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May 2017 Global Market Outlook: A tiring Trump trade may not be able to defy market seasonality

May 2017 Global Market Outlook: A tiring Trump trade may not be able to defy market seasonality

April has been a very choppy month for global trading with a lot of mixed action across markets. Stock markets for example have seen significant swings on both directions. US indices started the month off soft but bounced back as big cap earnings exceeded expectations. At the end of April, stocks are responding to good news, but the S&P and Dow have been unable to break out, a sign of seasonal exhaustion. The biggest event of the month has been the first round of French Presidential voting which sparked a big relief rally for stocks in Continental Europe, and an outflow of capital from defensive havens like gold and JPY. The surprise snap election call in the UK had a big impact on UK trading sending GBP higher and the FTSE lower with the Conservatives starting out with a big lead in the polls. April was a rough month for CAD and MXN as President Trump turned some of his sights on trade, complaining about dairy trade, imposing a tariff on softwood lumber and threatening to exit NAFTA in posturing ahead of trade talks. Crude oil had an up and down month depending on the news of the day with traders weighing the prospects of an extension to OPEC production cuts against rising US production and inventories. My forecasts for April were mixed either working out very well or disappointing very poorly. The UK 100 continued to decline as expected, completing a head and shoulders top and finishing the month close to my 7,200 prediction having traded down closer to 7,100. April was a very rough month for commodities and copper was no exception, trending lower through the month rather than higher. EURGBP trended lower through the month and did reach my 0.8320 downside objective by mid-month. A pop and gap upward on the France election clawed back some of the losses but by month end, the downtrend was resuming again. Historically, May has represented a seasonal peak for trading hence the old expression “Sell in May and go away” (for the summer). Stock markets have re-accelerated into the end of April but it remains to be seen how much follow-through there may be with the NASDAQ reaching a new all-time high but the S&P 500 potentially forming a double top. Key events and trends to watch for in May include: The Fed meeting on May 3rd may hint toward whether or not the Fed is still planning on raising interest rates in June or not. Weak GDP and rising inflation paints the Fed into a stagflation corner. The Fed would need to raise rates in June to keep on track for three this year. September looks unlikely as it looks like politicians are preparing for a budget showdown and potential government shutdown in September/October Earnings season wraps up by mid-May, will traders continue to support stocks after that or will we see a common May/June correction this year? Will traders continue to support the Trump trade or run out of patience with the glacial speed of government? A vote on health care reform, ongoing talks on funding the government, initial talks on tax reform and perhaps NAFTA renegotiation may occur in May. Trade may become particularly important with President Trump tying funding tax cuts to getting better (for the US) trade deals. In Europe, May starts with traders reacting to the EU Summit on what to do about Brexit, with focus then turning to the second round of French Presidential voting on May 7. A win by Macron would be seen as a win for stability but a surprise win by Le Pen could throw Europe into turmoil and call the future of the Euro into question. The UK election campaign continues through the month heading toward a June 8 vote. Oil may also attract attention this month with OPEC meeting on the 25th to decide whether or not to continue production cuts or let them expire. So far, sentiment appears to be pointing toward a six month extension so some kind of change would be needed to surprise the street. Deeper cuts could boost oil while an end to cuts could rip the rug out from under the price. Central bank meetings in the UK, Poland, Canada and New Zealand may influence currency trading depending on the decisions and inflation outlooks. Three interesting markets for May 2017 1) Index S&P 500 Current Price 2,385 1 month forecast 2,310 It looks like the Trump honeymoon rally may be near an end. Even with big tailwinds behind stocks from earnings the French election and the launch of tax reform, the S&P has been unable to break through 2,400. At this point it looks like a ton of good news has been priced in and a double top is forming. The index looks vulnerable to a seasonal correction back toward 2,310 a common 23% Fibonacci retracement of the post-election rally. 2) Commodity Cotton Current Price 76.45 1 month forecast 72.30 A year-long uptrend in cotton appears to be running out of gas. The price has completed a triple top near 77.80 and has started to drop back while a negative RSI divergence confirms slowing upward momentum. Initial support may appear near 75.00 but a move back toward the 200-day average near 72.30 appears possible which would be a common 23% retracement of its previous uptrend. May has historically been a negative month for cotton seasonally. 3) Currency AUDUSD Current Price $0.7452 1 month forecast $0.7330 Of all the major currency pairs, AUDUSD has historically been the worst performer with an average May loss of nearly 1.00% over 25 years. Resource currencies have been trending lower but AUD has not fallen as much as CAD, NZD or NOK, leaving it vulnerable. The Aussie Dollar recently broke down under $0.7500 while downward momentum has been increasing. My $0.7330 forecast is based on a 50% retracement of a previous uptrend and a retest of the November 2016 low. Commodity Outlook April has been a very difficult month for commodities. Even though a falling USD could have provided some support, only 6 out of 20 markets posted gains on the month, one was flat and 14 markets decline. Robusta Coffee and US Cocoa both fell by more than 10%, while Sugar’s small 2% gain made it the top performer. April was a difficult month for my selections. Copper started out reasonably well but fell off in the second half along with other base metals in a broad sector selloff. It has started to rebound into month end but it’s too little, too late. Oats spent the month consolidating its March losses and did decline a bit further but didn’t fall as much as I had forecast. Heading into May, energy commodities are under pressure, while copper is starting to rebound. Robusta coffee is starting to look really oversold after getting totally slammed in the last week or so. Lumber has been soaring with the US set to impose a new 20% tariff on Canadian softwood. May could be a volatile month for oil trading with OPEC and non-OPEC producers scheduled to decide whether or not to extend production cuts for another six months. May has historically been a very mixed month seasonally for commodities with 10 markets posting gains on average and 10 markets posting declines on average. May has historically been a weak month for metals, a good month for energy (except heating oil) and a split month for grains and softs. Orange Juice is historically the top May performer on average with Heating Oil historically the worst performer. Best Commodity Orange Juice Current price $1.65 one-month forecast $1.85 Bloomberg Symbol JO Orange Juice declined dramatically between October and March but spend April forming a base between $1.55 and $1.70. OJ has historically done well in May and this could be the month it turns back upward technically. A positive RSI divergence formed at the March low and since then, downward momentum has been facing. A breakout by the price over $1.70 or the RSI above 50 would signal an upturn. The $1.85 forecast is based on a measured move from the current base plus it is within a cluster of technical points that also includes a 38% Fibonacci retracement near $1.84 and the 200-day average near $1.88. Worst Commodity Palladium Current Price $797 one-month forecast $725 Palladium spent 2016 and the first several months of this year trending upward but is now looking exhausted. Upward RSI momentum has been slowing for several months, and the pair is approaching its previous high last seen in 2015 near $800. Meanwhile, a bearish rising wedge pattern suggests the potential for a correction back toward $725. This level appears within a cluster of technical points that includes $727 a 23% Fibonacci retracement of the previous uptrend and the 200-day average near $720. Key Dates for May 2017 May 2 RBA May 3 FOMC May 4 UK local elections May 5 US nonfarm payrolls May 7 France Presidential election second round May 10 RBNZ May 11 Bank of England + inflation report May 22-23 Eurogroup finance ministers meeting May 24 Bank of Canada May 25 OPEC meeting May 26-27 G7 Summit

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