Trader thoughts - the long and short of it

The S&P/ASX 200 rose on Tuesday above the 6,000 mark: The largest volume on the index was seen in Beach Energy Ltd that rose 2.2% on the session with earnings expected to rise, and margins expand after the recent acquisition of Lattice Energy.  The largest percentage gainer was WiseTech Global, the cloud-based logistics software company with a 5.28% gain.

Ten stocks hit 52-week highs on Friday without a single 52wk low. The 12-month after on the ASX 200 is 5,857 with Tuesday’s close roughly 3% above the 12-month average.

The implied data from ADRs shows BHP & Rio are set to open Wednesday lower by nearly 1% each.

Aussie Dollar: Fundamental event risk did few favours for the Australian Dollar this past session. The RBA’s confidence notwithstanding, there is little expectation that this once-high-flying carry currency will return to competitive rates of return anytime soon. In the meantime, the drop in housing prices reported by CoreLogic and slide in commodity inflation (both for April) puts the rate forecast in an acutely negative light. This was not enough to drive the Aussie Dollar to declines against more motivated declines from the Euro and Pound, but it was the perfect environment to leverage the AUD/USD’s remarkable dive. The pair is now down well over 300 pips in 8 trading days with noteworthy technical breaks (like the channel floor break around 0.7650) along the way.

Wall Street garners limited respite from US tariffs delay: Shortly before the midnight deadline the US had set for the metals tariffs (steel and aluminium) temporary moratorium to expire, President Trump again extended the pause out another month to June 1st. This was just one more uncertainty looming over the global markets and put the markets in an uncomfortable position about the future of trade. However, the allowance of another five or so weeks to fret over negotiations doesn’t seem to have won any genuine enthusiasm for US markets. In fact, the S&P 500 and Dow opened to their first gap lower in seven trading days. And though the afternoon session clawed back earlier losses, there certainly remains a lack of genuine optimism from the bullish camp. That may be in part due to the lasting concern over the US and EU’s relationship, focus on other issues like the Iranian nuclear deal or even impending event risk like the upcoming Fed rate decision stirring up recently dormant but more systemic concerns. After the bell, Apple will represent the last major figurehead of the dominant US tech sector to report earnings. Yet, given the tepid reaction to the broad FANG beat; the tone seems to have been set.

FOMC decision doesn’t require a rate hike to be market moving: It is very unlikely that the United States’ Federal Open Market Committee (FOMC) will change its benchmark lending rate Wednesday when it wraps its two-day meeting. Both Fed Funds futures and swaps markets are pricing in approximately a 5 percent probability that another 25 basis points move is hiding in the wings. Given that the group hiked at its last meeting and it has clearly committed to transparency, it is fully reasonable to expect no tangible change. However, the markets are prepared for that eventuality and will know to look for their bearing in the nuance. With the Dollar mounting a notable recover these past few weeks amid a further retrenchment into the dovish territory by QE champions ECB and BoJ, we have the type of environment that can leverage a response. Look for discussion that can clarify favouring three or four total hikes in 2018 along with the emergent concerns over asset prices and debt levels.

Eurozone growth, unemployment and then inflation: What was it that lifted the Euro from its hole and on to a lasting rally through 2017? Initially, the currency was simply oversold in the way that it was priced for the worst-case outlook on growth, political instability and capacity for investor returns. As those prominent threats eased, there was scope for alleviating some of the hefty discount the currency was under. Yet, the recovery seemed to build on its own momentum rather than the tangible fundamentals, and this has central bankers, lawmakers and some market participants uncomfortable. With EUR/USD’s drop below 1.2150 recently, the air seems to be deflating from the pumped up currency. That creates an environment whereby any underwhelming data can more fluidly translate into pain for the currency. The Eurozone 1Q GDP reading is due Wednesday morning which is wholly encompassing, while the jobless rate will speak to a trend upon which much expectation has been heaped. Yet, it may be the Thursday CPI reading for the Eurozone that really carries the weight as it hits the primary mandate for monetary policy.

Here’s to hoping that things in China are going well: That was a key message from the Reserve Bank of Australia after they maintained their neutral stance to see the Aussie trade down to new 2018 lows below 75 US cents per AUD.

The positive sign came from the RBA nudging their confidence higher in growth in expectations that the pace will exceed 3% next year despite inflation expected to remain low “for some time,” with gradual improvement.

A negative takeaway was the RBA’s view that the AU terms of trades, which measures the aggregate value of exports minus the aggregate value of imports will decline in coming years. Despite the updates, the swaps market kept at ~35% chance of a rate hike on December 19, the same as seen before the meeting.

A key driver of the commodity boom over the last few months has been a weak US Dollar: That tailwind may soon become a headwind as the US Dollar Index is close to breaking the opening range high of 2018 at 92.28. Crude oil fell by the most in three weeks, and most of the focus and fault was aimed at a combination of uncertainty surrounding Iranian sanctions that could be imposed on May 12 by US President Trump and the strengthening US Dollar.

Before calling a top, it’s worth noting that WTI Crude gained 5.6% in April and continues to trade at a ~$6 discount to Brent crude, the global benchmark.

The Iranian sanctions took a step towards probable after Israeli Prime Minister; Benjamin Netanyahu presented Iranian research that argues they pushed forward with their nuclear program and looks to be a clear violation of previous international agreements. Markets are focused on what this means as Iran OPEC’s third largest producer of oil.

Aluminium supply fears continue to ebb and flow as the tone from US officials has turned decidedly softer favouring the view that supply shocks will not choke the market.

Markets Update:

SPI futures moved 32.5 or 0.54% to 6015.23.

AUD/USD moved -0.0045 or -0.6% to 0.7485.

On Wall Street: Dow Jones -0.4%, S&P 500 -0.08%, NASDAQ 0.89%.

In New York: BHP -1.2%, Rio -1.17%.

In Europe: Stoxx 50 -0.01%, FTSE 100 0.15%, CAC 40 0.68%, DAX 30 0.25%.

Spot Gold moved -0.77% to US$1305.22 an ounce.

Brent Crude moved -1.9% to US$73.27 a barrel.

US Crude Oil moved -1.63% to US$67.45 a barrel.

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

LME Aluminium moved 1.44% to US$2255 a tonne.

LME Copper moved 0.15% to US$6807 a tonne.

10-Year Bond Yield: US 2.97%, Germany 0.56%, Australia 2.76%.

 

Written by: Tyler Yell, Currency Strategist, CMT and John Kicklighter, Chief Strategist with DailyFX