Trader thoughts - the long and short of it

Banks and energy producers lead Wall Street lower: Energy producers and banks led the way lower. A drop in oil prices weighed on fossil fuel-linked names. Lenders suffered as the yield curve flattened alongside the 2019 rate hike path implied in Fed Funds futures, cooling interest income prospects. Crucially, these moves run counter to dominant trends stated in early April and May, respectively. This paints them as corrective, warning against betting on follow-through beyond de-risking into the weekend.

Miners give ASX 200 its first weekly drop since March: Materials names led Australian shares lower Friday. The overweight sector accounting for nearly a fifth of the S&P 500/ASX 200 index shed 1.1%, with miners leading the sell-off against a backdrop of falling iron ore prices. The metal capped a four-day losing streak with a hefty 1.5% drop on Friday. That translated into the first weekly loss since March for Australia’s benchmark. A negative lead from Wall Street might make for further weakness as Monday’s session gets underway. A daily close below immediate chart support at 6085.20 exposes the next downside barrier at 6047.20.

Metals got roughed up last week, and there’s little evidence the weakness will stop: Iron ore dropped by the most in months thanks to the resurgent US Dollar and weak Chinese economic data for April.  The overall price action since March has been lifeless and may favor an extension lower of the move that started in February. At the same time, gold dropped to the lowest level in 2018 when it fell below US$1,300/oz, which is likely to continue if US Dollar strength extends. Still, commodities remain the asset class to beat with the best year-to-date returns in a decade thanks to oil prices. Brent broke $80/bbl, and the fundamental case for further gains continues to strengthen as the US takes a hard line on Iran and a supply squeeze remains in play.

Markets open is focused on where last week’s price action ended: It is often said that amateurs open the market but professionals close them, so where prices land at the end of trading periods tends to carry more weight when looking to gauge follow-through. Here is a look at some of the critical closing levels and the important thresholds that were breached last week, along with their implications:

• The US 10-year Treasury bond yield closed above 3.05%, which some institutions are saying could mark a turning point in the 35+ year downtrend in global rates.
• The US Dollar Index posted a bullish ‘Outside Week’ technical pattern, hinting that the recent move higher is likely to continue
• EUR/USD, the FX markets’ most commonly traded pair, closed below its 55-week moving average, another technical pivot that could precede a broader move lower in the common currency.

Central bank speakers headline economic calendar in the week ahead: Central bank speakers prove to be the best place to look for a catalyst driving FX volatility however. Top officials from four of the world’s leading monetary authorities – RBA Governor Lowe, BOE Governor Carney, Riksbank Governor Ingves and Fed Chair Powell are all due to speak. Minutes from the May 2 meeting of the US central bank’s rate-setting FOMC committee are also on tap. UK releases headline a small offering of tier-1 economic data, with CPI and GDP statistics set to cross the wires.

Is the Australian Dollar less vulnerable against USD vs other G10 FX majors? Positioning data released by the CFTC in the weekly Commitment of Traders report (COT) showed large speculators’ exposure to the US Dollar turned narrowly net-long for the first time since March last week. Their aggregate bets have favored Aussie Dollar weakness since the beginning of April, however, with net-short skew now at the largest in over two years. This might imply that the US Dollar uptrend has greater scope for near-term progress against non-AUD G10 FX majors.

Fed rate hikes drive rotation to blue chips in US equities: The latest build higher in benchmark US 10-year US Treasury yields starting in early April has been inversely tracked by a drop in the Dow/Nasdaq ratio. This metric compares the comparative performance of relatively cash-rich blue chip names dominating the former US stock index to that of the levered-up technology issues overrepresented in the latter. This seems to suggest something of a rotation within the equities space driven by the recent swell in Fed rate hike expectations, with capital flows favoring companies less vulnerable to higher borrowing costs. More of the same may be ahead as the global tightening cycle continues to develop in the months and years ahead, assuming it is not met with broad-based risk aversion. That is still a possibility as QE turns negative for the first time in a decade in July.

Market Data:

SPI futures moved -6.9 or -0.11% to 6087.36.

AUD/USD moved 0.0015 or 0.2% to 0.7526.

On Wall Street: Dow Jones 0%, S&P 500 -0.26%, Nasdaq -0.38%.

In New York: BHP -1.11%, Rio -0.97%.

In Europe: Stoxx 50 -0.51%, FTSE 100 -0.12%, CAC 40 -0.13%, DAX 30 -0.28%.

Spot Gold moved 0.18% to US$1293.05 an ounce.

Brent Crude moved -1% to US$78.51 a barrel.

US Crude Oil moved -0.29% to US$71.28 a barrel.

Iron Ore moved -3.75% to CNY462.5 a tonne.

LME Aluminum moved -1% to US$2270 a tonne.

LME Copper moved -0.35% to US$6855 a tonne.

10-Year Bond Yield: US 3.06%, Germany 0.58%, Australia 2.9%.

Written by: Ilya Spivak, Currency Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX