. The implications for local shares are somewhat muddled – most names may fall but gains in the overweight Financials sector may pull the overall market higher.

US inflation picking up but is the Dollar’s appetite for rate forecasts?: There is an important round of event risk for the US Dollar distributed evenly through this week. For Monday, the focus was on the personal income and spending statistics along with the PCE deflator derived from that data. The consumer activity figures for March were encouraging with income up 0.3 percent from the previous month (even though the forecast was 0.4 percent) while spending hit expectations of 0.4 percent. In terms of what that adds to the US economic forecast, there is a modest bullish bump for growth potential for a minor offset to the disappointment of this past Friday’s 1Q GDP. Carrying more fundamental heft in a week with an FOMC rate decision was the inflation figure. The PCE is the Fed’s preferred price gauge, and the measure’s in-line rebound to a 2.0 percent annual headline reading and 1.9 percent core undermines speculation that the central bank will have to pack off its pace to accommodate economics. Despite what his data offers, it does not really change the sparse 6 percent probability priced into swaps that we will get another 25 basis point hike from the bank later this week. What really matters though is whether the market will pay closer attention – especially after the ECB and BoJ took more bearish tones last week. Rate forecasts are the most hawkish we have seen in a decade, yet the Dollar has still struggled over the past year.

Will Apple earnings salvage the parade for quarterly corporate updates?: In past years, US earnings season was an opportunity for bulls to loosely justify their appetites for further leveraging their exposure amid earnings that beat forecasts and optimistic forecasts that defied most economic uncertainties. That has clearly not been the case for this season’s numbers run. The reports these past few weeks have offered the typical skew towards ‘better-than-expected’ across the various important industries. And, the market leaders identified colloquially as the FANG (Facebook, Amazon, Netflix and Google) offered particularly robust top and bottom line figures. Nevertheless, neither those tickers nor the indices have benefited the optimism. With that in mind, we have to wonder how much anticipation is being placed at the feet of the forthcoming Apple report. The world’s largest company whose cash holdings are always spun into stories of ‘what could be’, a disappointment could play into a default scepticism while a negative reaction to a positive report could make the bearish bias that much more tangible.

Aussie Dollar back on the defensive: AUD/USD succumbed to another wave of selling following Friday’s brief recovery, sinking to the lowest level in over four months. Building Fed rate hike bets appear to be at the heart of the move, with the greenback scoring outsized gains versus currencies most vulnerable to being supplanted as the objects of carrying interest. Critical chart support lines up at 0.7502, marked by the December 2017 swing bottom. A daily close below that opens the door for a descent to challenge the May 2017 floor at 0.7329. Minor resistance comes in at 0.7584, followed by a more substantive barrier at a recently broken two-year rising trend line now acting as an upside barrier at 0.7643.

Commodities: The commodities market was a mixed bag through the US close Monday. Energy was general in the green, metals in the red and agricultural resources, varied. Among the more remarkable moves through the day was the drop in gold which dipped all the way to $1,310 during the session, but ended of the lows. The precious metal is at the floor of its 2018 range and the Dollar’s rise is creating notable pressure given its own bullish break recently. As for energy, crude oil was charged Monday by the news that the Israeli Prime Minister shared evidence that Iran had pursued nuclear weapons despite its agreement at a critical time in President Trump’s consideration on whether to end the United States’ participation in the deal.

S&P/ASX 200 may struggle to build on Monday’s gains: Australian shares traded higher at the start of the trading week, with all but two sectors scoring gains. Materials issues were among the laggards despite Chinese PMI data. The East Asian giant is the primary source of demand for local commodities exporters. Financial names were a standout on the upside, adding 0.77 percent. That probably reflects bets on a broad upturn in global borrowing costs as expectations of a steeper Fed rate hike cycle build. The US central bank’s role in setting the lending rate for US dollars – the medium for over 80 percent of monetary transactions – makes it a pacesetter for the cost of credit worldwide. A negative lead from Wall Street may sour sentiment, however. US equities erased an early advance to finish the day in the red. SPI futures are pointing down nearly 0.2 percent ahead of the opening bell in Sydney.

Market Data:

SPI futures moved 29.09 or 0.49% to 5982.73.

AUD/USD moved -0.0055 or -0.73% to 0.7526.

On Wall Street: Dow Jones -0.27%, S&P 500 -0.5%, Nasdaq -0.46%.

In New York: BHP 0.74%, Rio -0.24%.

In Europe: Stoxx 50 0.5%, FTSE 100 0.09%, CAC 40 0.68%, DAX 30 0.25%.

Spot Gold moved -0.55% to US$1316.74 an ounce.

Brent Crude moved 0.71% to US$75.17 a barrel.

US Crude Oil moved 0.48% to US$68.43 a barrel.

Iron Ore moved -0.64% to CNY463.5 a tonne.

LME Aluminum moved -2.29% to US$2223 a tonne.

LME Copper moved -2.41% to US$6797 a tonne.

10-Year Bond Yield: US 2.95%, Germany 0.56%, Australia 2.77%.

 

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