We open the page on the month of June and I for one hope we can break this malaise in markets, with either an upside break or at least a reasonable pullback in global equities to attract new money and fresh life into the markets.
There will be a reasonable amount of event risk to work through, not just with UK elections (8 June), with the ramifications of that event seemingly contained to UK assets, but key central bank meetings from the European Central Bank (also 8 June) and Federal Reserve (14 June). Locally, we get Q1 GDP (7 June) and that in itself will get a fair bit of attention and while we get a major contribution to that data point today with Q1 CAPEX, there are calls for the quarter to yield very subdued activity. Of course we will keep a focus on all things Trump too, and his approval rating given the USD’s correlation there and there has been some focus, not just on Trump reportedly making his decision to pull out of the Paris climate accord (Source: Axios), but there have been numerous reports that former FBI Director James Comey will testify next week, as early as Thursday.
On this issue, the talking point from traders this morning has been if Trump did indeed pressure James Comey to drop the investigation into former advisor Michael Flynn’s relations with the Russians, then what exactly was Trump trying to achieve by his pressure? And if Comey has a view here on Trump’s motives, what, if any evidence does he have to back the claim?
Either way, the stage has been set for Asia on the first day of the month is to start on a drab, yet somewhat negative start. We see oil price trading heavy, yet, once again buying support has kicked into the 17 May lows of $48.35. This level clearly needs to hold and so far it is, and buyers have stepped in thanks to a huge 8.7 and 1.7 million draw respectively in the API private inventory report. In the short-term much will now hinge on tonight’s (01:00 aest) Department of Energy weekly inventory report. Clearly, we extrapolate this strong drawdown in the API report into tonight’s official read, but as it stands crude and gasoline inventories are expected to fall 2.66 and 1.49 million barrels respectively.
We are also staring at real weakness in the bulk commodity complex too, with spot iron ore closing 2.5% lower at $57.02, while iron ore, steel and coking coal futures closed 3.2%, 2.4% and 2.9% lower respectively. Iron ore futures look like a short sellers dream (see chart below) right now and the technical set-up looks about as bearish as you will see. It’s amazing to see BHP’s American Depository Receipt only down 0.9%, although if you focus on Vale’s US-listing (as a read through for the likes of Assured Guaranty Ltd (NYSE:AGO) and Fortescue Metals Group Ltd (AX:FMG) etc) it closed down 4.5%.
Copper and gold seem like good places to be invested today, if in the commodity space.
So our opening call for the ASX 200 sits at 5728 (+4 points), and just outperforming the moves in SPI futures, which currently sit down five points. This is reflective of a move in the futures from 16:10 aest to 16:30 aest, when they closed before resetting at 17:10 aest for the night session. It will be interesting to watch the price action in the index after the full unwind as investors have few reasons to be putting money to work, but a few reasons to be somewhat cautious here so I wouldn’t be surprised if from 10:15 aest to 10:30 aest the ASX 200 found sellers easy to come by, but I could be wrong and this may tell us more about semantics to the macro backdrop. Either way with implied volatility in the ASX 200 so low we are not expecting fireworks.
As mentioned the highlight in the session ahead is the Aussie Q1 CAPEX report, where consensus is we see Q1 capital expenditure increase by 0.5%. We also get April retail sales at the same time, with calls for a 0.3% increase. Before we start seeing other key Q1 GDP components, such as inventories and net exports as a percentage of GDP, this CAPEX print should get the ball rolling. Perhaps more importantly for rates and FX traders will be the second estimate of business spending ‘intensions’ for 2017/18, where the market will likely be going into this print expecting the intentions to rise to $86 billion. We can use this as a guide for moves in Aussie government bonds and the AUD, and a revision higher above $90 billion we should see a decent bid in the AUD, and below $82 billion and perhaps stronger AUD selling. AUD/USD has traded in a range of $0.7476 to $0.7424 on the session, and while this pair will get the lion’s share of attention, I would be looking far more closely at AUD/NZD which seeing a strong trend lower.
Traders can also look forward to a couple of US economic data reports in US trade with the ADP private payrolls (consensus 180,00 jobs created) released at 22:15 aest and expected to set the scene for tomorrow’s nonfarm payrolls (consensus also for 180,000 jobs, economists range of estimates at 235,000 to 130,000). We also get the May ISM manufacturing report at 01:00 aest, which is expected to show manufacturing grew at a modestly slower pace, with the index expected to print 54.7. I would specifically be keeping an eye on the US ten-year treasury here as the yield (now 2.2%) is perilously close to the 18 April swing low of 2.16% and a break of this low would bring in a whole new wave of Treasury buyers, which will likely flatten the curve and pull the USD and US financials lower in its wake.
