After the Asian session headlines noting President Trump’s instructions to look for an extra $100bn in China trade tariffs, Trump’s tweets Friday afternoon added more fuel to the fire. A soft Non – Farm Payrolls report did not help sentiment and shortly after China’s response that it was ready to make a ‘’fierce counter strike’’, accelerated the selloff in US equities and buying of US Treasuries. The US Dollar traded lower with CAD, NZD the underperformers and Sterling the big winner (AUD was a bystander). US officials attempts to calm markets came to no avail and Fed Chairman Powell’s speech did not have any surprises.
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While an outright US-China trade war is not on the cards yet the war of words is definitely on and it is likely to keep markets on edge over the coming weeks and potentially months. Officially the process of tariffs impositions includes public hearings (on 15 May) followed by an opportunity for rebuttal comments (22 May) before The Office of the United States Trade Representative (USTR) reviews all comments ahead of a final decision. Then a 60 day period noticed period follows and assuming no amicable deal is achieved behind doors, then the earliest tariffs could be imposed is somewhere around late July/early August. The US-China war of words has only just begun.
So after news that President Trump had instructed USTR to look into an additional $100bn in China trade tariffs, Chinese Ministry of Commerce spokesman Gao Feng said that ‘’If the U.S. announces tariffs on $100 billion of imports, we will have no hesitation and fight back hard immediately; and we do not rule out any option’’. Key Trump advisors tried to allay investors fears, but with no success. Indeed Treasury Secretary Mnuchin made things worst acknowledging that ‘’there is the potential of a trade war’’ In a Sunday interview, Mnuchin tried to back away from that comment saying ‘’but I don’t expect it at all’’ in reference to the potential for a trade war. President Trump also tweeted on Sunday (again), saying that ‘’China will take down its trade barriers because it is the right thing to do. Taxes will become reciprocal and a deal will be made on intellectual property. Great future for both countries!’’
Trade tensions were the main theme on Friday, overshadowing the US labour market report. Non-Farm Payrolls were weaker than expected at +103K in Mar (+185K consensus), however, gains still averaged 202K in Q1, up from 182K in 2017. The Unemployment rate held at 4.1% and hourly earnings were +0.3% m/m, matching the consensus and taking the yoy to 2.7% from 2.6%.
US equities ended Friday sharply lower (S&P500 -2.19%, NASDAQ -2.28% and Dow Jones-2.34%) and the sell-off was broadly based in nature with all 11 sectors of the S&P500 ending in the red. Early in the session European and Asian equity indices closed with modest declines, suggesting both markets are likely to open under pressure this morning. News of a chemical attack in Syria over the weekend is also likely to weigh on sentiment at the start of the week. President Trump has lashed out at Syrian President Assad and his allies Russia and Iran saying there will be a “big price to pay’’.
The USD underperformed in index terms with both BBDXY and DXY down 0.22% and 0.39% respectively. The risk off mode saw the JPY (0.43%), CHF (0.46%) and EUR (0.33%) outperform, but somewhat surprisingly given the soft data releases in recent days, Sterling was the outperformer, up 0.64% with cable closing the week at 1.4092. The market appears to have dismissed the soft UK data releases as temporary (weather related) with Sterling also one of the outperformers on the week.
In contrast the Canadian Dollar (-0.25%) was the underperformer on Friday despite better than expected labour market data (32.3k against expectations of +20k). The sharp decline in oil price amid trade tensions appears to have been the offsetting force. Still, on the week CAD was the outstanding outperformer, up 0.91%. NZD also underperformed (-0.19%), but after reaching a low of 0.7243 shortly after the US labour data release, against the decline in risk sentiment, NZD rallied to close the week at 0.7271.
As for commodities, after two days of decline iron ore gained 1% and recovered a little bit of lost ground, but not enough to erase the 2.4% decline on the week. Gold benefited from the risk off mood, gaining 0.57%, but oil prices had a day (-1.8 to -2.33%) and a week to forget (~-4.5%).
In his first speech as Fed Chair, Jay Powell said ‘’The absence of a sharper acceleration in wages suggests that the labor market is not excessively tight’’, and also noted that participation among of those aged 25-54 was still not back to its pre-recession levels. In the Q&A Powell said that it was ‘’really too early’’ to estimate how tariffs will impact the economy.
The ECB’s Coeure had more to say on the issue of trade wars, indicating that its risk increases the burden on central banks by dimming global growth prospects. Protectionist sentiment has already ‘’contributed to tighter financial conditions’’, he said. He later said in a CNBC interview that the ECB can for now look past the market impact of the trade spat as’’ it all comes against the backdrop of a very strong growth momentum’’. He noted that the ECB had seen ‘’some uptick’’ in recent inflation numbers and that ECB rate guidance will gain in importance.
This morning on the Economic Front we have German Current Account Balance at 7.30 am and this is followed at 8.30 am by the Euro-Zone Sentiex Investor Confidence. We have no UK or US data of note today while this afternoon the ECB’s Prayet speaks in Frankfurt on the Euro-Zone Economy at 3.45 pm.
June S&P 500
On another wild trading session my S&P plan worked well with the market finally trading lower to my 2625 buy level before rallying to a rebound high at 2639. This move higher off my buy level enabled me to cover this long position at my 2632 T/P level and I am now flat. Subsequently the S&P traded below its 200 Day Moving Average at 2595 before a late rally saw the market again close above 2600. Interesting , despite the S&P falling over 70 points from its post NFP release and the Dow falling 700 points, the McClellan Oscillator still closed in positive territory. Despite the S&P closing below the 2610 support level I am reluctant to chase this market lower as I still think we may challenge the 2630/2650 resistance level one more time before selling off. Today I will be a small seller on any rally higher to 2630/2648 with a 2656 stop. The S&P has good support at 2570 and today I will be a buyer on any dip lower to 2568/2578 with a 2559 stop.
EUR/USD
No change as I am still a seller on any rally higher to 1.2345/1.2385 with a 1.2415 stop. The Euro continues to hold the 1.2250 support level which I do not trust at this time given the amount of times that this key level has held. For this reason my only interest in buying the Euro is still on a dip lower to 1.2145/1.2185 with the same 1.2110 stop.
June Dollar Index
My Dollar plan worked well with the market spiking lower to my 89.80 buy level shortly after the NFP was released before trading higher to my 90.10 T/P level and I am now flat. As long as the Dollar can hold the key 89.00/89.60 support zone then the Dollar will continue to be a buy on dips. Today I will again look to buy the market on any dip lower to 89.15/89.55 with a 88.85 stop.
June DAX
Unfortunately the DAX just missed my buy level late on Friday before rallying into the New York close and I am still flat. Today I will leave my buy level unchanged from 12020/12100 with the same 11150 stop. I still do not want to be short the DAX at this time.
June FTSE
Unfortunately the FTSE also just missed my 7040 buy level with a 7043 low print before rallying into the close. I am still flat and given the renewed strength in Sterling I will now lower my buy level to 6970/7020 with a 6935 tight stop. Just like the DAX above I still do not want to be short the market at this time.
Dow Rolling Contract
Thankfully we had no buy levels in the Dow on Friday especially with the market falling over 700 points from its post NFP release before rallying over 250 points off the 23700 low into the close. This is not an easy market to trade given the volatility. Today I will look to buy the Dow on any dip lower to 23650/23800 with a 23490 stop. The Dow has strong resistance from 24250/24400 and I will be a small seller in this area with a 24520 stop.
June NASDAQ
It took a while but finally my NASDAQ plan worked well with the market trading lower to my 6420 buy level with a 6408 low print before rallying to my 6470 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 6280/6350 with a 6230 stop.
June BUND
The boring action in the Bund continues at these insane low yields of just 50 basis points and I am still flat. I am not going to chase this market higher and I will leave my buy level unchanged from 158.00/158.40 with a 157.60 stop.
Gold Rolling Contract
Gold came close to my 1312 buy level with a 1319 low print before rallying on the back of the weaker equity markets and I am still flat. Today I will move my buy level higher to 1310/1319 with a 1303 stop.
Silver Rolling Contract
No change as I am still long at 16.45 with the same 16.55 T/P level. I will still look to add to this position on any move lower to 16.15 and if this second buy level is filled I will then lower my T/P level to 16.40. Meanwhile I will leave my stop level unchanged at 15.90.
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