Good morning and happy Friday.
To the scoreboard:
Dow: 20,951 -7 (-0.03%)
S&P 500: 2,390 +2 (+0.06%)
AUD/USD: 0.7413 +0.0004 +0.05%
ASX200 SPI futures (June contracts – 20 minute delay): 5,856 -8
Iron ore benchmark 62% fines: $US65.20 -$US3.48 (-5.1%)
1. Oil price collapses: West Texas Intermediate (WTI) fell a whopping 4.90% to $US45.48 and benchmark crude lost 4.73% to $US48.39 overnight. Technical support gave way even though OPEC said it will likely agree to extend its 1.8 million barrel per day production cuts past June. The fact prices collapsed suggests that markets think deeper cuts will be required in addition to the extension to negate the impact of increased production in the US. Here’s the fall in WTI from investing.com:
2. European markets buoyant: European stocks shot up as composite (manufucturing & services) PMI data recorded its highest reading in six years and retail sales beat forecasts. Italian shares rose 2% and there were strong gains on French and German markets. US and UK shares traded flat as the oil rout dampened sentiment, with US markets failing to get a boost from the Trump administration’s first major legislative success – getting the repeal of Obamacare through Congress.
3. Iron ore hits the skids: As expected, iron ore fell sharply overnight after futures got smoked yesterday. The overnight trading session didn’t go much better with futures down 5.71%. It’s been a rough week for commodities, and that points to more pressure on the ASX today. Over-supply concerns drove iron ore and copper prices lower while gold lost another 1.5% overnight to fall below $US1,230 per ounce. Here’s a six-month chart showing the recent movements in iron ore:
4. Competing forces in currency markets: Strong data results moved the euro moved back above $US1.09 overnight while the pound continued to hold above $US1.29. Continued growth in Europe will put downward pressure on the US dollar, but central bank policy will also play a role. The US Fed is expected to hike rates in June and is further along its tightening cycle than the European Central Bank, and that should provide support to the US dollar in the near term. The AUD held just above US74c last night, but may face more pressure today after another fall in commodity prices overnight.
5. Data today: The Reserve Bank of Australia releases its quarterly monetary policy statement at 11:30am AEST. After good data on jobless claims last week, tonight’s ADP payrolls report in the US (10:30pm AEST) takes on extra significance. Strong employment data will confirm the market’s view that the Fed will raise in June, which will impact the US dollar and bond yields. Yields on US 10-year treasuries crept above 2.35% overnight with the probability of a June rate hike currently at around 70%.
6. China crackdown leads markets lower: The fall in commodities is at least partly explained by the recent stress in Chinese markets as authorities address risky lending practices. The Shanghai Composite Index has lost nearly 5% over the last month, and 10-year government bond yields have spiked to their highest level in two years. The Wall Street Journal reports that riskier off-balance sheet loans totaled $US2.8 trillion in 2016 as banks chased higher returns. That’s around one quarter of China’s annual GDP.