- NASDAQ Composite -0.11% Dow +0.28% S&P 500 +0.17% Russell 2000 -0.81%
- NASDAQ Advancers: 754 / Decliners: 1548
- Today's Volume (vs. Wednesday) -17.78%
- Crude -0.41%, Gold +0.57%
- May US Challenger planned job cuts 58.6K
- ECB leaves its key deposit rate at -0.4% and refi rate at 0.0%
- US Q1 Productivity (revised) +3.4% vs. consensus +3.5%; Q1 Unit Labor Costs (1.6%) vs. consensus (0.8%)
- Apr US International Trade ($50.8B) vs. consensus ($50.5B)
- US Jobless Claims unchanged for the w/e June 1st at 218,000
- Bloomberg Consumer Comfort at 61.7
- Fiat Chrysler withdrew its merger proposal to Group Renault
A lot of credit to the recent market rally has been given to the now “accommodative Fed.” We say “accommodative” because it has recently shown its sensitivity to market turmoil where previously it would stayed the course. The odds are climbing that the Fed lowers rates well ahead of a potential recession, which will probably benefit riskier assets such as equities. But if those cuts come too late, then risky assets will suffer through a recession until they see the light on the other side. That’s why we are now hearing the term insurance rate cut enter into discussion.
The two basic rate cuts are an “insurance” cut and a “recession-reaction” cut. The first is a policy easing that successfully maintains the economic expansion. Bloomberg points out that the 1998 rate cuts provided insurance against recession in reaction to the financial turmoil related to the Asian financial crisis. In this instance, riskier assets such as equities advanced after the Fed action. While the inverted yield curve has pointed towards potential recession, concrete signs are not yet evident. An insurance cut against slower inflation now is viewed as a prudent measure to maintain economic growth or equilibrium.
The ”accommodative” theme continues today as monetary policy continues to dominate the headlines. In a move that was widely expected, The European Central Bank extended its pledge to keep interest rates at record lows while also reaching an agreement on how to supply lenders with additional cheap cash. Interest rates will remain at current levels at least through the first half of 2020 or as long as necessary. The cost of long term bank loans can fall as low as the deposit rate, currently minus 0.4% plus 0.1 percentage points. The ECB also agreed on the terms for a new round of long term loans to banks beginning in September. These loans will initially be priced at the main refinancing rate plus 0.1 percentage point but can go lower if the banks meet specific lending quotas. The Euro rose against the Dollar while German bund yields ticked higher.
So far, the markets are trading in measured territory lacking the wow factor of any blockbuster news that could propel the market higher or lower. On the trade / tariff front, talks between Mexican officials and the White House failed to reach an agreement yesterday as talks continue today. President Trump stated yesterday after no deal was reached that Mexico “needs to step up to the plate.” Tariffs are scheduled to go into effect on Monday of next week. On the U.S.-China trade negotiations, The President has said that he will decide if he will enact tariffs on another $325 billion of Chinese imports after the Group of 20 summit that begins June 28th .
The economic calendar was reasonably full today. The trade balance has remained fairly stable over the past year. The trade deficit narrowed to $50.8 billion in April from a revised deficit of $51.9 billion in March. Both exports and imports were below the March totals. Non-farm productivity increased by 3.4% during the first quarter while unit labor costs decreased by 1.6% indicating subdued inflationary pressures. Jobless claims for the week ending June 1st was unchanged vs. March’s revised total of 218,000. Continuing claims increased to 1.682 million from a revised 1.662 million. Finally the Bloomberg Weekly Consumer Comfort Index improved to 61.7 w/e June 2nd from 60.8 a week earlier.
In the commodity space, oil prices have steadied after hitting five month lows yesterday on an unexpected stockpile surge domestically and ongoing concerns about demand due to a slowing economy. Gold continues its steady rise, approaching 2019 highs on the increased expectation that the Fed will cut rates and on continued trade tensions and geopolitical risk.
Sector movement is divided today with Energy (1.21%), Consumer Staples (0.67%) and Healthcare (0.61%) leading and Industrials (-0.30%), Real Estate (-0.18%) and Financials (-0.01%) lagging.
Brian’s Technical Take
The ECB extended its pledge to keep rates unchanged at least through the first half of 2020 due in part to the economic impact of the rising threat of protectionism. The overall statement however was not as dovish as markets were anticipating. While acknowledging downside risks to the economy, the ECB’s Governing Council actually raised its forecasts for growth and inflation this year.
Accordingly the euro and short term bund yields moved higher in reaction to the ECB’s “less dovish” message. While the reaction was relatively modest, it is noteworthy and not simply because all journeys begin with a single step. In yesterday’s MIDDAY UPDATE we again repeated the “perfect storm” technical setup in the EURUSD and its potential for a strong upside reversal. Today’s ECB announcement only supports that possibility.
While a strengthening EURUSD often times bodes well for emerging markets, commodities and overall risk sentiment, that may not be the case if the trade war continues to expand. However one asset that may actually benefit in that environment is spot gold.
Across nearly all time frames there is a strong positive correlation between gold and the EURUSD. Just as the euro has the potential for a strong upside reversal, accordingly the long term technical setup in gold has similar potential.
As seen in the below monthly period chart, spot gold has been facing clearly defined resistance at the 1,350 – 1,400 range since early 2014. This represents the 38.2% retracement (1,381) of the decline made from the 2011 highs to 2015 lows. It has tested this resistance range on numerous occasions over this five year span which thus validates its importance as a critical price level. Breakouts from long term price levels are often be accompanied by powerful momentum.
Gold’s momentum is favorable with the weekly RSI reaching overbought levels (+70) in February before pulling back to a recent 49 low in April and May, well within the bullish zone. The weekly RSI has resumed its prior uptrend to a current 65 reading. The below monthly chart shows the longer term RSI (lower panel) testing three year highs at the 59 level. As with price a “breakout” in momentum measures carry an expectation of higher prices and thus INCREASING acceleration. Given this longer time monthly period, the upside momentum could be stronger and longer than many would otherwise expect.
With both price and momentum currently testing clearly defined multi-year resistance levels, gold has some serious upside potential for the first time in a long time. With the recent escalation in the global trade wars, Powell’s dovish remarks yesterday vs. the ECB’s “less dovish” meeting today, as well as the upside potential in the euro, there are no shortage of reasons arguing gold’s increasing attractiveness.
Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.