Stocks end a stonking quarter on a high, the data this week is going to be huge – McKenna Macro Markets Weekly

on March 31, 2019

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Key Takeaway

Stocks are staying bid despite the bond market rally and many fears that with momentum stalling and the buyback blackout period starting they’d be falling. That’s important information – even if this is a topping process after a very strong first quarter reversal of the weakness at the back end of Q4.

Past its peak certainly is British democracy. Sterling traders finally noticed that Pommie Pollies are so divided and hopeless they couldn’t even boil water let alone figure out Brexit. But the Pound hasn’t broken wide open yet because hope springs eternal for a positive outcome.

On currency markets the USD did better and is close, but has not yet broken. It sets up a tantalising week with non-farms to be released Friday.

The week that was…

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

Key Themes driving markets

Brexit, delay, defeat, no deal exit?

What a mess. The UK parliament knows what it doesn’t want – a no deal Brexit or Mrs May’s agreement with the EU. But it can’t resolve on what it does want. We see factions with parties of Remainers and Brexiteers and we have self interest running very close to the surface and driving many of the actions we’ve seen in evidence from Pommie Pollies over many months.

Yet still a deal is not done, a path is not clear, and the Commons has effectively rebuffed the EU’s offer of an extension to may 22 and now has only a couple of weeks with which to sort itself out or risk – again I know – the reality of crashing out of the EU without a deal.

Of course the alternatives are either no exit from the EU – remain – or a very long extension. And of course we have the theatrics of the political battle between the Conservatives and Labour, not to mention the conservatives with themselves.

Indeed, over the weekend the Sunday Times (via Reuters) reported that the Conservative government of Mrs May is at risk of “total collapse” as the Remainers and hard-line leavers at at odds. All the while Mrs May’s advisers are rumoured to be talking about an early election which can fracture her party and her leadership…which seems fatally flawed anyway.

GBPUSD Daily – TradingView

Until last week Sterling traders weren’t troubled by the shenanigans and while the dam hasn’t burst just yet a move below 1.2960/80 (range low and 200 day moving average) could set the cat among the pigeons for another 2+ big figure move lower. While it holds though we remain in this 4 big figure range and prone to continued headline risk.

Peak pessimism? A tactical low for bonds may be in.

I looked at the candle on the 10 year treasury rate Friday morning and wrote in the Market Summary part of the daily newsletter, “US 10’s are at 2.39% (short term low in?)”.  

Following on from Thursday’s candle was another mild up day for rates on Friday and it looks like the chance of the move back to test the break down level in the 2.49/2.51% (Fibo levels over different time frames) and possibly the bottom of the recent range at 2.55%

US 10 Year Treasury Rate Daily – TradingView

That’s not to say I am abandoning my outlook which says 2.28% perhaps 2.02% (maybe lower) will ultimately trade. But tactically we may have hit peak pessimism in the past week as the Fed has signalled – 3 or 4 speakers at the end of last week – that there is a difference between patience and the need for rate cuts.

It’s in contrast with Markets pricing for cuts this year in the US and increased calls for recession. Note this is tactical and a break – and close – back below 2.35% would reignite the rally. But for the moment it’s setting up as a chance for bulls to reload their longs as rates back up.

Can we really be bullish Stocks?

The most widely despised bull market I can remember in many years has continued to defy the doomsayers. I myself have had a few goes at shorting this market after capturing the initial leg of the rally from early January as my system turned.

Rhetorically though it’s been a difficult rally for many investors to participate in  outside the momentum crowd as the rally went against the deterioration in the data flow.

Source: Twitter

But there are signs – not least of which are in the price action – that as we head into the buyback blackout period real money is stepping back into the market.

Reuters reported Friday that its “latest asset allocation poll of 40 fund managers and chief investment officers in Europe, the United States, Britain and Japan” found “global funds recommended switching cash back into equities in March as stocks have recovered smartly despite some turbulence this quarter from a deep sell-off late last year”

The poll showed equity allocations were up 2% on the previous month with the resulting drawdown in cash levels to a 4 month low of 5.8%.

This poll Reuters said, “showed a clear shift away from the more defensive approach among long-term investors held over the previous months”.  And the poll showed “nearly 85 percent of the fund managers who answered an extra question expect the upswing in U.S. equities to continue for at least another three months, including over 55 percent who said six months or more”.

That’s pretty bullish really folks, it says the fund managers don’t see the chance of rate cuts or recession that many in the market are calling for, it says that the constancy of the Twitter bearishness I see each day is off pace, and it suggests that buy the dip is a live and well.

S&P 500 Weekly (arrows are crossovers in my JimmyR indicator) – TradingView

Looking at the price action then you can see above on the weekly chart the simplest of indicators – my JimmyR system for stocks which is just the 15 and 30 ema crossover – has been long for a couple of weeks.  It’s one reason that despite the daily charts looking like a pullback was needed I tempered my bearishness.

It’s now looking like a retest of the 2,866/77 (resistance zone and Fibo level) are on the cards. Above that it is the 138.2% projection at 2,897. Support is 2,785/90 then 2,760. I favour top side short term – especially after the weekend China NBS PMI pick up.

S&P 500 Futures Daily – TradingView

Could we see new record highs – certainly if those levels above break. Do I think we’ll see new record highs? No because I’m going to respect those lines and levels. But they break then we’ll need to completely reconsider the outlook. Likewise any break below 2,760 opens, 2,720 and below that fresh thinking would be needed.

It’s worth keeping an eye on this too – it will shape the narrative.

Dow Jones versus Dow Jones Transports Daily – TradingView

US dollar, Euro, rates and the Fed

last week was a good week for the Greenback in both e DXY terms and across the board. But, as you can see in the chart below, it is still clealry inside the range it has been in for a while now and it is also clearly yet to best the 97.70/97.90 range top and Fibo resistance that is needed to kick it to 100+, 103/104.

US Index (DXY) Weekly – TradingView

Naturally if it does best, and hold on close, above that 97.90 level the whole conversation about the USD will change. It’s a question of when not if from where I stand – eventually anyway. When it will break I’m not sure and until it does I’m going to respect that line and levels.

That said when the break comes it is likely to be the start of a big acceleration.

Turning to the Euro, it too is close to an important level. The recent low of around 1.1175 was just 10 points below the 1.1185 61.8% Fibo level of the 2016-2018 rally for the Euro (yes I still call them points not pips – can’t help myself I’m an old interest rate trader).

Euro Weekly – TradingView

A break here is likely easier than a break of 97.70/90 but they won’t be unrelated if they comes. Through 1.1175 I have 1.1080 as the next target as the weekly support that has been touched 3 times (not shown above) and below that 1.0990 as a Fibo projection and then 1.0900/20 as the bottom of the downtrend channel in the chart above.

And if the USD is either breaking, or holding on these two measures of strength then it is likely to be doing likewise across a number of pairs. I’d expect the Aussie to be below 70 cents, the Pound below 1.2960, USDCNH above 6.7450 to name a few.

I’m a USD bull…but I’m a patient one knowing how often recently the USD has had setbacks at important technical levels.

Australia’s RBA continues to fight the rate cut advocates

It’s the first Tuesday of the month this week and that means that as in 11 months of the year (the RBA is at the beach in January) the RBA board will sit down to discuss the economy, rates, and the governor will make his statement.

Last week’s surprise uber-dovish tilt from the the RBNZ will have a few folks excited that the RBA will follow suit.

Indeed, the market is pricing in RBA rate cuts soon. Two of the four Major Banks are saying the RBA should cut this year. AMP Capital’s Shane Oliver was one of the most bearish on housing early and says the RBA should cut, many others are now on the rate cut bandwagon.  I myself have said the RBA should cut, back last year when it was Shane, the Kouk, Capital economics and few others.

A big part of this is the weak housing outlook and the impact that could, would, likely will have on on consumption and the domestic economic activitut the RBA is hanging steadfastly onto the notion that it is the jobs market which will be the salve for what ails the economy.

Just last week RBA assistant governor Luci Ellis ended her speech on Households saying (my bolding):

“My talk today has deliberately not overlapped with what the Bank has recently said about the housing market…Whatever other forces might be affecting housing market developments, fundamentally demand for housing rests on the household sector’s confidence and capacity to take on the financial commitments involved in the purchase or rental of a home. Without enough income, and so without a strong labour market, that confidence and capacity would be in doubt. This is not the only reason we are watching labour market developments closely. But the nexus between labour markets, households and housing are crucial to our assessment of the broader outlook.”

Source: Twitter

Could the RBA make an RBNZ style dovish pivot after that ending to an important speech and with ABS job vacancies look strong still? It would be a surprise/ And that means a tactical play in AUDUSD and the crosses might be present itself this week.

Oh, and the other question we could ask ourselves is why would the RBA signal a cut when the budget is likely to add plenty of fiscal stimulus when it is read this week.

And just quickly,  the CFTC data

The surprise of the week was deliver to me Friday with the CFTC data showing the big speculators had not materially changed their positioning in the US 10’s. Equally interesting is the build in longs for oil and gold, while it is clear the USD is still favoured, maybe crowded, but equally still strong.

The key to the USD is that when it comes to these US dollar longs there is still substantial position limits available is history is any guide.

The week ahead

The last first week of the month is always a huge one for data in the way that the back end of the month is not.  That means that by the end of the next week we’ll have had enough data from enough jurisdictions to know if the US dollar, bond, and stock market rallies can be supported and kick on or if perhpas the magnificent first quarter move for 2019 was really just a low volume path of least resistance head fake.

It’s going to be huge.

Monday kicks off with manufacturing PMI’s across the globe – Australia, Asia, Europe, the US and elsewhere. In Japan the Tankan is out as well while in Australia we get HIA new home sales, the monthly inflation gauge and (apparently) the NAB monthly business survey. I say apparently because it is not usually out on a Monday and Feb’s survey was out March 12. But that’s when the last survey said it would be released.

Naturally there will be much interest in the Caixin China manufacturing PMI and the EU PMI’s to see if the actual full survey estimate is as weak as last month’s flash surveys. EU CPI and US retail sales will be watched closely as well along with US business inventories and construction spending. ECB’s Guindos is speaking as well and there are a couple of Bundesbank speakers out on the hustings.

Tuesday kicks off with NZ Business confidence, building permits in Australia, and of course the RBA decision and statemetn from the governor. The Federal Budget with its fiscal stimulus – it’s an election year – will also be out, 7.30pm AEDT Tuesday.  EU unemployment and PPI along with US durable goods, ISM New York, and total vehicle sales are also out along with the global dairy auction and API crude data (early Wednesday my time). Outgoing ECB chief economist Peter Praet is giving a speech as well.

Wednesday kicks off with services PMI’s around the globe. They’ve done better recently than their manufacturing siblings so lets hope that continues. We also get Australian retail sales for February along with trade for that month.  EU retail sales are also out along with mortgage applications, ADP employment, and EIA crude (and other) stocks data in the US.  Atlanta’s Raphael Bostic and Minneapolis Fed’s Neel Kashkari are speaking

Thursday’s relatively light with ANZ commodity price index in NZ, German factory orders, the French Budget, Challenger job ads and weekly jobless claims in the US.  e Fed’s Williams and Mester are sepaking also.

Friday is non-farms day in the US while Canada also has it’s jobs data out. Apart from that we have Japanese household spending, German industrial production data and a speech from the Fed’s Bostic after the close.


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaStocks end a stonking quarter on a high, the data this week is going to be huge – McKenna Macro Markets Weekly