The big rally in US markets that started election night has been running on fumes in recent weeks and now it appears a significant and overdue correction may be starting. The US Dollar index broke down under 100.00 today while US indices turned downward with the Dow and S&P falling over 1.0%, the NASDAQ losing 1.5% and the Russell 2000 falling 2.3%. Banks were hit the hardest falling 3.9%. Earnings reports after the bell were mixed with Nike beating the street by a wide margin but FedEx missing badly.
By early March, it had become clear that markets had priced Trump to perfection. In other words, the markets had priced in that President Trump would be able to enact all the reforms he wants in a timely fashion and that they would all be beneficial for the economy with limited opposition and disruption. LOL. By the time of last week’s FOMC meeting it became clear that all the good news was in the markets and it wouldn’t take much to upset the apple cart.
Today US markets started to tumble in earnest and it looks like we may have reached a tipping point for sentiment. The cause for the correction appears to be difficulties in finding agreement among Republicans on health care reform which could be defeated in a House vote planned for later this week. A defeat would represent a setback for the new Administration and confirm that its plans may not be able to sail clearly through Congress like traders had been thinking. More time spent on health care also means that tax reform and infrastructure plans could be delayed or could drag on longer that traders had hoped.
The drop in the US Dollar has had a positive impact on some currencies. Gold gained 1.0% as traders recognized increasing political risks in the US. GBP soared 1.1% as higher than expected UK inflation added to the case for the Bank of England to give up on adding to stimulus and consider raising interest rates. EUR also gained ground after French polls suggested Macron won the first election debate, easing Frexit risks.
Commodity currencies like CAD, AUD and NZD didn’t fare quite as well. WTI crude oil fell 1.7% on the day despite the lower US Dollar. Given the big swings in inventory reports and the big surprises of the last three weeks, traders appear wary to commit ahead of the reports. Interestingly WTI didn't fall any further following the 4.5 mmbbl increase in API oil inventories suggesting that the earlier selloff had already priced in another big build.
Canada reported strong retail sales today which attracted some interest but the Loonie quickly faded between the oil selloff and traders awaiting tomorrow’s Canadian federal budget.
Today, Asia Pacific markets may be active around oil price moves and swings with energy stocks likely in focus. We also could see some trading around Japanese trade figures and preparation in NZD for tomorrow’s RBNZ meeting.
FedEx $2.35 vs street $2.62
Nike $0.68 vs street $0.53
Significant announcements released overnight include:
US API crude oil inventories 4.5 mmbbls
US API gasoline inventories (4.9 mmbbls)
Canada retail sales 2.2% vs street 1.0% vs previous (0.5%)
Canada retail ex auto 1.7% vs street 1.2% vs previous (0.3%)
UK consumer prices 2.3% vs street 2.1% vs previous 1.8%
UK core CPI 2.0% vs street 1.7%
UK retail prices 3.2% vs street 2.9% vs previous 2.6%
UK producer input prices 19.1% vs street 20.0%
UK producer output prices 3.7% as expected
UK house prices 6.2% vs previous 6.4%
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
6:00 pm EDT FOMC Mester speaking
9:45 pm EDT FOMC Rosengren speaking
10:50 am AEDT Japan trade balance street ¥807B
10:00 am EDT US existing home sales street 5.55M
10:30 am EDT US DOE crude oil inventories street 3.0 mmbbls
10:30 am EDT US DOE gasoline inventories street (2.4 mmbbls)
10:30 am EDT US DOE distillate inventories street (1.5 mmbbls)
4:00 pm EDT Wed NZ RBNZ Official Cash Rate 1.75% no change expected
9:00 am NZDT Thu
4:00 pm EDT Wed Canada federal budget
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