Stock markets in a state of flux

Summary

The state of flux in White House communications keeps markets wavery for yet another session.

Which way to jump

Another European stock session with cautious forays to the upside mixed with resigned drifts back to the downside. The backdrop is Wall Street’s roller-coaster ride that took Dow industrials on a 900-point round trip into a lower close, and Asia on course for a fourth straight monthly decline. After a ‘false dawn’ in the White House’s stance on trade, it’s difficult deciding which way to jump. President Donald Trump essentially announced that plans to ban China from investing in U.S. technology had been dumped. Instead, existing procedures for vetting Chinese investments would be beefed up. But the state flux in the administration’s communication style meant a twist was all but inevitable. Economic advisor Larry Kudlow later downplayed the appearance of a softened approach. "It's not meant to be harder or softer," he said "It's going to be very comprehensive and very effective at protecting our technological family jewels in the United States." At a minimum then, conditions for continued investor uncertainty remain. They seem likely to keep major European indices on the dithery route to the downside for the rest of this week. S&P 500, Dow Jones and Nasdaq futures contracts are slightly positive.

Mini oil supply shock

Oil adds further froth to equities after a mini supply shock in Cushing inventories. The near 10 million barrel stock draw was the biggest in 21 months and took traders off guard. It’s directly linked with a supply outage in Canada though appears to reflect just one day of lost production at the 350,000 bpd facility. The plant could be offline throughout July. In confluence with a strong likelihood that a power struggle could stem Libyan oil exports and U.S. pressure on buyers to honour its resumed sanctions on Iran, the market is girding for another sharp oil price rally. WTI futures are heading back up to Wednesday’s 3½-year high despite Saudi attempts to talk up production plans after last week’s OPEC deal largely mandated higher compliance with the prior reduction regime instead of an outright supply hike. The market does have a glaring price resistance level in its sights though, $73.25, representing the last stand by oil bulls in November 2014. Prices plunged to as low as $26 a barrel 14 months later. Whilst $73.25 remains untaken, bulls will be less than resolute.  In turn, a key prop for equity markets will be less reliable.

AUD as yuan proxy

Investors do not appear to have made up their minds about where to stand in relation to the dollar either, as the U.S.-China trade dispute lingers. The yuan has now cleared the 3% mark in its drop against the dollar to the lowest since December last year, but clear translation benefits have yet to flow directly back to the greenback.  Markets seem more inclined towards selling yuan proxies, chiefly Australia’s dollar. Early-June upside momentum in the Aussie now looks to have been used as an opportunity for bearish flows, as traders eye the possibility of another ‘devaluation debacle’ a la 2015. At the same time, Beijing’s relative silence this week in the face of Washington’s relentless rhetoric may not last. With yuan positioning almost certainly overdone, a chaotic rebound could be seen, with consequences for the dollar.

Euro poised ahead of data

European Economic Sentiment readings (released 10 am BST) have failed to reflect much of the multifarious negative news flow seen this month, so euro traders have another pretext for upticks back towards the $1.573 high in Asia. An initial reading of German inflation (1 pm BST) may serve the opposite purpose, if the monthly print overshoots lower than 0.1% consensus, down from 0.5% in May. Such trading will remain mere tinkering whilst euro pressure from the U.S.-EU yield differential and a unresolved CDU-CSU dispute continue. Traders will look past Final U.S. GDP in the afternoon unless the outside chance of a change from earlier estimates is realised.