Weekly market wrap

By David Morrison  |  06/04/2018 15:29

US payrolls disappoint while the war of words on US-Sino tariffs escalates

Friday saw the release of the latest update on US Non-Farm Payrolls. The headline number showed that just 103,000 jobs were created in March compared to 313,000 in the prior month. This was also well below the 195,000 expected, and there were downward revisions totalling 50,000 to previous data releases.  Meanwhile, Average Hourly Earnings rose by 0.3% month-on-month, or 2.7% year-on-year, in line with expectations.

Bond yields fall

The data led to a knee-jerk sell-off in equities while the yield in the 10-year US Treasury resumed its decline falling back below support/resistance at 2.80%. The dollar also slipped with the Dollar Index falling back below 90.00 – a level which has acted as resistance for the past two months. The general takeaway was that the weak payroll number would persuade the Fed to hold off from raising rates “aggressively” over the rest of this year. However, it’s usually a mistake to read too much into a single data point. Just as February’s number was decidedly toppy, Friday’s poor reading could easily be revised up next month. Overall, the six-month rolling average continues to come in just shy of 190,000 – pretty good considering that at +4.1% the Unemployment Rate remains at a 17-year low.

Tariff ping pong

Nevertheless, global equity markets were already under pressure after China responded in kind to the Trump administration’s threat of $50 billion on trade tariffs, leading Trump to up the ante by a further $100 billion.

Worry-list growing

The last two months have seen stock market volatility heading back up to “normal” levels – at least when compared to the last few years. We’re also seeing large swings in bond yields as investors dump US Treasuries on inflation fears only to pile back in again as a sanctuary from tumbling equities. Investors are having to adjust to a dramatic shift in market sentiment since early February. The “buy the dip” strategy which has worked so well over the last few years seems in danger of morphing to “sell the rallies”. This comes as the euphoria of Trump’s tax cuts and spending plans has evaporated to be replaced by fears of growing budget deficits, the possible imposition of trade tariffs, a dysfunctional White House, troubles with the giant tech corporations, an expensive stock market and the ongoing withdrawal of monetary stimulus by the Federal Reserve.
 
First quarter earnings season

There are no significant economic data releases this week. However, investors are looking now for guidance from the first quarter earnings season which begins this week. Friday sees updates from some of the world’s major banks including Citigroup, JP Morgan and Wells Fargo.
This is shaping up to be a crucial reporting season. Not only does it come during a stock market shake-up, but there’s also a very polarising look at how it could go. On one hand analysts are looking for December’s tax cuts to prove positive with many corporations announcing dividend pay-outs and share buybacks which should give the market a short-term lift. But others are warning that this quarter could disappoint given tough year-on-year comparisons following strong results from the first quarter of 2017.
 
FOREX

Ahead of Friday’s Non-Farm Payroll release the dollar was rallying and on the verge of breaking above resistance around 90.00 on the Dollar Index. Meanwhile, the EURUSD was heading back down towards 1.2200 which has held as support since the middle of January. It looked as if the greenback was about to break out of a range that’s building over the last couple of months. If so, this would have been an indication that the dollar sell-off which began at the beginning of 2017 may finally be coming to an end. However, the payroll release was a disappointment and this led to a sharp downward move in US bond yields and a corresponding sell-off in the dollar. The overall takeaway was that the weak data raised the possibility that the Fed may decide to raise rates at a slower pace than currently forecast.

Nevertheless, it may still be precipitous to expect the greenback to resume its decline. After all, the Federal Reserve is still the only developed world central bank which is steadily raising borrowing costs while simultaneously engaging in quantitative tightening. This should prove supportive for the dollar going forward, particularly as both the ECB and Bank of Japan show few signs of wanting to reduce monetary stimulus – despite some disingenuous commentary. However, investors still see the Trump administration as favouring a weaker dollar as this should boost exports and help “Make America Great Again”.
 
Precious metals

A quick glance at the weekly gold chart shows that the metal has been rangebound above $1,300 but below $1,360 for the year so far. In January it briefly topped $1,360 to trade at its highest level since August 2016. But the price has been capped ever since, despite some large positive moves recently as investors bought into gold as a “safe haven” trade, which subsequently unwound. Of course, gold is very much at the mercy of the US dollar which has also been rangebound following its protracted sell-off since early 2017. At the end of last week, the Dollar Index was knocking up against resistance around the 90.00 level. A break above here could see gold come under pressure again, particularly if it came on the expectation of an accelerated rate of monetary tightening from the Federal Reserve. This would be particularly damaging for precious metals if this came against a background of a pull-back in inflation as this would mean that real interest rates (nominal rates minus inflation) were rising which is generally negative for gold and silver.

Silver has also been rangebound for most of 2018 – roughly between $16.30 and $16.80. But in contrast to gold, it’s trading nearer its multi-year lows than its multi-year highs. This means that the gold/silver ratio (that is the price of an ounce of gold divided by the price of an ounce of silver) is at a 2-year high and remains above 80. Historically we should expect this ratio to narrow from here. This may suggest that silver is ready to rally relative to gold. However, there’s no reason why the gap can’t decrease through a fall in gold. Much will depend on where the dollar heads over the medium term.

Crude oil

Both WTI and Brent sold off sharply last week, pulling back from highs made towards the end of March. Traders were rattled by the escalation in the threats of import tariffs by both China and the US. This saw China match Trump’s initial bid of $50 billion on Chinese imports only for the US president to raise his bid by an additional $100 late on Thursday. Investors expect an imminent response from China which raises the prospect of an all-out trade war. This would be damaging for oil prices as global demand would come under pressure. This comes as large speculative traders continue to add to their long positions. This is potentially dangerous as this positioning can unwind sharply on the back of negative news.

Nevertheless, the underlying oil fundamentals also include evidence of tightening supply as US inventories recorded large drawdowns in the prior week. At the same time OPEC remains determined to keep the 1.8 million barrels per day output cut in place for the rest of this year, if not beyond. The only question is if it can keep its coalition with non-OPEC members going, given that Russia is understood to want to end the agreement once global inventories fall back towards their 5-year average; something which could happen later this year.

Chart-wise, there’s the possibility of a double-top formation which would indicate that the path of least resistance is now downwards. However, both WTI and Brent are still within the bounds of an uptrend which has been building since last summer’s low point. From this it looks like there’s some support for WTI and Brent around $62 and $66 respectively.
 

Key events next week

Monday -             EUR Sentix Investor Confidence

Tuesday -             AUD NAB Business Confidence; CAD Building Permits; USD PPI, Final Wholesale Inventories

Wednesday -     JPY Bank Lending, PPI; CNY CPI, PPI; GBP Manufacturing Production, Goods Trade Balance; USD CPI, Crude Oil Inventories, FOMC Meeting Minutes

Thursday -           JPY BOJ Governor Kuroda speaks; EUR ECB Monetary Policy Meeting Accounts, German Bundesbank President Weidmann speaks; GBP BOE Governor Carney Speaks

Friday -                 CNY Trade Balance; EUR Trade Balance; USD Consumer Sentiment, Inflation Expectations

We have first quarter earnings from Bed Bath & Beyond, Citigroup, First Horizon National, JP Morgan Chase, PNC Financial Services and Wells Fargo.

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