Market Weekly

Stocks break higher, what’s with that? US dollar slips – McKenna Macro Markets Weekly

on March 16, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Despite the previous week’s bearish engulfing move US markets had a great week of gains. Better than that actually the week saw the Nasdaq and S&P 500 break out of the range highs and push sharply higher.

In many ways it was a curious move given the data was on the weaker side of the ledger which rates, bonds, and US dollar traders noticed and reacted to. Not so the equity market bulls who – fuelled by buybacks, hopes the Fed is on hold for a very long time, and no credible alternative investments chased return. That saw inflows into junk bonds and cash back into stocks.

It’s as if QEInfinity is back on the table – in the US and across the globe – as central banks wax dovish once more having noticed that their paradigm is upside down and growth harder to sustain than weakness in the global economy so investors are betting on lower rates and more stimulus.

That backdrop that supports that renewed stimulus would trouble stocks buyers and perhaps it will in time. But the market weighing machine is now a perpetual motion machine with FOMO and buybacks at least – if not more – important than fundamentals.

The week that was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Stocks markets rally – the party where no one came….

Even with last Friday’s bounce of levels around 2,721 in the S&P 500 (I missed my TP by less than a point) when I sat down to write last week’s weekly the bearish engulfing candle that was the previous week’s candle suggested that the weakness hadn’t played out fully yet.

Indeed I wrote that even after the bounce that previous Friday, “we are still left with a bearish engulfing candle on the weeklies. Crucially – for my outlook on stocks – it also means the JimmyR trend indicator is still another week away from crossing bullish”.

Early in the week though it became clear that this outlook was wrong. My system triggered a long in the Nasdaq, I bailed on my shorts, and now we find that the S&P 500 has risen – in physical terms – to finish at 2,822 while the futures at 2,829 and around 107/8 points above the previous Friday’s lows.

That’s one heck of a rally given “real money” has largely sat this move out.

Source: FT.com

That the party was raging while nobody came is best exemplified by this chart above from the FT. of course we know that momentum traders have been following and driving prices higher since the lows and it seems clear that buybacks are also a big part of the rally so far.

Source: Twitter

This combination helps explain how – and why – the stock market can ignore the economic fundamentals. Because the rally has nothing to do with them.

But that begs the question when stocks are going to succumb to the inevitable gravity that a slowing US and global economy, weakened earnings outlook, and expectations of a swift trade war settlement which likely need to be unwound will happen.

It could be this next month many say as buybacks fade because of the earnings blackout period. That certainly seems reasonable. But here’s the question I ask myself. Could, fear of missing out, FOMO, replace buybacks. That is could money that is on the sidelines and the risk of underperformance drive cash back into stocks driving them higher until the air finally gets too thin?

The answer is YES.

Reuters reports, “Investors plowed $14.2 billion into global equity funds this week, the largest amount in a year as investors jumped on to 2019’s stock market rally, Bank of America Merrill Lynch said on Friday, citing flow data provider EPFR…U.S. equity funds were the biggest beneficiaries with net inflows of $25.5 billion while emerging markets saw net outflows…European funds also saw $4.6 billion of outflows after the European Central Bank slashed its growth forecasts and signaled a cautious economic outlook at its latest policy meeting”.

And that means that while rhetorically I can’t see any reason to buy stocks my daily system is now long again while the weekly system has been long for 9 weeks (that’s my trading not rhetorical self there).

Crucially, the JimmyR indicator has now switched to long again  can see by the arrows on the chart below.  I’ve talked about what this is a lot. But suffice to say it’s a good very MACRO indicator of overall direction. The funk in December has caused the Bolly bands to open up in a way that I haven’t seen for a very long time which is a warning that we may see more choppyness. But for the moment this stocks market rally may find more support than many think.

As discussed in the dailies, any moves into the 2,675/2,725 region is expected to be very well supported. I’ll update in the dailies as to whether we have a signal that such a move is a foot. Fo r the moment though, price is still pointing higher.

S&P 500 (futures based) Weekly – arrows = JimmyR 15 and 30 ema crosses

The EU’s data flow is now less bad than the data in the US – Implications for asset prices

It had to happen eventually (just because of the construction of the indexes), but the past week has seen the Citibank Economic Surprise Index (CESI) score for the United States fall below that of Europe, Emerging Markets, indeed almost everyone except China.

Now when I say it had to happen because of the construction of the indexes I mean that as data prints poorly so then are expectations re-calibrated such that the data eventually stops missing expectations. What had been remarkable was that EU data was so weak for so long.

That told us just how poorly the EU was performing economically. So it was no surprise to me or you dear readers that the ECB turned tail and is now trying to figure out how to restimulate growth and still claim it has done a back flip with a full twist.

Anyway the ECB did pivot, the Euro did fall and the USD rise, EU stocks have lagged the US for a bit, but now that the US data is worse than expected and the EU data is starting to be less bad what does it mean?

For the US dollar (in DXY terms and more broadly – right hand side of the chart below) the data flow looks to be a negative that could see the greenback lose a couple to a few percent from where it currently sits. In DXY and Euro terms that might see prices head toward the bottom and top of the respective ranges we’ve been trading in over the past few months.From a stock market portfolio the divergence between the S&P 500 and the data flow has been stark. While these charts are 12 week rate of change and thus the Stock component (LHS of the chart above) reflects the big bounce from the very week December period it is easy to see why real money has been leery of buying back into this US stocks market rally.

That’s the battle between our (my own) rhetorical or fundamental selves and our trading and signal based selves. For the moment the traders are winning.  

Looking at the Euro and USD directly we see they both have reversed off important levels over the past week.

In the USD Index terms that level is 97.70/90 which is both the multi-month range top and the 61.8% retracement of the big fall to the 2018 lows. It’s a solid level and the eventual break I expect will be decisive. But for now it’s a nut too hard to crack – and the data suggests it might remain so for a little while yet. That may put 95.00 perhaps even 93.70 into the frame first.

USD Index (DXY) Weekly – TradingView

For the Euro the level was 1.1185 which as the 61.8% retracement of the big rally into last years highs is analogous with the 97.70/90 region in the DXY. An eventual break below there – which I expect – will drive EURUSD toward 1.08/09 perhaps even 1.03/04.

For the moment though it too is a macadamia nut fresh from the tree.  That puts 1.14, perhaps even 1.1520/70 back in the frame. Either way it appears a period of consolidation/pullback is in the offing for the USD and thus for many pairs against the USD.

EURUSD Weekly – TradingView

Bonds don’t believe the hype…does that matter?

Looking at bonds then it is important to both note we should not ignore the signal they are sending about cross asset values but equally to recognise that – for now at least – the 10’s are still in the “Goldilocks zone” I have been talking about all year.

To reiterate what I have been saying in my daily spot positioning thoughts for many, many weeks now, “Bonds are in a 2.55%-2.82% range a break either side would be a very important signal for markets more broadly. Holding below 2.82% is a bullish sign for risk assets . But if 2.55% range low were to break that would be a bad signal for risk assets. Above 2.55% for the 10’s is kind of Goldilocksy. Watch this though. 10’s are telling us something right now.”

So, we’re not there yet. Not quite anyway.

US 10 year Treasury rate – TradingView

But again, it is clear in he flow into junk bonds over the past week or two, in the new money coming into stocks, in the bounce in oil, and the price action of the S&P 500 and junk ETF that bonds are telling a very different story.

And this is why a host of real money is on the sidelines. Bonds are likely to be right. But with the hope of more stimulus coming for stocks they may elevate first. But then….

10 year Treasury rate(black), JNK ETF (purple), S&P 500 (blue), and WTI (red) – TradingView

Theresa May – Monty Pythons Black Knight or a Machiavellian strategist?

Those of you who have been reading me for a while that I have been bashing the “Pommie Pollies’ for the ham-fisted way in which they have been handling the Brexit negotiations with the EU and then in the Commons itself.

You’ll also recall that last year when we saw Mrs May’s deal and everyone was up in arms I suggested that she may have just found the right mix that could pass because in pleasing no one really she’d struck the middle ground.

Much water has flowed under the bridge since then and the theta on my calls has steadily decayed. But, there is a growing school of thought that perhaps Mrs May just might have snookered her opponents – at home and in the EU – such that with the time constraint and bookends of a hard Brexit and the EU parliamentary elections she has finally focused attention on both sides of the Channel that a little compromise wouldn’t hurt.

Source: Twitter

To that end in the Bloomberg opinion piece referenced in the tweet above Mohamed El-Erian argues in a  that, “to many, this week’s handling of the Brexit saga by the British government has appeared chaotic and inconsistent, leading some to predict the demise of Prime Minister Theresa May’s leadership and the risk of the UK stumbling into a disorderly Brexit. That is certainly a possibility. Yet game theory suggests that, with external constraints starting to bind a lot more, the government could well end up using a strategy that allows it to outmaneuver its critics, both within and outside the UK”.

I must admit that I both agree with him and that equally I have been so focused on the ineptitude of the Pommie Pollies that this notion had receded to the back of my mind recently.

So it is something I have not been articulating but El-Erian is right when he says, “with many European officials likely to oppose UK participation in the elections, the prospects of a disorderly hard Brexit essentially imposing itself will prove very threatening to British politicians on both sides of the argument. In other words, a May-proposed deal that includes some further EU concessions will certainly still not be optimal for them but will be better than being widely blamed for the alternative. And Brussels would go ahead, also fearing the alternative”.

It’s an interesting take. GBPUSD is already better bid than it was a couple of week’s ago and this week got near the 50% retracement of the Brexit high/low at 1.3400. If it gets through there we’ll be talking about 1.37 maybe 1.40.

But to do that we need more than the UK parliament voting to take no-deal of the table. We actually need that to happen. Brussels will be crucial.

And just quickly,  the CFTC data

Not a lot of movement from  speculative community over the past week. But check out the 10 year short coming down. Look out for a short covering rally folks if 2.55% breaks. It could move materially, 2.28% would be my target on a break. That could fuel a big rally in stocks initially. At least until folks recognise what’s caused it.

The week ahead

Plenty of central bank meeting this week with the Fed on Wednesday and the SNB and bank of England Thursday the highlights. We also see some meetings in EM Asia as well.

Monday kicks off with Japanese trade data before EU trade stats are released later in the day. The Buba’s monthly report isn’t usually that exciting but what they say about the outlook might get some attention. Canadian portfolio flows and US NAHB index are also out.

Tuesday we get the Westpac consumer survey in NZ – my heart goes out to all my readers across the Tasman, what that bastard did Friday at prayers is unspeakable. But of course we must speak against it. In Australia we get a speech from RBA assistant governor Chris Kent on Bonds and benchmarks. Sounds a bit dry so shouldn’t move the markets. We do get the house price index and the minutes to this months RBA board meeting are out.

Swiss and French trade are out along with UK employment and unemployment data, the ZEW survey is out in Germany and the EU while in the US it’s factory orders and then the API data at the end of the day’s trade.

Wednesday’s fare is dominated by the Fed meeting, decision, statement, dot plot projections, and press conference. But before that we get Kiwi current account, the Westpac leading index for Australia, minutes from the BoJ meeting last week, and a speech from assistant governor Michele Bullock at the UDIA – given that forum she may touch on housing.

German PPI and UK inflation – RPI, CPI, PPI – is out as is the EIA crude inventory data.

Thursday is HUGE in the antipodes with Kiwi GDP and Australia’s employment data out. Unsurprisingly for employment the forecast is 15k and a 55 unemployment rate. But there are whispers of negative prints so watch out. The SNB is out with its decision as will the BoE a little later on. We also get UK retail sales, US jobless claims, and Philly Fed index.

Friday sees the release of Japanese inflation data and it is also Markit’s second biite of the marketing cherry with the release of the “preliminary” PMI’s in Japan, Europe, the US and across many jurisdictions. Good marketing, poor practice – why release partials like this a week before the actual numbers unless it’s just for marketing and to move the markets and get folks talking about you in the press.

Anyway, climbing down from the high horse, we also get Canadian retail sales and BoC inflation data. Existing home sales are out in the US along with wholesale inventories and CFTC data.

A big week, not as huge as the last, but plenty to chew on just the same. Enjoy.

A big week, not as huge as the last, but plenty to chew on just the same. Enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

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Greg MckennaStocks break higher, what’s with that? US dollar slips – McKenna Macro Markets Weekly

Stocks swoon, bonds rally, and the trade war gets sticky – McKenna Macro Markets Weekly

on March 10, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Markets got a real sense that president Trump is trying to hard to goose stocks and is desperate for a trade deal last week. China seems to have as well and is pushing back. Throw in Mario Draghi and the ECB’s outlook for EU growth, the continued China slowdown, OECD downgrades, Australia’s poor GDP performance, and the consequences were inevitable

Stocks swooned and bonds across the globe caught a bid tone.

That oil defied that tone is interesting, that gold and the yen waiting till Friday’s awful non-farms to catch a bid was remarkable, that the USD still had a really positive week seems surprising – except that it’s still the least ugly duckling in forex land.

Now for the week ahead, let’s dive in.

The Week that was….

Key Themes driving markets

President Trump is trying hard to goose the market even as China pushes back on trade deal terms

Last weekend I tweeted that president Trump was trying too hard. He’s too invested in stock prices as an arbiter of the success or otherwise of his presidency.

That makes him vulnerable on two fronts. First his protagonists – like China in the trade battle – will see this as a weak spot and exploit it. Second, it is making him talk to much and seem desperate to get the trade deal done which makes him vulnerable politically and vulnerable to the market completely ignoring him when he talks.

Friday’s comment by the president that (my bolding), “as soon as these trade deals are done, if they get done, and we are working with China, we’ll see what happens, but I think you’re going to see a very big spike,” in markets is just the last in a long line of comments seeking to try to move the markets.

“If they get done” though is the operative word.

Even the White House’s version of Dr Peter Pangloss  – Larry Kudlow – was, I would say, more circumspect than he’s been portrayed in this interview with Bloomberg it gets interesting a little after the 5 minute mark.

But he does say the president could walk away.

And that is something the Chinese are wary off as I highlighted in my daily notes last week.

The latest update from Bloomberg is that, “China Warns U.S. That Trade Deal Enforcement Must Be ‘Two-Way’” Vice Commerce Minister Wang Shouwen said over the weekend any enforcement measure must be “two way, fair and equal”.

Which is exactly as you’d expect. China s=would never accept being a vassal of the US by accepting one way enforcement mechanisms. More important though is that China continues to highlight that any deal has to be two way, middle ground, fair and equal and so on.

More tellingly though is that the very structural issues the US – Mike Pence, the USTR, and Kudlow in that Bloomy interview link above – are pushing for don’t get a mention in China comments.

Indeed Wang’s comments above and a South China Morning Post report Saturday where  Xiao Yaqing, chairman of the State-owned Assets Supervision and Administration Commission (Sasac) says, “State-owned enterprises are independent market players. They are self-operated, self-financed, self-sustained, self-disciplined and self-developed” screams PUSH BACK.

So it’s starting to feel like we have come a bridge too far. And with President trump having walked away from North Korea’s Kim Jong-un  in Hanoi is it any surprise that China is leery of sending President Xi to the US only to have trump walk out?

Apparently it’s what Clinton did to Zhu Rongji back in the 1990’s over WTO. It didn’t play well at home.

So where are we?

Less certain a deal will get done anytime soon. And even less certain that it will be able to hold markets up when the global economic backdrop continues to weaken.

USD Range reinforced by a disappointing non-farms print

I’ll get to stocks in a sec.

But first I want to talk about the USD which just couldn’t break resistance again after February non-farm payrolls missed by a mile with a 20,000 print Friday. Markets had been expecting 180,000 new jobs.

Balancing out the miss was the increase in wages to a 3.4% annual rate, the fall in unemployment to 3.8% and the fact that over the previous 2 months the US economy is reported to have produced 538,000 jobs.

USD Index (DXY) Weekly – TradingView

But it was a bad enough miss to halt the US dollar’s rally in its tracks. In DXY terms it still can’t break 97.70/90 which is both the recent range top and the 61.8% retracement of the 2017/2018 fall.

A break above there and we’ll be talking about 100/101 in DXY terms.

Likewise though Euro traded mildly below the 61.8% retracement level of the big move to last year’s highs which comes in at ~1.1185.  As you can see on the chart below though the bias still looks to be lower in time.

EURUSD Weekly – Trading View

The question is how is the reaction in Euro and thus other currencies against the USD is. Friday was an inside day, so that actually doesn’t tell me anything.

So I’ll stick with my system which is short Euro on the Dailies and is looking to now short on the weeklies.  resistance looks to be around 1.1330/50 fr the Euro.

And it is worth noting that the USD had a very strong week against EM forex, the Singapore dollar, the CAD – even after Friday’s bumper jobs report and reversal – and a host of other currencies.

But the ranges and important levels have been reinforced – so we might need a reaction before the USD eventually breaks. But when it does…

Even with this slowdown the US economy and the US dollar are still the least ugly duckling.

Stocks need to find support

A momentum, liquidity, and holiday capitulation in stocks in late 2018 gave way to a momentum, low participation (real money) rally in 2019. Roughly 20% down and then back.

So given the drivers of the selloff and rally it is no surprise that as momentum faded and as the talk of stickiness in negotiations and China push back against US demands has grown that stocks in the US – and thus across the globe – have pulled back.

Friday’s bounce back from the lows was impressive – I missed my TP but under 1 point :S – but we are still left with a bearish engulfing candle on the weeklies. Crucially – for my outlook on stocks – it also means the JimmyR trend indicator is still another week away from crossing bullish.

S&P 500 – TradingView

Bearish engulfing on the weeklies, dailies pointing lower – that suggests stocks need to fall to levels where real money buyers might find value.

We’ll only know that ex-poste but some levels to watch are 2,700 which is the first – 23.6% – line of Fibo support from the 2018/2019 bounce. Below there it is the 2,625/30 region as the 38.2% level which, to me at least, is most likely to attract real money flows as stocks approach that region.

Why? Because if I abstract the liquidity/holiday funk the range was 2,600 – 2,825 approximately before the December funk. So back toward the bottom of that range and given the strong bounce my guess would be money managers might exhale a sigh of relief and start putting money back to work.

In the meantime I’ll update the dailies during the week. At present I’m still short on this basis.

Bonds suggest that stocks are still going to struggle

You know global growth is doing well – NOT – when you have a synchronised rally in global bond rates.

German 10’s ended the week at just 0.075% – that’s the lowest weekly close since October 2016. This rally in bunds is indicative of the reaction in global bond markets to the renewed and accelerating economic weakness.

US, German, UK, and Australian 10 year bond rates

Of course those rates are rallying because the data has been truly awful recently relative to what the market was expecting. [Please note I’m not sure why the Citi ESI for Australia is higher after recent data flow].

So, with US 10’s ending the week at 2.62%, with oil’s rally stalling recently you have to ask the question. Can stocks elevated levels continue to hold?

US 10’s(black), CLc futures(red), and S&P 500 futures(blue) – TradingView

For me at 2.62% the US 10’s don’t actually threaten the overall rally. Certainly that level suggests a pullback. But I’ve labelled the 2.55% to 2.82% region the “Goldilocks” zone.

That is, a break either side would be a very important signal for markets more broadly as it would describe an economy either a little hot or too cold.

Holding below 2.82% is a bullish sign for risk assets . But if 2.55% range low were to break that would be a bad signal for risk assets. Above 2.55% for the 10’s is kind of Goldilocksy.

But watch out if 2.55% breaks – as it is stocks need to dip a big based on this analog anyway.

And we are finally back up to date on the CFTC data

Finally, the CFTC is now up to date. Woo Hoo!!!

But what’s it mean when we look at the positioning data for the large specs I watch in the markets?Big money likes the USD is probably the key takeaway, though the history of the last few years shows there is still plenty of position limits available to get even more short if we see the big levels mentioned above break.

The short on 10’s is noteworthy as well given what I’ve written in the section above – watch 2.55% folks.

The week ahead

Don’t forget the clocks change in the US Sunday so you’ll need to adjust you timing on when the market opens and closes. For me it’s halfway to my preferred timing with the stocks markets close now 7am my time from 8am…soon it will be 6am, but not yet.

That timing difference makes the writing of the daily note and running of systems so much easier…ANYWAY.

Monday kicks off with Kiwi credit card spending data, nothing of note in Australia and we’ll be waiting for the Chinese data on New loans and M2 growth to see whether the PBOC is still manning the monetary pump. Japan has machinery orders and Germany releases industrial production and trade data – should be interesting.

So too will US retail sales data for January after Friday’s non-farms. Business Inventories are also out.

AND DON”T FORGET – Fed Chair Jerome Powell will be on US 60 minutes during Asia trade Monday.

Tuesday sees the latest round of home loan and investment lending data in Australia and the ALL IMPORTANT NAB business survey. Chinese FDI is out as is UK manufacturing and trade data. In the US CPI will be worth a look but so too will the NFIB business optimism index.

Wednesday sees the Westpac Consumer Sentiment data in Australia which with the previous day’s NAB survey will give a good read on whether the hand wringers or the RBA is right. I’m with the hand wringers.

the Kiwis have theor food price index out, Japanese machinery orders will be released, EU industrial production and then US PPI is out. US Durable goods will also be released and will be an important gauge on where the economy sat as we entered 2019. Construction spending is out as is the EIA crude data. The UK budget will be released as well.

Thursday’s data is dominated by the triple treat in China with the release of retail sales, industrial production, and investment data for February. It’s a big release, especially for risk assets and the Aussie dollar.

German and French CPI is out also Thursday along with the jobless claims and import and export price releases in the US. Canada has new housing prices.   while the US has new home sales.

Rounding out the week Friday sees the release of the latest decision and thoughts from the BoJ on interest rates. Board members and governor Kuroda have been battling in public lately, so it’s mostly but not exclusively a non-event. EU CPI is out later in the session and then we get US industrial production and capacity utilisation for Feb along with January Jolts and Michigan consumer confidence.

A big week, not as huge as the last, but plenty to chew on just the same. Enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

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Greg MckennaStocks swoon, bonds rally, and the trade war gets sticky – McKenna Macro Markets Weekly

The trade war could end this week, or really kick off – McKenna Macro Markets Weekly

on March 2, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Bonds up, stocks holding near 2,800, and the US dollar recovering from weakness. You’d swear that we were reflating and the economic outlook – especially for the US – was again rosy.

It’s not though and president Trump has just thrown a hand grenade to China’s President Xi on trade – will he pull the pin?

Let’s dive in.

The week that was

Key Themes driving markets

Donald Trump has just brought the decision point on the trade war to NOW!!!

Petrol or water?

That’s the question which sprang to mind when I saw US President Trump’s tweet that things were going so well with China and the trade talks he’s asked them to drop all tariffs on agriculture.

Source: Twitter

Quite frankly I have no idea how this will play out.

But having wasted time in Hanoi with North Korea’s Chairman Kim last week President Trump seems keen to see if China is really keen to deal. This strikes me as a test of reciprocity after the U.S. Trade Representative issued a notice on the delay of China tariff increase during the last few days.

Depending on what China says and does – especially given that the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC) are meeting this week  and that Canada has just agreed to allow the extradition of Huawei CFO to proceed  – it is going to be a huge week for risk assets.

What do you think, go or no go on China for tariff relief??? Will they pass President Trump’s test of good faith? Or not?

Pretty much whatever the Chinese say and do renders all other analysis moot…but lets crack on regardless. 

Global Manufacturing is still slowing…

That the global growth profile is slowing is no big surprise. That it appears to have slowed so fast over the past 6 months, especially in Europe seems to have caught many, including the ECB flat footed.

I recall writing last year – when the German slow down was blamed on the auto industry alone with calls it and the European slowdown were transient – that I didn’t think as going to be the case.

So here we are in early 2019 with the latest read on the JP Morgan IHS Markit Global Manufacturing PMI dipping to a 32 month low.

Source: IHS Markit

Sure “PMI readings signalled expansion in 18 out of the 29 nations for which February data were available’. But, “the rate of expansion in new  orders stayed close to the stagnation mark”, IHS Markit said in a pres release Friday.

It could have been worse, we could have seen a materially further slowing in manufacturing PMI but instead we saw, “rates of expansion in global manufacturing output and orders held broadly steady in February” according to David Hensley, Director of Global Economic Coordination at J.P.Morgan.

But he also highlighted “the outlook remains lacklustre, as stagnant new order growth, declining international trade volumes and weak business confidence rein in the prospects of output growth staging a meaningful revival in the coming months”.

We’ll see where services are this week…but the best we can hope for global seems stabilisation at the moment. Will that be good enough for stocks?

Stocks at a critical juncture

During the week I posted the chart of the S&P 500 showing that this 2,790-2,820/30 region has been important resistance and support on at least 9 previous occasions since the start of 2018.

S&P 500 Daily – TradingView

It’s clearly a key area of inflection for the bulls and the bears and the sentiment around them.  That we are here as the President encourages the Chinese to put up or do the other thing is all the more tantalising.

Above this zone the next resistance is around 2,875/80 and above that it’s fresh record highs. Support is around 2,770 (15ema) and then 2,750 (200 sma) and 2,730 (30ema).

This could be a very interesting open Monday.

Oh, and can I leave this hear as a place holder….economics data surprise and stocks. hard to be a bull unless you think the data is going to bounce back – STRONGLY

 

US dollar – regains its footing, what’s next

So, the bears tried to belt the US dollar last week and did manage to get the DXY below 96.00 and the Euro back above 1.14.  And even though the moves – in percentage terms – aren’t that big it was pretty solid USD fightback.

USD Index (DXY) Daily – TradingView

Realistically we have a 93.70 to 97.70/90 range with and inside range of 95.00-97.70. But that the USD fought back reasonably well as the data disappointed was testament to some form of underlying demand.

That was especially the case given the recent collapse in the Citibank Economic Surprise Index for the US.

Not even the cleanest shirt in the laundry anymore – the US CESI score has fallen from +27 4 weeks ago to -43.4 as at Friday March 1.

Looking at the Euro chart it’s a similar story insofar as EURUSD is simply in the middle of its own range as well.

EURUSD Daily

The issue for Europe is that the ECB meeting this week raises the possibility of a dovish tilt from  Europe’s central bank unless the ECB is somehow going to try to justify why it shouldn’t react given it’s own moribund data flow.

So the outlook might actually be for a little more USD strength.

Longer term Euro needs to break up and through 1.1450 and then 1.1570 to change the outlook. Support is at 1.1200/15 and is key. Below that we are talking about low 1.11’s and then below 1.10.

I’m bullish the USD medium term – but it’s in a range at the moment.

Bond rates rising? What’s up with that…

Given all of the above this is the most remarkable move in developed markets over the past week I reckon.

Earlier this week I was writing at the trend line test and 2.63% that if the 10’s traded down and through that level we’d be looking at retest of the recent low of 2.55%. Inexplicably though over the following 3 days the 10’s rose 12 or so points to finish the week at 2.75%.

US 10 Year Treasury Rate Daily – TradingView

But it wasn’t just US 10 year rates, German rates moved higher, Gilts too.

US and German 10 year bond rates

Exactly what gives I don’t know. If it was just the US I’d say some auction results and the lack of offshore participation during the week might have been a coal mine canary event. But the fact that it is a broader move leaves me scratching my head – to be frank.

But I do know that we need to keep an eye on where these bonds head. 2.55% to 2.82% is still the Goldilocks zone in my view for US 10 year Treasuries. 2.77% is the next big test within this range as you can see on the trend line on the 10’s chart above. rates shouldn’t trade through that and certainly not 2.82% at present.

If they do though we need to take notice it will impact other markets.

Gold has failed again at crucial resistance

Bonds up – in rate – gold down. You’d swear we were reflating. But that’s not the case if you look at the data flow. Indeed the USD isn’t even strong enough to justify the move in gold.

Of course it doesn’t need to be when blind Freddy can see gold has just failed again near the long term resistance level of $1,351 and has now rolled over in MACD and turned terms on the dailies.

Gold (XAUUSD) Daily

It’s worth watching though because it too could send a signal about broader markets. Though I see interest rate rises and gold selling as incompatible. Without the Trump tweet I’d normally say buy bonds in this regard.

We’ll see  – it might be a nice pairs trade though

The week ahead

The first week of the month is always huge and this week won’t disappoint with non-farm payrolls in the US Friday and the much anticipated response to President Trump’s Friday night Tweet.

Anyway, Monday kicks off with monthly inflation in Australia along with ANZ job ads, building approvals, and HIA new home sales. That’s a nice little microcosm of the Australian economy right there – watch out Aussie traders.  We also get a couple more partials for Wednesday’s GDP relaes with Business inventories and company profits. EU producer prices, and Sentix investor confidence are out in Europe and in the US we get ISM New York and construction spending for December.

Tuesday kicks off with Services/non-manufacturing PMI is Australia and thus across the globe. That means we’ll also get the composite numbers to see just where our economic future lies in the months ahead. Naturally as the first Tuesday of the month we also get the RBA’s decision on monetary policy and governor’s statement. Australia also has the current account to feed into GDP. Retail sales are out in the EU, Redbook in the US along with ISM non-manufacturing, new home sales, and IBD/TIPP economic optimism.

Wednesday will be interesting in the antipodes. We get a speech from RBA governor Lowe at 9.10 am and then at 11.30 we get Australia’s GDP result for the fourth quarter of 2018. Surely the ABS could have released this Monday – BEFORE THE RBA MEETING. But no, it’s been like this for years…ugh, ugh, ugh. In the US its ADP employment, mortgage applications, trade, factory orders and a speech by NY Fed president Williams. .

Canada too has a central bank meeting this week and we’ll get the results Wednesday (Thursday morning in Australia) along with it’s trade data. Also out are the Fed beige Book.

Thursday sees the release of Australia’s construction PMI – can it get any worse? We also get retail sales for January and the trade balance for the first month of the year as well. China’s reserves data is out Thursday as are UK house prices, Italian retail sales, EU Q4 GDP and employment.

Of course the ECB has a meeting and press conference as well – DOVISH tilt folks.  Challenger job ads are out in the US along with non-farm productivity, unit labour costs, and jobless claims. Speeches from the Fed’s Brainard and BoC’s Patterson will be interesting.

Friday kicks off with Kiwi manufacturing sales, Japanese Q4 GDP and January trade. China trade is out as well and will be a big number even though there are likely to be LNY distortions in the Feb data.  Factory orders and industrial production is out in a number of EU countries including Germany and the UK.

And of course then we get US non-farm payrolls for February and all the associated data on unemployment, participation, and earnings. At present the market is looking for 185,000 and 3.9%. Canadian unemployment is also out  and by the end of next week I think we might be caught up on CFTC data.

It’s a big week, NO IT”S HUUGE, enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

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Greg MckennaThe trade war could end this week, or really kick off – McKenna Macro Markets Weekly

A trade deal close, what’s it mean + some Buffettisms – McKenna Macro Markets Weekly

on February 24, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber last week:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

How many times can the market react to the same headlines?

More than you’d think is the clear takeaway from the current rally in stocks, buoyed prices in oil, and renewed strength in the Yuan.

But the news is we are closer than we’ve been since the start of the trade war to a deal. Conversations are ongoing as I write and expectations are high that something will be inked by President’s Trump and Xi next month.

We’ll see. But as ebullient as folks are for a trade deal global growth continues to falter and central banks are increasingly cautious and dovish. A dichotomy to be resolved in the months ahead.

Let’s dive in.

Key Themes driving markets

As the trade war seems to reach conclusion is it priced

It has been clear for some time now that both President’s Trump and Xi were over their trade war and wanted it behind them. All that was necessary was their respective negotiating teams needed to work out a deal where they could both claim victory.

US VP Mike Pence’s speech in Munich made it clear the hegemonic battle between the established and rising super-power was off to one side from the trade war. But he still seemed to outline a high hurdle for success given the structural issues around industry support and non-tariff initiatives  China uses, which still  distort trade.

But as the week ended news broke and it became clear in the Oval Office that President Trump wanted a deal.

USDCNH Daily

USDCNH thus, reversed the bounce off the 38.2% retracement level at 6.69 to close back on its lows and close to a break which could see it run to 6.60, perhaps lower into the 6.50’s if the Yuan and stability are really part of this deal.

Likewise the S&P 500 improved 13/14 points in the last 2 hours of trade after earlier in the day backing away – again – from the mid 2,790 region.

That’s a continuation of what we have seen every time there has been a positive news headline over the past month or so. That this continues to happen while flow data (see below) suggests real money is not invested tells you this is a market where the marginal player is setting the price.

I’ll get to that below, but first here’s an exchange between President Trump and his chief negotiator Robert Lighthizer which gives colour to the deal being done.

Via Reuters:

“I don’t like MOUs because they don’t mean anything. To me they don’t mean anything. I think you’re better off just going into a document. I was never … a fan of an MOU,” Trump said from his perch behind his desk.

“An MOU is a contract. It’s the way trade agreements are generally used … A Memorandum of Understanding is a binding agreement between two people,” Lighthizer said. “It’s a legal term, it’s a contract,” he said.

“I think that a Memorandum of Understanding is not a contract to the extent that we want. … We’re doing a Memorandum of Understanding that will be put into a final contract, I assume. But to me the final contract is really the thing, Bob, and I think you mean that too.”

Lighthizer, clearly not making traction in the back-and-forth with his boss, decided to go for a change in terminology.

“From now on we’re not using the word Memorandum of Understanding anymore. We’re going to use the term trade agreement, all right?” he said.

“OK,” the Chinese vice premier, sitting next to Lighthizer, responded.

“Assuming you decide on an agreement … it’ll be a trade agreement between the United States and China,” Lighthizer told the president.

“Good,” Trump said. “I like that much better.”

Clearly the President has been dudded by an MOU in his business past – but equally clear the two parties do indeed seem very close to some sort of deal.

The US gain has to be everyone else’s loss…

And part of that deal CNBC suggested is that the Chinese will buy $1.2 trillion of US goods.

That would go some way to alleviate the US trade deficit over time with China which is what the US president wants. But it is worth noting that the Chinese promised this last December, when the trade truce was agreed and the 90 days granted.

At the time US Treasury Secretary Mnuchin said, “they put on the table an offer of over $1.2 trillion in additional commitments. But the details of that still need to be negotiated…This is the first time that we have a commitment from them that this will be a real agreement”.

What’s important here – for a global economy struggling for growth and seemingly slipping back into the mire, is that US gains in sales of exports have to come from another country in the absence of massive China stimulus to increase its economy by this amount.

That’s something that doesn’t appear forthcoming with both President Xi and Premier Li saying in the past 5 days that won’t happen.

So in the zero sum game of global trade the US win will be some other nation’s loss. Australian LNG for US gas (as the export terminals come on stream), maybe Australian coal too. US soy beans fro Brazilian ones, and so on and so forth.

When we get the details of the deal we’ll know who’ll win and who’ll lose. We’ll then be able to know what impact – if any and if material – that will have on growth across the nations impacted. And then we’ll judge how currency and other markets react.

As I wrote during the week. The only thing that really matters for stock indexes in aggregate is that the 10% tariffs don’t become become 25%. But for other assets – and individual stocks – it’s more nuanced and the details of the deal will impact.

Money is still being pulled out of stocks because investors see weakness ahead, its companies buying stocks

OECD Leading Indicators of growth

RBA governor Phil Lowe in his statement to the Australian parliament last Friday made the point that the global economy had slowed. But that it was only slowing back to average it wasn’t collapsing.

but as I always right (HT Paul Colgan at Business Insider who helped me articulate this view better) is that people feel changes not levels. And as the chart above shows there are some decent levels changes in the OECD leading indicators. Likewise the Citibank Economic surprise indexes across the globe have been weak for some time as the data continues to undershoot.

That said, there was some improvement in a few data points – Europe – last week.

For the moment though, the shift in the data flow, the renewed dovishness of central banks across the globe has not only kept investors on the sidelines (BAML survey) but is still seeing money exit stocks.

Zerohedge reports”

“…according to the latest weekly EPFR data, the conundrum refuses to go away for yet another week, because despite the latest breakout in stocks, which are just a few points away from the “massive resistance” level that is 2,800 but their Sept 20 all time highs, the selling continues unabated, with global equity funds sees another $12.7 billion in outflows ($1.1bn ETF outflows, $11.6bn mutual fund outflows).

Even more surprising is that the equity revulsion turned broader, as this was the first week of EM debt ($39MM) and equity ($0.5BN) outflows since October 2018, while inflows into IG and HY debt continued, while the now historic redemptions continued from European equity, while financials, tech & energy funds all saw a drop.”

The bet is clear there…traders are wary about growth but seemingly believe low rates and zirp will keep zombie companies alive for a while longer yet.

So what gives in stocks then? Yes we know the momentum players, CTA’s and the like are long this market, or have at least covered their shorts as at the latest CFTC data – Feb 5.

But it seems the big buyer of stocks is companies as management gooses prices higher. Again via Zerohedge (their bolding):

“Bank of America showed earlier this week, corporate buybacks last week not only offset the selling by all of the bank’s other clients, leading clients to remain aggregate buyers of single stocks overall. … but on a year-to-date basis, buybacks are already tracking far above last year’s records, and are in fact a whopping +91% higher compared to the same period in 2018, and as BofA notes, Buybacks by corporate clients picked up to their fourth-largest weekly level in the bank’s data history (since 2009), suggesting another record year.”

Which brings me to this…

Source:Twitter

Now, I’m not one of those who rage against the markets recovery even though I detest buybacks as a mechanism to return money to shareholders. Rather, the reality is if you were an unbiased momentum follower using a system like MACD system you’d be long of this market.

And in a world where there is a disconnect between fundamentals and prices what should you do? Follow the price, it’s what techical analysis is all about. The rest of this is just an interesting narrative to try to explain whats going on.

Anyway, here’s the S&P 500 (cash based CFD) – it’s getting close to the ceiling It seems. The signal to sell could come soon on the dailies. 2,745/50 is the key.

S&P 500 (cash based CFD) daily

US dollar – what’s next and then what’s next

The USD is in a big old range. It has been tooing and froing within this range for months now as the economic data in Europe is offset by the dovish tilt of the Fed, which is offset by the redovishing of the ECB which is then offset by the deterioration in US growth.

USD Index (DXY) Weekly

I’m focusing on the DXY and the Euro here as the bellwethers for the Greenback. So we’ve had 95.00-97.70/90 as the range for the best part of 5 months and before that 95.00ish was an important ceiling in price. The analogy with Euro is around 1.1200/15 – 1.1550/1.1600.

EURUSD Daily

If, as I’ve suggested above we forget about all the machinations of trade deals and economics and central banks and so on that’s pretty much all we need to know.

When we break that range, that will be the big signal. naturally the question is which side of the range that break that will be.

For me, I’m a dollar bull and see the break coming eventually to the topside for the Greenback and bottom side for the Euro and others. But at the moment as markets react to the trade deal story, the Yuan strength and associated expectations and asset flows things could get fraught.

That said, once the instant reactions of the USD selling because everyone else should benefit from president Trump taking his foot off their economic throat subsides. The reality that the US will be effectively dragging growth from other nations with this deal will buoy the Greenback.

And then of course we have a moribund EU economy, fracturing political structures, a renewed dovishness at the ECB (and other central banks) and then the elections in May.

A little bit of wisdom from Warren Buffett

Warren Buffett’s annual letter to Berkshire Hathaway shareholders is out and it comes with the usual dose of practical wisdom. Now I know after the big sell down in Kraft Heinz on Friday in the US there is plenty of brickbats from many quarters for the Sage of Omaha.

Berkshire Hathaway A shares versus S&P 500 Index (analog)

But the reality is he’s done what many haven’t and he’s done it in a structure – company like Berkshire – where he’s kept doing it and hasn’t walked away when things have gotten tough and there was a substantial underperformance – like many hedge funders do.

So Buffett gets props for that. As he should.

Anyway to the letter, and given the above comments on buybacks it’s worth noting Buffett said Berkshire, “it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value”.

Is that a test other companies buying back their shares make?

He went on (my bolding):

“assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay…For continuing shareholders, the advantage is obvious: If the market prices a departing partner’s interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company. Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is value destructive, a fact lost on many promotional or ever-optimistic CEOs“.

Indeed. For the moment though, buybacks are buybacks and they have driven stocks higher while real money investors have pulled money out. If companies see the same sort of value that Buffett suggests drives his and Charlie Munger’s approach then the US economy is in much better shape than we all think.

If not, then a reckoning will come. We need to be alert to that. But the disconnect can’t last forevers. Even if the money on the sidelines eventually gets sucked in the data will need to be their to justify stocks which are – in the US at least – not far now from record highs.

Kinda feels like USDCNY at 6.95, 96, 97…it never did crack 7.00, did it.

The week ahead

There is a lot on the Calendar this week but it’s mostly at the back end.

The Kiwi’s have retail sales on Monday. japan has its leading an coincident indexes, the Chicago fed national activity, wholesale inventories and Dallas Fed index are also out.

Tuesday is pretty much Gfk confidence in Germany, inflation hearings in the UK, a speech from Mrs May, US housing data (starts, prices, etc) along with the Richmond Fed manufacturing index.

Wednesday’s highlight will be Jerome Powell’s testimony on Capitol Hill. We had something above 5 speakers Friday and they all kept to script so no expectations of any earth shattering news from the Fed Chair. We also hear from the ECB’s Mensch.

Kiwi trade is out Wednesday as is the first of the partials for Australia’s Q4 GDP with construction work done. EU money supply, consumer and business confidence and conditions are out as well as a speech from ECB’s Benoit Coeure. The US releases Durable goods for Jan as well as the trade balance, factory orders, and home sale – big numbers folks. The Canadian release their inflation data and Powell gives his follow up speech on Capitol Hill (different committees).

Thursday is Japanese industrial production, retail trade and foreign investment, private sector credit, HIA home sales and the next partial for GDP in CapEx is out in Australia. China releases its official manufacturing and services PMI’s. CPI and growth data is out in France, CPI in Germany, Italy and Spain.

We hear again from Chair Powell while his deputy Rich Clarida is also on the hustings as is Raphael Bostic. More importantly the latest update for Q4 GDP is out along with personal consumption. Chicago PMI is out while Canada releases industrial production and the current account.

Friday kicks off a new month and that means its manufacturing PMI day in Australia, the region, and the globe. Big numbers folks – markets and sentiment movers. German import prices and employment data is out  as is EU unemployment and CPI data. In the US it’s personal income, consumption and spending but it doesn’t look like non-farms are out Friday.

Canada has Q4 GDP out.

It’s a big week, enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..[/vc_column_text]

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaA trade deal close, what’s it mean + some Buffettisms – McKenna Macro Markets Weekly

Stocks still powering, USD rally stalls, Xi plays Trump – McKenna Macro Markets Weekly

on February 16, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan will be  sent to subscribers Sunday.

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber this week:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Trade, Fed making the right noises, weak data supporting the need for a deal and reinforcing the Fed and other central banks are out of play for a very long time. Stocks just going up, oil joining in, and forex traders trying to find the signal from the noise.

That’s the story of the week that was and it’s likely to be the story of the week ahead as China puts the acid on President Trump and his negotiators by turning up in Washington, as we get more data – especially from Germany – and we see the Fed minutes from the last meeting.

Let’s dive in.

Key Themes driving markets

China is playing the US beautifully during trade negotiations

If the art of the deal is to give your opposition enough rope to hang you then president trump is artful.

I know that sounds rude, and I mean no disrespect to the office of the president. But in saying this week that he was open to shifting the deadline to increase the tariffs on Chinese goods from an economy slowing 10% to an economy crashing 25% if a deal was close he gave the Chinese control of the narrative.

That’s because knowing that the US Administration cares as much about the level of the S&P 500 as it does about the workers whose jobs have been offshored all the Chinese had to do was wax lyrical about progress and they snooker Trump.

What happens when markets get excited about free money forever…(Zerohedge)

They are able to do that because there is no way US negotiators are going to say anything other than “there is still lots of work to do”. They will not disavow that progress has been made whatever the void between the two parties because they don’t want stocks to notice the earnings revisions, or the collapsing data flow.

Indeed as the FT said Friday, “The impasse has raised pressure on Mr Trump to delay a scheduled increase in tariffs on March 2 to facilitate a possible make-or-break summit meeting with Mr Xi”.

Beijing, under pressure, has managed to turn the focus back on President Trump. They wouldn’t have watched the Border Wall and Government Shutdown battle at all would they?

So when president Xi says, “China and the US are inseparable…They both do well or they both get hurt. Co-operation is the best choice”. We all know is has hand at the moment.

Let’s see how things play out. But for much of the past couple of week’s the market’s catalysts for strength have continued to be the same story – resolution of the trade war. All the while the global economic back drop has been deteriorating – at pace.

Global data is still slipping

I strongly believe one of the underlying drivers of this market rally is the cumulative effect of all the headline drops on the US and China trade deal and the clear attempt by both sides of this trade spat to manipulate the news cycle in a positive manner.

Others, like the Bloomberg’s excellent Joe Weisenthal (a former colleague when I first started writing for Business Insider) – think it is just about the Fed.

Source: Twitter

I agree the Fed is a big part of it – stocks have gone up on the backflip and then the Fed has added to the narrative in the past 8 days by both saying that QEInfiinty is being studied as a permanent tool (Daly) and that the Fed will soon communicate the end of QT, it’s balance sheet reduction plans (Mester and Brainard).

So that is a big part of it – and rates are pricing no move by the Fed with a small chance of a rate cut.

That may change however  to a great probability as the offshore weakness washes up on the shores of the US economy. Indeed as the table above shows you can see the collapse of US data flow in the past week (+17.1 to -23.6).

The slowdown globally is also in evidence in the persistence of weak European over the past 12 weeks and the global data flow. Indeed things are getting so bad that just a few months after ending QE ECB members are talking about support for the economy again.

In Friday Benoit Coeure said Friday, “There might be scope for another TLTRO” where the ECB injects cash in European banks.

The futures so bright, central banks are thinking about easing you gotta wear shades.

We seem to be back to a QE stock market – when will non-participants get sucked in

And that’s the key isn’t it. Stocks are up regardless of the deteriorating backdrop of earnings and global data because traders are betting that’s CB’s can do it again.

Don’t underestimate though – again – that this is a headline algo, momentum driven rally which has no really sellers because the collapse cleaned them out.

If it’s QEnfinty then those sellers will be absent.

But if this is something that real money investors see as ridiculous given the economic backdrop there is no reason they can’t sell a little more of their allocation to stocks and move into cash. It might be a fantastic alpha generator to sell near/above 2,800 in S&P 500 terms over the medium term

Collapse in US CESI score a warning for stocks

But the stock market is rallying and though not bullish medium term frankly I can’t see any point fighting it until we get a signal to sell. I tried it this week and got stopped.

Donating money to the bulls is never fun. Trying to outsmart my system is just plain dumb –  even those of us who have been doing this for ages can be stupid too :S.

S&P 500 Daily (TradingView)

Basically while the trendline and 15 ema holds – 2,710/20 early next week – the uptrend is intact. resistance is 2,808/2,823.

Let’s see how things look when/if it gets there. t might be a good place to sell. As long as I get a signal that is.

Just quickly bonds just don’t believe stocks – they’re watching the data 

Oil has decided stocks are right and is going with them. But bond traders are not convinced. Certainly the 10’s are still in the Goldilocks zone of 2.55% to 2.82% (reflecting neither too much weakness in the economy or the Fed is back because of too much strength) which doesn’t handbrake the stocks rally.

But the non-participation is telling.

Source: TradingView

So, about that US dollar break out

The US dollar broke out this week but because of the data deterioration it has not held the highs.

That Thursday’s retail sales was a surprise (worst result since 2009 with a fall of 1.2% in December) is no under statement. Then Friday industrial production fell 0.6% in January against expectations of a 0.1% fall.

Most forecasters didn’t get anywhere near the prints for these data points. Hence the big collapse in the CESI score for the US and the drop in the Atlanta and New York Estimates of GDP growth for Q4 to 1.5% and 2.23% respectively. In the case of the New York Fed of Q1 2019 GDP was downgraded to just 1.08%.

Anyway, the saving grace for the US right now is that Europe – and so many other parts of the globe are in economic strife.

So the USD broke out but couldn’t hold the highs. Overall it’s 93.70/97.90 but short term it needs to hold 96.660/65 not to slip back toward the middle or lower parts of the range.

USD Index (DXY) Daily – TradiingView

The corollary of course is the Euro selling, and then bounce Friday. What you see is an overall slip during the week to the very bottom of the range.  But it reamins under pressure unless it can climb above resistance at 1.1340/70.

EURUSD – Just a big old range really…

Likewise USDJPY broke above 110.15 but couldn’t hold its highs. USDCAD can’t best overhead resistance in the 1.3325/50 (70) region. Neither could USDCNH/Y best the 6.8250 region I see as crucial to the breakout of the Greenback.

So you’d say it was a good, but not great week for the USD. The level identified above have  to hold for it or a big dip may eventuate once more.

The week ahead

There is a lot on the Calendar this week.

The US is out for President’s day Monday – so watch out for flash crashes as liquidity will be thing through big chunks of the day. It doesn’t have to be a fat finger to form a flash crash it might just be a human or algo noticing the market is thin and able to be pushed around.

Also in the US this week we get the release of the minutes to the last FOMC on Wednesday (6 am Thursday my time) – that’s going to be a big event given the import of the Fed in the stocks and forex debate right now.

We also get the Redbook retail sales which might be a bit more important than usual after the December collapse in sales, mortgage applications are out too, as are jobless claims, the Philly Fed index, and Durable goods, existing home sales, and the guess at Markit PMI’s.

That Markit PMI guesstimate day – talk about milking the release for the most publicity for the firm –  on Thursday will include a number of preliminary February numbers for European and other nations.

Also in Europe this week is Germany’s ZEW survey and the associated European version. Germany also releases its PPI and CPI, and Ifo business expectations, climate and current conditions.

In Australia it’s a huge week with the Wage Price index Wednesday and the employment data Thursday. RBA will be in the frame – or at least traders will be talking about it – which ever way this data flows.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..[/vc_column_text]

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaStocks still powering, USD rally stalls, Xi plays Trump – McKenna Macro Markets Weekly

Stalling risk momentum makes for an interesting market setup – McKenna Macro Markets Weekly

on February 10, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

AND – you’ll see that my daily now has my positions, prospective and actual in it.

Key Takeaway

Stocks stalled, indeed the S&P 500 only got back into the black for the week in the last 5 minutes of trade for the week.  That’s a warning.

The USD was better bid across the board but just couldn’t break out – Yet! And of course the very thing that is stalling stocks, causing bond rates to fall, and adding to the general sense of caution after a strong rally in stocks – SLOWING GLOBAL GROWTH – saw oil dip back after failing to break resistance.

So, we are in hiatus. Waiting for positive trade news in many quarters to push stocks to the next leg higher. But will it? Friday ended with what seemed to be the promise of QE to infinity – not sure though that’s what was proposed. But what it shows is there is still a lot of hope in this risk rally from the lows.

It’s not necessarily over. But there are signs in the charts that caution is as warranted now as it was in late November and early December. Or at least October.

Weekly performance Feb 1 to 8 2019

Key Themes driving markets

The US dollar had its best week in six month but hasn’t broken out

Like the donkey in Shrek I kind of feel like saying “are we there yet”. By that I mean the realisation that for all the faults that there may be in the US there are greater and in some ways more intractable political and economic threats outside the US.

You can see that in the French-Italian spat as the French President, his eyes on the upcoming EU elections in May – faces off against Italy’s populists. You can see it in the constant downgrades to the German and EU wide economic outlook – Italy is in recession for goodness sake.

Yet even though the Citibank Economic Surprise index shows the moribund state of the EU data flow and even though it shows that on balance the US data is still okay it clear in the price action trader are either still too long of Greenbacks or not yet ready to re-embrace the US dollar.

(Unfortunately the CFTC data is still catching up so we don’t know yet the actual positioning – seriously are they doing it by hand?)

USD Index – Top, Daily and Monthly; Bottom Weekly and against the USDCNH rate

So the US is on the cusp of a break but – not yet there yet. Sorry Donkey!

A move above 96.70 would open the topside toward the uber-important 97.70/98.00 region which has constrained the US for some time now. A big part of that is the heavy longs that were being carried as well as the re-calibration of Fed expectations and notions the US will soon join the rest of the world in slowing down.

It likely will. But in the relatively game of least ugly which is global foreign exchange trading the USD rally is likely to be broad and powerful sometime in the next few months.

For the moment though I’ll make you 93.70/97.70 – give or take – as the range for the moment.

Euro is still in its range but could break

Like the USD Index – of course because it is essentially a derivative of the Euro and some other currencies against the USD – the Euro is stuck in a big old range.

EURUSD Daily

With the constancy of the weakness in EU data and thus the growth outlook even the most ardent USD haters (why else would you buy Euro unless you are repatriating funds from trade) are a little more sceptical about the outlook for the single currency.

Indeed throw in the France/Italy spat and the upcoming EU Parliamentary elections at the end of May this year and you could make the case that fears will grow about the whole European experiment the closer we get to that data and weigh on the EURUSD.

But, it’s worth noting there doesn’t appear to be any groundswell – even wind chop really – for change to the single currency.

So it’s going to be data and expectations about growth and central bank policy which will be the driver of the Euro (a little Brexit too).

And of course the price action is key.

As you can see in the Euro chart above it is drifting back toward the bottom of the range inside the range – 1.1280/1.1570. A break of 1.1280 opens the low of 2018 at 1.1215 and of course there is that pesky neckline at 1.1150 now.

Euro would need to get back above 1.14 to negate the negative short term outlook.

QE to infinity rescued stocks late Friday

What traders viewed as a QE to infinity story dropped late in New York trade Friday. But I think that market might have the wrong end of the stick, or at least I hope they do.

All Federal Reserve Banks: Total Assets

Here’s a thread I put on Twitter Saturday, which I’ve edited to make it readable in this format:

Here’s the QE to infinity story. “Fed debating if balance sheet should be regular tool, Daly says”. That’s San Francisco Fed President Mary Daly.

I don’t think the way the market took it is correct.

What the news tells me is the Fed is debating whether the past 20 or so years of monetary policy by decree – the rate is “here” at 5%, 3%, 1%, 0% or now 2.25-2.50% – has failed and they want to go back to old world (when I first started in markets) when they (central banks around the world) acted in the market all the time to get rates at a level they wanted.

That means the Fed and others will buy AND SELL securities to nudge rates around…

It’s easy to characterise this as a just buy all the time because of where the economy is at (or where markets think its at). But it simply recognises (finally) QE and QT are probably symmetrical. Hallelujah!!!

That’s something anyone trading rates & bonds before the “policy by decree” era will remember.

Daly said – “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily”.

So yeah, Daly said we can use QE as a tool.

But the bigger AND BETTER debate (maybe epiphany) the Fed has had is this is old school central banking, QE is not one sided and if the market can get used to buying and selling bonds they can more effectively manage the economy. 5/5

Of course I could be wrong and maybe it is just QE to infinity in which case the world economy is utterly screwed.

There are some signs of that anyway right now…moving on.

Bonds and oil tell a different story to stocks as earnings growth slows

People who read my daily writings know that I have highlighted the divergence in narratives you can draw from the performance of stocks, bonds, and oil prices in the United states.

Via TradingView – US10’s, S&P 500, and WTI Crude Oil

Stocks noticed towards week’s end and the rally stalled. It’s not terminal because in the 2.55-2.82% zone US 10’s a re pretty Goldilocksy in what they say about the US economic outlook. But while oil and rates stop rising and momentum washes out of stocks the chance of a decent retracement grows.

Likewise the  earnings outlook has and is being downgraded with Reuters reporting, “Analysts expect first-quarter earnings for S&P 500 companies to decline 0.1 percent from a year earlier, which would be the first quarterly profit decline for the group since 2016, according to IBES data from Refinitiv…The latest forecast is down sharply from the start of the year, when analysts estimated growth of 5.3 percent for the quarter”.

Some revision!

The good news is expectations are still Panglossian positive with Reuters saying, “second-quarter S&P 500 earnings are expected to increase 3.6 percent from a year earlier, while profit growth for all of 2019 is estimated at 4.3 percent, based on Refinitiv data”.

If the rally is ending now is a good time and place for it to happen

Back to the charts then and as you can see in this weekly S&P 500 even with the later rally Friday the weekly candle and failure at the 50 day moving average could be telling. It could be a signal of a top for this run and that a pause either in time or price is in the offing.

S&P 500 futures Weekly (continuous contract) – what a candle.

My sense is that 2,676/80 (last week’s low and previous resistance) needs to break to actually change the outlook from a pause and stall in momentum to something more pernicious.

And worth noting I have sell signals on my weekly system if that level breaks, along with other stocks sells.

What’s next for the Aussie dollar as the RBA downgrades growth and puts cuts on the table

The Australian dollar is again under a lot of pressure. It found some buyers at 0.705ish Friday after the RBA on Friday – via the quarterly Statement on Monetary Policy – confirmed the more troubling outlook for the Australian economy Governor Lowe had outline Wednesday.

The chances of a rate cut have thus increased materially if house prices continue to slip hurting consumption and employment. Of course it’s not a done deal yet we might see the Aussie fall into the 60’s – 68 cents would be good, 65 cents better.

That might actually save the economy from itself.

Looking at the chart then I’d say we saw a big reversal last week after failure at the 200 day moving average. That saw the wedge bottom break but support emerge around 0.7050 at week’s end.

Chance of retest of break at 0.7135/40 (wedge bottom). But below that the downside to flash crash recovery low at 0.6993 opens up. Below that support is 0.69545/50 and 0.6850/80.

AUDUSD Daily

The week ahead

There is a lot on the Calendar this week and the focus is China both because it’s back and we want to see where its markets and the Yuan head but also because there is a raft of important data slated for the week.

leaving aside the trade talks that includes,  money supply, foreign exchange reserves, and new loans Monday, FDI Tuesday, Trade on Thursday (HUGE) and PPI and CPI Friday – also huge.

The UK has GDP, industrial and manufacturing production Monday, trade too. And of course we are all eyes on the Brexit negotiations and any chance of a deal that stops the hard-Brexit growing in probability by the day. At least till the players look over the precipice. Also in the UK this week we get retail, consumer and producer prices. retail sales close out the week.

Australia has home loan data out but we all know things are parlous there. We also get the next update of the NAB business survey – this time for January. Did things improve from the weak December results we saw recently? Probably not. We’ll see Tuesday. Westpac consumer confidence is on Wednesday so these two data points WILL influence markets this week in Australia.

In the US we hear from Powell, George, an Mester among others this week. Unit labour costs are out as is JOLTS, CPI and PPI and retail sales. That will all be a test for sentiment.

in the EU we have a Eurogroup meeting Monday, Industrial production Wednesday, and then Thursday is a big one with the release of German and EU GDP for Q4 – could it be any worse than we already know? EU trade is out Friday.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..[/vc_column_text]

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaStalling risk momentum makes for an interesting market setup – McKenna Macro Markets Weekly

Unlocked – Macro Markets Morning 7th February 2019

on February 7, 2019

Morning folks – Welcome to McKenna Macro’s Market Mornings.

SUBS you have this

G’day folks – I thought I’d send today’s not as it has a lot in it and there are some important points markets are at. 

You’ll also see there are some changes I’ve made recently where I talk more directly about what my positions are and what I’m doing. Even though this is not a signal service I thought it improves things a little. 

Anyway, enjoy and if you’d like to subscribe email me at greg@gregmckenna.com.au and I’ll reopen the launch special for the next 24 hours. 

Cheers and I hop you are all well. 

Greg

In a rush? Here’s the key takeaway

  • Stocks drifted a little as bonds rallied and oil markets stalled. That could be important. At the close the S&P 500 was down 0.2% at 2,731.
  • The USD continues to march higher and is at 96.39 in DXY with the Euro and GBP a little lower as Donald Tusk says there is a ‘special place in hell’ for the Brexiteers who tipped the UK into this mess without a plan.
  • And of course the Aussie dollars woes continued in European and US trade both against the USD and on the crosses as traders bet the chance of a rate cut is real given the housing price falls.
Let’s dive in

——————–

MARKET SUMMARY (As at 8.30amish Sydney after NY close)

You’ll see in the body of today’s note that bonds and oil seem to be telling a different story to stocks. That doesn’t mean sell per se. but it is a handbrake on the rally as we’ve seen the past couple of days.

So at the close besides the S&P 500’s 0.2% fall we saw the Dow down 0.1% to 25,390, the Nasdaq 100 was 0.4% lower at 6,997, while the Russell 200 dipped 0.15% to 1,518. Small bikkies I know and far from the end of the world. But just watch this space – as momentum slows the chance of a reversal grows.

European stocks were lower as well. The FTSE consolidated its break closing essentially unchanged at 7,173, the DAX was 0.4% lower on more weak German data with factory orders for December collapsing 1.6% against expectations of a 0.3% increase. They are now down 7.4% year on year. The CAC dipped just 0.1% in Paris.

In Australia though we found 20 points of gains yesterday and PSI traders added another 18 points overnight. We are nearing some decent overhead resistance though as you can see in the chart below.

On forex markets the Aussie and Aussie crosses were the standout after RBA governor Lowe put rate cuts on the table. So the AUDUSD is off 1.63% now at 0.7115, the AUDJPY is off 1.6% and we’ve even lost ground against the Kiwi which is at 0.6826, down 0.97% after being caught in the Aussie’s tractor beam.

Elsewhere the Pound did reasonably well given Donald Tusk vitriol – its at 1.2934 down just a smidge. Euro is down 0.44% after the data at 1.1363 and USDJPy is largely unchanged at 109.96. USDCAD is up again at 1.3206 for a 0.6% gain while the 0.3% lift in USDSGD confirms the USD breakout.

On commodity markets gold has dipped 0.66% in the wake of USD strength and is back at $1,306.20. Silver is down 1.2% at $15.65 but copper remains bid with a gain of 0.6% to 2.834 – it did reverse off the range top though. Bitcoin is falling and is near $3,300 while WTI and Brent are both a little higher and not ready yet to rollover it seems. WTI is up 0.6% to $53.98 while Brent lifted 1% to $62.63.

US 10’s are at 2.70% after a good auction Wednesday. The 2’s are at 2.53% and the curve is at 1.80 points.

On the day today we have Kiwi employment, unemployment and labour cost data around the time you’ll be getting this note. Then in Australia we have the AiGroups performance of construction index which – because of concerns about housing and Governor Lowe’s speech yesterday – will garner more interest than normal. The last print was 42.6 so it’s already in a parlous state and you’d hope not falling further.

Japan release foreign reserves data and coincident and leading index data,  its still a holiday in China, and then we get German industrial production French trade, and Italian retail trade – might be an ugly smorgasbord. Mrs may is meeting the EU and of course we have the BoE meeting which will do and say very little I would think so as not to startle the horses. Unless the BoE decides British Pollies need a damn good kick in the tail 🙂

In the US we hear from Fed vice Chair Rich Clarida, we get jobless claims and consumer credit. And Fed Chair Powell si on the docket as well.

Macro stuff that affects everyone and everything – either today or eventually

INTERNATIONAL 

On trade. Is a deal possible?

I genuinely wonder if a trade deal is possible given the necessity to break a number of China-US battles away from each other in order to get a deal. Here’s my current thinking.

There is a clear assumption that President Trump will prevail with a trade deal. Indeed yesterday Reuters reported “US’ Mnuchin, Lighthizer to hold talks next week in China: sources”. And the only answer to that is which US face is going to present in China – Mnuchin ‘want to make a deal’, or Lighthizer, ‘you folks are cheats’?

So of course I tweeted in response to the story  “No doubt they’ll hold talks between themselves – or play rock-scissors-paper – to see who wins Mnuchin conciliation or Lighthizer hard ball”.

To this end, markets have assimilated a deal – they seem to believe that President Trump wants a deal and one will be forthcoming. I have written something similar though questioning the path to which the US can detach the hegemonic and technological battle from Soybeans.

But as Bloomberg points out yesterday President Trump said in his SoTU speech that a trade deal must include structural change in China.

“I have great respect for President Xi, and we are now working on a new trade deal with China,” the President before adding “it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs”.

Hands up if you think that will happen…Beulah, Beaulah???? Indeed, that’s Lighthizer, not Mnuchin.

So I offer you this from the twitter feed of Christopher Balding, Associate Professor
HSBC School of Business, Peking University, Shenzhen. If you don’t follow him you must – here’s the link. 

Source: Twitter

And when you see stories like this where the Alcoa CEO says the Aluminium market is being hurt by the “sucking sound” of production being dragged toward China because of state subsidies you have to wonder if a deal can get done.

Roy Harvey told Bloomberg, “that playing field simply isn’t level. And that in turn means that you’re getting this sucking sound of productive capacity, and now semi-fabricated products, into China. You’re pulling more and more of that primary demand back into China, and it’s only a gain for the Chinese”.

I can imagine the White House PA system “Messrs Lighthizer and Navarro to the Oval Office please, Mr Mnuchin can wait outside”. 🙂

Politically it might actually be better for the President to prosecute this argument a little longer. Particularly as the Democrats move further to the left. That’s something Fox Business’ Charlie Gasparino said Wall Street Democrats aren’t and can’t support.

Brexiteers – where is your place in hell.

We have Irish Republicans telling Mrs May that a no-deal Brexit means a referendum on Union between the North and the South, we have the DUP still saying it won’t stand for the Irish backstop, we have the Irish Prime Minister saying we’ll never need it but because Westminster is so dysfunctional we still need to have it in writing AND then we have EU President Donald Tusk going straight for the jugular.

He said once again the agreement is not up for negotiation but added, “I’ve been wondering what that special place in hell looks like, for those who promoted Brexit, without even a sketch of a plan how to carry it out safely”.

Yep. Too bad he wasn’t this aggressive a while back – British Pollies may have woken up to reality and sorted themselves out.,

Now, for Mrs May to pull a rabbit out of the hat with her meeting at the EU Thursday.

Oh, if you are interested in seeing Tusk say the words, click on the caption.

Are bonds and oil sending stocks a message?

I’ll just leave this chart here as a reference.

But I do wonder if the stocks recovery can continue while oil price rises stall and bond rates fall. Now of course I still think the 2.55/2.82% zone for the 10’s is the Goldilocks zone where rates will not cruel the rally. And it is equally true that when a crisis/market funk passes assets that were correlating to 1 diverge again. That’s actually healthy.

US 10’s, S&P 500, and WTI oil Daily

But when you look at the chart above you have to wonder. Something for us to keep our eye on.

S&P 500 chart.

With regard to the above if there is a place for a bit of a pullback for stocks maybe today’s candle on the S&P 500 futures and physical is an indication. Indeed these types of candles have been inidcative in the physical market of a dip a number of times since the high. We get less of them in the futures market because it is open almost all hours.

S&P 500 (futures based CFD) daily

So for me, the 200 day moving average might be it. Especially given we are back retesting the underside of the very long term trend at the moment. It is important to note that for my MACD system I do not have a signal.

On the RBA.

Here’s what I told Platinum subs yesterday afternoon:

What’s faster than a speeding bullet or a Powell Put turnaround?

The back flip that RBA governor seemed to do today in softening the market’s understanding of what the RBA REALLY meant yesterday with his statement after the Board meeting and decision to hold rates at 1.5%.

Although it was a back flip at all really was it. It was a clarification in the same manner that NY Fed President John William’s clarified Powell’s comments after the December 2018 FOMC press conference.

Indeed in this morning’s (yesterday’s now) newsletter I said I thought that Governor Lowe would be “positive, but also more dovish than folks reckon after yesterday’s reaction to the statement”.

And that’s what we got, glass half full, but with equal waits of optimism and caution. And that is dovish if you think housing is going to weigh on the Australian economy.

So they aren’t going to cut in a hurry or unless necessary. Watch unemployment. This is a data dependent central bank – like the others.

And on where we are right now in the continuum of rate hike cut – this:

Source: Twitter

Just quickly:

FOREX 

The USD is breaking higher.

We are not there yet but 96.65/70 is looming as a very important delineation point for the USD rally. That’s because it is both the 61.8% (96.68) retracement level of the most recent rally as well as the recent high  before the recent reversal back toward 95.00.

That 95 held is clearly a good sign for the Greenback in these terms and it is of course analogous to the Euro faltering above the 1.15 level again and Sterling running out of puff back above 1.32. Of course the DXY is a derivative (or at least a calculation) of these moves so that makes sense.

A break of 96.70 would be bullish for a 1 big figure run toward the recent range top and that would have implications for the other currencies against the USD – that’s market reflexivity for you.

US Dollar Index (DXY) Daily

The corollary of the DXY move is the Euro is dipping lower again as well. It’s now below the cluster of support from the 3 moving averages and the SAR has flipped to a short. 1.1355 looks like an important short term level to me – below there we are headed back to the recent lows around 1.1280/1.1300.

EURUSD Daily

GBPUSD must hold 1.2916 to avoid another 1 cent fall.

This chart speaks for itself – at the 38.2% retracement level the easy money has been made. I’ve dragged my stop down but am still giving this room to break because the MACD system and Wednesday’s candle suggests it will.

GBPUSD Daily

Elsewhere USDCAD and USDSGD are higher which I’ll take as confirmation of the US dollar move because China and Chinese flows are largely absent at the moment. Continue to watch these three though as the lead indicators for the Greenback. With CAD and SGD on the back foot a little USDCNH above 6.7850 would further aid the Greenback.

COMMODITIES-Oil, Gold, and Copper  

Oil

Oil is looking a bit like USDSGD did for an extended period where it hung and hung before dipping back toward the 38.2% retracement level of the most recent move. It’s up today  after 2 down days and still firmly in the range between $50.40 and $55.45/50ish. The 15 ema continues to be supportive, and unless that breaks there is little point getting too bearish. But even with an up day, the price action, the MACD, and the  stochastics suggest oil is going lower.  $52.30/50 which holds the SAR and 30 ema is also supportive.

WTI Daily

Fundamentally the EIA stockpile data had a bit for everyone in it – a build in Cushing to take inventories to the highest level in a year might be seen as brearish for oil. But the distillate numbers and the lower than expected build in the headline crude inventory of 1.26 million barrels instead of the 2.179 million expected helped prices recover from the days low.

There’s also a lot of chat about the OPEC Russia tie up being formalised but as I noted yesterday and last year the Russians have said not to this. So we’ll see. Brent i sin a similar technical position to WTI, back above the 15 ema with it and the 30 ema providing support. Below $60.85 looks like the bull/bear delineation point within the range.

Gold, silver, copper…

Gold looks to be rolling back toward support at the breakout level of $1,298/1,300 after Tuesday’s inside day gave way to selling Wednesday. If $1,298 gives way then we’ll be looking at a much deeper fall  maybe even back to $1,280.

Gold (XAUSUD) Daily

Copper reversed away from the channel top Wednesday posting a high around $2.845/7.  As I noted yesterday this range top is going to be formidable resistance here above $2.80 a pound. So I’ll respect it unless or until it breaks. Looking to sell soon.

Copper (HGc terms) Daily

AUSTRALIA 

Policy and economic outlooks matter

The Aussie looks set to head back under 70 cents after RBA governor Lowe clarified what the changes to the statement ACTUALLY implied. As I Tweeted during the speech, “This is classic #RBA pragmatism from Lowe Changing tack, set the scene to act if their outlook is wrong As Lowe says, “The question is: what effect will this [house price falls] change have on household spending?” Indeed – I think it will hurt “.

And that’s the point. In the same way as the Fed flipping dovish gave traders an opportunity to exercise their bearishness on the US economy – so far unrequited love – so too did governor Lowe in signalling changed thinking at the RBA free the bears up to push the Aussie lower – across the board.

A 1.73% loss against the USD with moves from -0.8% against the Kiwi through to -1.7% against the the Yen  the Aussie is under pressure. Which is exactly what the RBA govenor had in mind when he said (my bolding), “we cannot insulate ourselves completely from the global risks, but keeping our house in order can go a long way to assist. Our floating exchange rate and the flexibility we have on both monetary and fiscal policies provide us with a degree of insulation”.

That’s left the Aussie under pressure and below the recent wedge bottom. 0.7075 fractal is the next support and then its the 0.7015/20 region. Resistance is 0.7050/75. Here’s the daily chart – I’m still short.

AUDUSD Daily

ASX Indexes – hit the 200 day moving average and stalled

As highlighted yesterday the local market’s analog with the US means we are in the zone where the rally on the ASX has some equivalence with the bounce in US stocks – using the S&P 500 as a bellwether. That’s partly why I didn’t really expect much give back on the local market yesterday – all the ASX has done is play catch up.
Traders added 20 points on the physical and then SPI traders (at 6am my time, 2pm New York have added another 28). That means prices is up and through the 200 day moving average in both SPI and ASX cash terms. Based on the technicals that means the SPI is biased toward 6071 on a pure Fibo extension basis.
But I was looking at an old ASX 200 cash chart on Reuters and realised there is an old channel bottom lurking overhead. It’s the channel bottom from the 2016-2018 up trend.  On the SPI weeklies it comes in at 6045/60 at the moment (weird but the dailies and weekly versions give me different numbers, hence the zone). On the cash ASX it’s at about 6,071.
So we are in the zone folks – here’s weekly SPI.

SPI 200 (futures based CFD) Weekly – 6061/71 resistance zone

Naturally given this price action recently I have no actual sell signal at the moment.

Positioning Thoughts

Macro Positioning Thoughts that flow from my analysis of the Platinum Scan and the daily iterations

These are the core views impacting markets and suggesting positioning.

SIGNALS – I’m short AUDUSD, GBPUSD, EURUSD, WTI, and Gold . My brokers don’t trade DXY but I am theoretically long now. Spreadsheets will be rerun at the end of New York trade – 9am my time for new signals.

  • The Fed has UTTERLY blinked – we can almost ignore good US data, should it come – with this backdrop. This provides a constructive backdrop for risk. So, not fighting it as I have I have no actual sell signals now for stocks as the rally in the SPI has negated that one now. I looking to get short now…waiting on my MACD system.
  • China is stimulating – that is is positive too though their data is awful and sliding a little still.
  • Global growth is slowing –Stocks don’t care though.
  • The USD is just in a big old rangeStructurally a USD bull, tactically cautious. 
  • Bonds are in a 2.55%-2.82% range a break either side would be a very important signal for markets more broadly. Holding below 2.82% is a bullish sign for risk assets . But if 2.55% range low were to break that would be a bad signal for risk assets. Above 2.55% for the 10’s is kind of Goldilocksy.
  • Gold and silver look more cautious short term at present.
  • Oil has now tested the 38.2% level in WTI terms and the reversal confirms that for the moment it is in a big old range and only a break of resistance at the 38.2% retracement of the big fall would kicks things higher. Watch this zone of support.
Have a great day
Greg 

@gregorymckenna on Twitter

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaUnlocked – Macro Markets Morning 7th February 2019

The Fed, the Dollar, Stocks, Bonds, and RBA – McKenna Macro Markets Weekly

on February 3, 2019

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Key Takeaway

Oil is the standout this week as the Venezuelan situation, reduction in US rigs, ad Saudi resolve to lower production combine to tighten the market. That’s got WTI and Brent right back at resistance – on the cusp of a very serious extension to the rally, or a retracement of same.

We’ll see this week.

Stocks too are still bid as this exhausting rally rolls on. The ASX, SPI, and DAX stalled – but the FTSE looks solid as do the S&P, Nasdaq, Russel, and Dow.

I am waiting for the sell signal – though besides the SPI I haven’t seen any yet on stocks.

The Aussie is also higher too.

Of course the narrative that draws oil, stocks, the Aussie, and bond rates together is the risk appetite increase we’ve seen as a result of the Fed’s back flip and the soothing noises coming from beijing and Washington over trade. They want to do a deal – but can they.

Key Themes driving markets

The Fed might be on hold but the economy is not terrible

The Fed Put – sorry Powell Put – is alive and well.

Robert Kaplan and James Bullard are also out their waxing lyrical about no change in monetary policy for at least the first couple of quarters of 2019.

That means traders could ignore the 304,000 jobs that were created in January. Even though after the 70,000 reduction from the previous months original release that still makes for more than 500,000 jobs created in the United States in the past two months – just as the Fed was panicking and changing the goal posts.

Indeed whereas the fed had been previously concentrating on the economic conditions it has switched gears and – according to Fed Chair Jay Powell last week – been focusing on financial conditions.

Note to Mr Powell and his colleagues – a weaker USD and a big bounce in risk assets has rewound a lot of that.

But that’s the key isn’t it. The Fed blinked so hard and fast the markets are now convinced their bearishness about the outlook for the US economy is the right view to have. That these employment data are backward looking, that the US government shutdown has harmed growth, the trade war too.

All the while the Citibank Economic surprise index for the United States is still the best on the planet – that’s helping stocks  and its pushed bonds up a little.

Maybe the market will be right, maybe the Fed’s U-turn is the right one. As you know I advocated for a pause – along the lines of RBA protocols – in late 2018. But for the moment all we are left with is the implication the Fed has blinked and any fall in stocks takes primacy over all other indicators in the economy.

In that sense Powell is not the refreshing change many of us thought he would be.

That’s keeping the US dollar bid, well okay – range bound.

That Powell put reverberated in forex markets too but its impact was tempered by the fact that growth outside of the United states is still moribund as German retail sales, EU and Italian GDP, as well as a raft of PMI’s showed last week.

You may think the USD should fall – but it’s stuck in a big old range because the data just hasn’t supported the many pundits notions that US growth will fall in a heap. Indeed the New York Fed puts its Q1 GDP nowcast up to 2.4%.

US growth may well slow – but this is still a least ugly contest and Italy is in recession and the EU growth profile – and societal constructs – are in peril as we head toward the May EU parliamentary election. Not to mention the chance of an accidental hard Brexit.

So, looking at the weekly chart below I’d say the DXY ( and thus the Euro and others) remains constrained by the overhead resistance at 97.7/97.90. Resistance at previous support trend line comes in at 97.20/25 and only a close above their reopens the topside. Support 95.00, 94.50, and 93.75.

MACD pointing lower though overall trend indicators still pointing higher. Rangebound!!!

I’ll make you 93.70-97.70 and trade the range when it breaks – I favour topside by the way. I’m a USD bull.

DXY Weekly – Trading View

THE BOND CURVE – Something for the the hand wringers

We’ll all be ruined they cried. The economy is collapsing they said. The Fed has never paused without dropping rates, they wrote on twitter. The 304,000 jobs growth in January is bunk. And, in a complete narrative shift from the curve flattener signals recession we’ve recently heard they it’s the steepen er that is the worry.

Seriously folks, I’m not cut out for this world of histrionic headlines and calls on Twitter to get clicks and views and flog a service. But they influence the narrative.

What’s important is that you understand these folks shift their narrative so as never to be wrong. Me, I’m often wrong. But I’ve prospered for 30+ years by acting on my wrongness and dealing with it honestly.

Anyway, I raise this because as you’ll see below (top segment curve, middle 10’s, bottom 2’s) the narrative that said the curve will kill us – when the Fed said it was technical factors. has now morphed into the steepening curve will kill us. As you can see though the curve looks like it may have bottomed – but it’s hardly steepened.

So ignore the hand wringers – and trade the market in front of you.

Ultimately the curve will steepen again – as I wrote last year when the hand wringers were focused on the flattening. But much water will flow under the bridge before then and having a fixed position as if you know the outcome with certainty can destroy your equity – even if in the end you are right.

US 2’s, 10’s and the curve – TradingView

And stocks are bid, back at the long term trend line

It’s always a bit dodgy – at least in my mind – to fit a linear trend line to a time series. That’s the case whether it’s long or short.

The reason for that is as the price moves up, or down, so the slope of the trend line is impacted.  But that said, what do you see when you look at this chart of the S&P 500 against the LT trend line and the 200 day moving average?

S&P 500 with trend line and 200 day moving average

Let me tell you what I see. I see that periods of market funkiness – like we have just bee through like we saw in 2011/12, 2015/16, and more recently often include a retest of the trend line before the bottom is formed and the uptrend actually resumes.

So, even though I don’t have a sell signal yet on the pretty much anything other than the SPI 200 and ASX. I’m on the look out for a turn in sentiment and the technicals. Not preempting it yet, I have to see the MACD – in particular – turn. But I’m watching closely.

Maybe it’s 2,750, maybe 2,800, or 2,823 – I’m not sure. But a turn will come.

The RBA is central bank of the week

The RBA board meets Tuesday and we’ll see the Governor’s statement on why they – as expected – left rates at 1.5% at 2.30 pm Sydney time. We’ll then hear from Governor Lowe in a speech Wednesday and the  the quarterly Statement on Monetary Policy is out next Friday morning.

So, by the end of the week we will be in no uncertainty – or we shouldn’t be, this isn’t jay Powell after all – as to what the RBA thinks and plans to do.

There are many, myself included, who think the RBA should take out a bit of insurance and maybe cut rates to sure up confidence in the economy as house prices fall sharply – and at an accelerating rate i Sydney and Melbourne – and as Business Conditions in the NAB business survey collapse.

House prices and credit creation (ex-refinancing) – Curve Securities

I will grant you that the house price fall is exactly what the RBA and APRA wanted – they engineered this after all. And they should be congratulated for that because in a world of short term societal, markets, and political focus Australia’s Council of Financial Regulators clearly made the decision to play the long game.

Short term pain for long term financial stability and affordability for those who want to live in thier property – not just investors.

But the question is whether things are getting away from them. I think they are. And while I note that I’m not convinced a rate cut would actually achieve any last benefit for the economy. It might actually stop the rot – or slow it.

And to this end Stephen Koukoulas  has penned an imaginary piece on what Governor Lowe should say in his speech this week. here’s an excerpt;

“The economy has not performed as we were expecting.

This is not to say that the economy is entering a period of trouble, far from it. But the economy is falling short of the optimistic outlook the RBA held for the bulk of the last year. The main areas of surprise are related to the housing downturn, both in terms of house prices and new construction, and the flow through of these trends to household consumption spending.

In addition to weaker than forecast GDP growth in the September quarter, the severity of the housing downturn is forecast to reduce GDP growth in 2019 and 2020. The downward revision to the forecast for household consumption growth is not being offset by unexpected strength elsewhere, hence the material change to the Bank’s overall growth outlook.”

I couldn’t agree more – but given RBA Board member Ian harper said last week things were fine. Given former RBA Board Member John Edwards echoed those thoughts there is every chance the RBA, the board, and the Governor actually spout the message that, “she’ll be right”.

She won’t be, housing is going to drag on domestic consumption at a time of slowing Chinese and global growth. But the RBA may not acknowledge that it yet needs to do anything.

Either way its a big week for the Aussie dollar, bonds, and stocks. Not least because the report of banking Royal Commissioner Ken Haynes is to be released after the bell Monday afternoon.

The week ahead

The RBA is huge this week – Tuesday, Wednesday, and the SoMP on Friday. If we are confused at the end of this week then they are as bad as the Fed in making their point. But I doubt it. She’ll be right 🙂

Australian trade and retail sales are also out, there is a raft of services PMI’s, Canadian trade, President Trump’s State of the Union, Kiwi employment, Chinese reserves (apparently) German Industrial production and of course the bank of England gets to wax lyrical on rates and policy amid the debacle that is Theresa may and her Conservative party colleagues trying to run down the Brexit clock to get what they want.

Japanese and German trade is out and don’t forget the US will continue to try to play catch up on the data front and China is out for the week.

新年快乐 / 新年快樂

It’s a big week, enjoy.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaThe Fed, the Dollar, Stocks, Bonds, and RBA – McKenna Macro Markets Weekly

Markets at an important juncture – McKenna Macro Markets Weekly

on January 27, 2019

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. Don’t miss out on the launch offer which is open at the moment- the cost ends up as the equivalent to about a coffee a day. And you’ll make much more than that back by reading and watching. Here’s the link. 

Key Takeaway

I’ve said in my Platinum member scan this week that this was a most uncomfortable time to look at markets after last week’s price action. Not for any other reason than the narrative volatility is almost as high as the actual market volatility.

That one follows the other is obvious. But contrary to what many think what we often see is an exposte rationalisation of the moves in markets by the press, by pundits, and by traders rather than a genuine recognition in an ex ante manner of what the drivers actually will be.

I’m as guilty as others often but I try very hard to avoid that and it is one think I picked up very early writing at Business Insider back in 2013 that we always said in headlines that something happened “after” something else rather than “because” of something else. It’s an important distinction in this Mandelbrotian world of volatility we are in right now.

Anyway there area few clear drivers of markets right now – Brexit, the US/China trade War – especially with this week’s big meeting in Washington – and how the data will flow and just where the global economy is.

That and a Fed meeting this week means Washington and New York – and to a lesser extent Beijing – will be the fulcrum around which markets pivot.

Key Themes driving markets

The US government is open and Forex traders are betting the data will be awful

I didn’t see the USD reversal that occurred on Friday coming.

With the Euro, Aussie and others having broken recent supports it looked on the charts and given the Draghi/ECB catalyst for the USD move Thursday I thought we’d see further strength. Within the range certainly. But I was pointing toward USD strength not USD weakness.

And to be frank I still can’t find a satisfying narrative to explain the reversal of fortune and the big surge in the Euro, Aussie and other pairs – not to mention gold – when stocks and bonds seemed to react positively to the news. You’ll see below where the move seemed to come from.

But, I also think that the fact that we’ll get a US data deluge in the coming week/s means that perhaps some traders are betting on bad data and a dovish Fed. That’s possible. But to avoid the risk of fitting the narrative here lets just say the data and fed are important and so to is this  95.66/80 region and then if that breaks 95.00. Below that we are talking about the bottom of the recent range and full round trip of the recent rally which comes in at 93.78.

USD Index reversing back to support – TradingView

But then again the USD selloff seems to have started in China Thursday  on PBOC QELite

The PBOC did something that is potentially massive for markets on Thursday last week.

Here’s how the Xinhua site characterised the move (my bolding):

” The People’s Bank of China (PBOC) has decided to launch Central Bank Bills Swap (CBS), a tool allowing primary dealers engaged in an open-market operation to swap the perpetual bonds they hold for the central bank bills.

The move can increase the liquidity of perpetual bonds, enhance market enthusiasm to subscribe the bonds and therefore support banks to replenish their capital through perpetual bond issuance and create favorable conditions for the financial institutions to boost the real economy“.

To me, and a few others, this was the big event of the week. And the reason I bolded the bit I did is because that sounds very much like quantitative easing. Banks can now issue perpetual bonds that the central bank will effectively underwrite the bonds so others – including life insurers whose rules were relaxed by their regulator Thursday – can buy them.

Currencies and commodities 30 minute chart – TradingView

I could be narrative fitting, but the chart above suggests that the USD reversal had it’s genesis around the same time as the Yuan started its own reversal and garnered strength.

That this moves highlights the fact the PBOC and authorities in Beijing DON’T want to go the full hog to stimulate the economy as they did in the Financial Crisis, that it fairly screams the economy is under intense pressure, is lost in the markets acceptance that QE has goosed markets and asset prices in the jurisdictions it has been tried at – at least initially.

My USDCNH/Y target for some time technically has been 6.69/70 as the 38.2% retracement of the big rally last year. So maybe we just need to see something close to that before the USD can catch its mojo again. or of course Chair Powell could suggest US growth is actually okay.

But in that vein – this is spot on.

Source: Twitter

So what of stocks at a critical juncture – S&P (plus others) inside week

Interesting isn’t it. For all the tooing and froing the coverage the ups and the downs so many markets had inside weeks. The FTSE had a shocker rebounding away from very significant resistance as the Pound roared higher. But many other markets had inside weeks which tell us nothing really.

That they finished closer to the highs than the lows and in the top third of the candle means the bulls – as Bill Williams wrote – won the battle of that particular candle.

But what you can’t see here is the Put call ratio is back at levels that suggest maybe stocks are back to fully priced for current circumstance. So as I wrote in the platinum scan on the S&P 500 technicals, “Price stalled after going vertical the previous week. But above the 61.8% retracement level of the fall at 2,620 a full round trip to 2,808 is in the offing. MT Trend has turned along with the MACD. As noted last week, the next 30 to 60 points is a good place for the rally to stall. BUT, no signal to sell yet” on weekly and daily timeframes”.

S&P 500 futures (ES front contract continuation) – TradingView

Oil has stalled near resistance – check this Brent chart

Just quickly my take on the very long term technicals – this is a big level.

Inside month after Dec found support near 61.8% retracement of the 2016/2018 rally at $49.86. MACD pointing lower but MT trend not yet turned. Respecting either side of December’s range as Brent heads back to test the break lower. That makes $64.00 crucial and decisive – would be a good place for a break or reversal and have significant long term implications for oil.

Brent Crude (continuous contract) – TradingView

The week ahead

Normally the back end of the month is a pretty quiet period for data hounds but there is a lot on the Calendar this week with the US government reopening. Quite frankly I’m not exactly sure yet how the calendar will flow. But here is a Bloomberg article showing all the data we’ve missed over the past few weeks.

Beside that we have more Brexit news to deal with, we have a Fed meeting, Australia has the NAB Business survey and Q4 CPI, EU confidence, Q4 GDP and German inflation are out along with employment data and on the 31st we get Chinese PMI’s.

And of course the week is due to close out with US non-farms and the ISM manufacturing data.

Here’s a link to all that’s out – it’s actually a huge week.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaMarkets at an important juncture – McKenna Macro Markets Weekly

Markets Morning – Mixed messages on trade, but USD stronger as European growth struggles

on January 25, 2019

Morning folks – Welcome to McKenna Macro’s Market Mornings.

SUBS – YOU ALREADY HAVE THIS

In a rush? Here’s the key takeaway

  • The US dollar is stronger as Friday kicks off after Mario Draghi and his colleagues signalled weaker growth and all measures of monetary support in the toolkit are still on the table. That set the scene along with confusion on the trade talks for the Aussie and Kiwi to fall too.
  • Speaking of trade, stocks were lower after Commerce Secretary Wilbur Ross said China and the US are miles apart on a deal. But as usual the captain of the Plunge Protection team Steve Mnuchin gave the market a cuddle saying he is hopeful of a deal. So the S&P 500 ended back in the black at 2,642 with a 0.14% gain.
  • Venezuela and Brexit are also in the news.
Let’s dive in, but just before we do 

 

My launch special ends Saturday January 26.

At present you get 25%  off the newsletter, video, and the bundle the two. Or you can get 50% off the Platinum Membership level for more active traders with bigger account sizes or aspirations.

The discount is for two years of membership. And, as members know, it’s paid for itself already in the first month.

Here’s part of an email i got over the weekend from a subscriber, “I have found your vids and market reports invaluable and they have already started to turn the tide on my trading.  Keep up the great work”.

Just click on the picture and it will take you to the launch page.

Let’s jump into today’s report.

——————–

MARKET SUMMARY (As at 8.30amish Sydney after NY close)

The truth hurts.

And markets were’t overly enamoured with Wilbur Ross’ honesty that trade deals take a lot of time that there was still much work to be done, and that the whole thing was more than about a few soybeans as I’ve been banging on about. But regardless that the truth speaker was trying to diffuse market expectations and thus a market funk at the end of next week’s discussion Treasury Secretary Mnuchin felt the need come out and try to talk stocks up again.

It worked. The S&P was 0.145 higher, the Dow reduced its losses to end down 0.09% at 24,553, while the Nasdaq was buoyed by semi-conductor gains closing up 0.66% while the Russell 200 ended 0.7% higher at 1,464. Intel’s move after the market might make things a little different tomorrow though.

Europe’s stocks were a little mixed. The FTSE in London was 0.35% lower but stocks in Frankfurt, Paris, and Milan all closed 0.53%, 0.65%, and 0.85% higher respectively. SPI traders too are more ebullient this morning adding 20 points to yesterday’s close. A lower AUD helped no doubt. The good news for the bears is that it gives them (us ) better levels to sell at.

As noted the USD was better bid last night with a 0.4% gain in DXY terms to 96.52 while the Euro dropped 0.65% to 1.1306 as I write (last thing I’m adding today). Mario Draghi was really very dovish and US jobless claims, and commentary from BoA say the US economy is in fine fettle still. Sterling is tiny bit lower at 1.3059 while the USDJPY rate is unchanged at 109.62.

On the risk/trade currencies. The Yuan in both CNY and CNH terms is largely unchanged on the day with USDCNH at 6.7940. The Singapore dollar is about 0.15% weaker against the Greenback with USDSGD at 1.3607 while the Aussie was the big loser off 0.7% at 0.7093. The Kiwi reversed as well and is down 0.32% at 0.6763 while the CAD is off 0.12% with USDCAD at 1.3352.

Gold again bounced from the range low and is at $1,280, silver is at $15.31 and drifting. Copper too seems to be in a bit of a mild funk – it’s at $2.678 down 0.6%. Oil was divergent with Venezuelan concerns appearing to drive WTI a bit higher despite the massive build the EIA data revealed in Crude. WTI is up 1% to $53.15 while Brent is essentially flat at $61.10. Bitcoin is still $3,400/3,600.

US 10’s are at 2.715% down a few points, the 2’s are at 2.566%, down a couple.

On the day today Ifo business climate and conditions in Germany is the big number.

Macro stuff that affects everyone and everything – either today or eventually

INTERNATIONAL 

Is the trade deal “miles and miles” away or very close? Depends on stocks it seems

Gee whiz this US Presidential Administration is invested in stock prices right now.

Commerce Secretary Wilbur Ross told CNBC that “we’re miles and miles from getting a resolution…Trade is very complicated. There are lots and lots of issues”. later he went on Bloomberg and said that every comma matters which seemed to reiterate the point he was making about the difficulty of doing a deal quickly.

What he was trying to say was, “people shouldn’t think that the events of next week are going to be the solution to all of the issues between the United States and China. It’s too complicated a topic”. He did say a deal is coming, eventually.

Later in the session though Mnuchin was out there banging on about a deal saying the US and China are “making a lot of progress” and that he’s looking forward to meetings week. Apparently like health care reform hegemonic trade deals are easy.

Mnuchin is clearly on the appeasement side of the debate, Ross is probably on the pragmatic side, and Lighthizer doesn’t trust the Chinese to do what they say will do. The key – as I keep writing – is whether the hegemonic, technological, and trade battles are a job lot or can be separated.

That’s something Ross noted saying any deal is, “not just how many soyabeans and LNG, but even more importantly, structural reforms that we think are needed in the Chinese economy. And then even more important than that, enforcement mechanisms and penalties for failure to adhere to whatever we agree to”. That folks is your sticking point.

And then of course there is this :S

One thing though Larry Kudlow told Fox News (while he was banging on about how good the next jobs report will be :S) that, ‘” think the (Chinese Vice Premier) Liu He talks will be determinative”. That fits with Wilbur Ross’ point. The US and China might actually be miles apart unless Liu He gives a lot of ground during the talks. Compliance checks though? Seriously? How would president Xi explain that?

The ECB may be back sooner than we think – or at least there won’e be rate hike for years

before I get to Mario Draghi it’s worth noting that last night’s flash PMI’s for Europe were pretty poor and a challenge to the outlook. But I want to highlight the German manufacturing PMI and EU year on year growth – look out below. Associated with this was the EU PMI which dropped to 50.7 which was the lowest level in more than 5 years.


source: tradingeconomics.com 

Anyway, to Mario and the ECB. Rates were left on hold but the ECB seems to be saying that the problems are all external. At least that’s my take when the statement says, “The incoming information has continued to be weaker than expected on account of softer external demand and some country- and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment”.

Yet around 6 or 7 pm Thursday German business paper Handelsblatt tweeted “the German government cut its 2019 growth outlook to 1% from a 1.8% forecast last fall due to weak global demand and Brexit uncertainty. Growth will pick up again in 2020 to 1.6%, Handelsblatt has learned”.

Draghi also said what the ECB does next, “will depend on whether we will end up assessing this slower growth as… persistent and then we will consider different contingencies and different elements”. He then added, “I don’t want to speculate about what contingency would call for a specific instrument, but if you look at the number of instruments we have in place now, we can conclude that it is not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available”.

So here he is UNMISTAKENLY DOVISH giving his 2019 version of the famous “whatever it takes” which essentially ended the EU crisis earlier this decade. Monetary policy, unconventional measures too, would appear to have diminishing returns though. Next step, helicopter money with an expiry date.

The Euro is truly lucky to be hanging anywhere near 1.13 on this backdrop folks. US growth might be weak in Q1 because of the shutdown but it’s slowing toward 2.5% not 1%.

Venezuela – why is the US interested in regime change?

This is speculation on my part but I think the US has suddenly and openly become involved in the Venezuelan issue for a couple of reasons. The first is that the opposition, usually fractured, has coalesced around Juan Guaidó recently once he became president of the national Assembly on January 5. The other reason is that the United States two big global foes – Russia and China – have been busy propping up the Maduro regime. That makes this part of a hegemonic and geopolitical battle.

The US will not want either of these regimes, nor the Cuban how US Secretary of State Mike Pompeo called out overnight – from exercising any influence over the nation. Equally with Venezuela now sharing the continent with Trump like leaders there is likely a greater acceptance of US help from the region.

But Maduro is dug in, he’s still supported by the Military, and he’s said he’s been in contact with Putin who has given his support. So we’ll see how it plays out.

Oil players too will be keeping watch because US sanctions could cut off supply to US users and thus distort the market in the US a little. Eventually though, you’d expect a wave of investment back into Venezuela to fix up its infrastructure and get it back producing. I know, I know, there will be folks saying this is just a grab for oil. But what an awful failed state Chavez and Maduro have turned Venezuela into.

Now to see how OPEC reacts – if it does.

Brexit

Brexit messiness continues.

Just like the US shutdown has the Dems eyeing the polls so too does the Brexit issue seem to have Labour leader Jeremy Corbyn with his eyes on the polls. Don’t rule out  afresh general election sometime this year. We have to get over the hurdle of march 29 first.

On Thursday Irish PM Leo Varadkar said this is an existential threat to his nation, to the peace of the last 20 years in the north, the increased north-south cooperation, and the foundation of the EU on which that was built. UK Pollies outside of northern Ireland don’t seem to care though.

The push remains on still for a second referendum though with Reuters reporting a group of British lawmakers appealed to Labour leader Jeremy Corbyn on Thursday to back a second referendum on Brexit, saying they did not have enough support in parliament to persuade the government to stage such a vote.

And we have other parliamentarians – like British Chancellor of the Exchequer Philip Hammond – saying leaving the European Union without a deal would represent a betrayal of the promises that were made during 2016’s referendum. I reckon May is keeping no-deal on the table to try to get the EU to blink. Some countries are. But it’s Mrs may who should be. Christine Lagarde told Bloomberg’s Tome Keen that a no-deal Brexit could wipe 8% off UK GDP over the long run.

And in excellent timing – NOT – EU tells Britain to align income tax rules with EU law

Just quickly:

And, this:

Company earnings calls increasingly mention recession concerns – via WSJ DailyShot Blog

 

FOREX 

Still in a range but limits to buy US dollars have been rebuilt

We haven’t seen CFTC positioning data for a little while and the last time we saw an update the market was heavily long US dollars. Likewise the BAML global money managers survey says the US dollar is the “most crowded’ trade again.

Naturally as a result of that most traders and pundits are saying that this is a handbrake on the US dollar’s ability to appreciate. Throw in the Fed pause and we saw the USD fall a little, but not a lot, out of bed a couple of week’s back.

But it seems that maybe traders have adjusted their currency positions as they’ve assimilated the changed circumstances at the Fed and the outlook for US growth coming from the markets message such that now the ECB and Europe looks to be on the skids there is plenty of room for fresh USD longs.

So, it is against this backdrop and in this fresh context that the chance for the USD dollar to again test the important zone of overhead resistance at 97.70/97.90 have increased. NB I have been writing 98.20 recently as I’m giving room for a break giving this is a very significant level. A break would suggest a full round trip above 100 in DXY terms.

I’ve always said that economic and policy divergence is a thing, that their are two sides to every exchange rate – something so many folks always seem to forget – and that as such I am a structural USD bull. I have been and remain tactically cautious because I am writing in a daily time frame for you in this note and the USD and many other pairs have been in a range with clear roof and floor lines.

Euro is breaking but not yet broken

The DXY is at 96.65 today with plenty of wood to chop for a break out. Likewise the Euro has slipped under 1.13 but is still well above the 1.1215 low and the 1.1169 H&S neckline. Pip wise anyway, in percentages they are two-fifth’s of not very much away from a break. They have to break to give a clear signal the Forex regime we are in is changing. But the chances are increased.

1.1186 is also the 61.8% of the 2017-2018 rally in the Euro. So this 20/30 point zone of support is very important. Long term, a break would suggest a run back toward 1.03/05. Here’s the monthly chart.

This is a very long term look, but you can see where the risks lie in the long run.

Elsewhere in Forex

GBPUSD has pulled up at resistance and may have put in place an interim top for this run. No MACD sell signal yet, but the setup is growing and a short against a stop a little above last night’s high mightn’t be too bad for the more aggressive out there. USDJPY has had an inside day below the 30 ema, the Aussie and Kiwi drifted and the CAD, Yuan, and Sing dollar are all showing signs of a little USD pressure. I still want to see these three break to give me confidence the USD is about to go for a gallop.

COMMODITIES-Oil, Gold, and Copper  

Oil

A divergence in fortunes overnight between Brent and WTI crude with the latter directly impacted by the thinking on Venezuela even though the EIA reported a huge build in Crude stocks of close to 8 million barrels overnight. That saw WTI up 1% to $53.17 while Brent dipped 0.13% to $61.06.

Importantly though, despite the divergent drivers both benchmarks held the support we’ve been talking about. It’s crucial and as you can see the SAR has come right up close to current prices.

Here’s WTI $51.40/80 is now key support with the SAR at $51.83.

Gold, silver, copper…

Gold has again test and held the range low in trade Thursday and it held for the moment. A break of $1,275/76 could open a $30 fall however. Silver looks like it is sliding though and watch copper – it’s drifting again and could be suggestive of a deeper malaise and fear about the global outlook sneaking back into markets even though stocks are relatively stable.

AUSTRALIA 

The market thinks Australia is stuffed

Here’s what I wrote in the Platinum scan yesterday afternoon, Australian employment wasn’t terrible today with a print of 21,500 jobs in December and an unemployment rate of 5%. As I tweeted, “The really bright spot over the past few years has been employment… While unemployment is lowish and jobs are still growing this is an important salve to the concerns about housing and it’s impact on consumption… For the moment anyway.”

And it’s that “for the moment” which is the key…the AUDUSD is off about 30 pips from the high because the NAB jacked up home loan interest rates out of cycle by between 0.12-0.16%. That reinforced some fears many have – me included – that falling house prices will weigh on the economy.

So the AUDUSD is under pressure and back under 71 cents at 0.7092.

Germane to this discussion are articles like this one from Bloomberg headlined, ‘Doom Loop’ of Debt Threatens to Drag Down Australian Dollar. What’s important about this is  that global investors and traders are having a general discussion about debt across the globe right now. They are worried about what that debt means about growth in the future. It’s exactly the thing I’ve been worried about for years.

If, when, Australians ever decide the mountain of debt has to be repaid we won’t be wondering about a fall but a collapse in consumption. Thank goodness that jobs are holding firm. But the bets that traders are making based on the NAB move yesterday is that rates in Australia will fall and that will undermine the Aussie dollar.

0.7015 remains my short term target. Longer term though the AUDUSD is likely to head back into the 67/68 region.

ASX Indexes

A nice little night of gains for the SPI traders overnight – not sure where that came from other than the hope that offshore receipts will be converted into more profit because the Aussie dollar is down 0.65%. That’s legitimate, don’t get me wrong. But the world where growth is slowing, Australia is slowing and at risk, is not a world I want to get excited about Australian stocks.

So, we still haven’t received the MACD sell signal – that’s that’s on hold. But those who think 5,900-5,940/50 is a reasonable level to short at for more classical reason may get another chance. here’s the cash based CFD.

Positioning Thoughts

Macro Positioning Thoughts that flow from my analysis of the Platinum Scan and the daily iterations

These are the core views impacting markets and suggesting positioning.

  • The Fed has blinked – we can almost ignore good US data, should it come – with this backdrop. This provides a constructive backdrop for risk. But the rally has run hard and fast and needs a pause itself. I have no actual sell signals though for stocks at present. I looking to get short now…waiting on my MACD system. Classically, I’m short S&P futures and the SPI. 
  • China is stimulating – that is is positive too though their data is awful and sliding a little still.
  • Global growth is slowing – IMF downgrades again at Davos hit stocks this week. Data so far reinforced this
  • The USD is just in a big old range. Sterling strength is helping the majors while the Yuan is keeping the USD from running away.  Structurally a USD bull, tactically cautious. Short Euro and Aussie. 
  • Bonds are back at 2.74% and cautious after failing at the 2.82% level I suggested we watch closely. Holding below that is a bullish sign – but bad for stocks short term
  • Gold and Silver are seeing their rally rollover and a break of $1,276 for gold would be a signal for a big fall. But the range held and stock funkiness is good for gold.
  • Oil has rolled back to important support and must hold $51.10/40 in WTI terms to avoid a bigger drop. I’d lift a little off the table right here and convert to options or bring stops up.
Have a great day
Greg 

@gregorymckenna on Twitter

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Greg MckennaMarkets Morning – Mixed messages on trade, but USD stronger as European growth struggles