Stocks sink lower as grains extend their rally

Summary:

• US indices break below key supports

• S&P500 drops to 2 ½ month low

• DE30: German unemployment surges

• BOC keep rates on hold at 1.75%

• Grains experience wild price rally

After hitting an all-time high a little over a month ago, there’s been a notable pullback in US stocks with the re-emergence of US-Sino trade tensions weighing on risk sentiment. The S&P500 is currently trading only a little over 5% from its record peak of 2962, but there is some suggestion that the decline could just be getting started with two long-term technical signals being triggered - A break below the Ichimoku cloud on a daily chart and a potential head and shoulders.

On the trade front there’s little by the way of fresh negative developments, but these aren’t necessarily required for a further pullback in stocks, with the markets remaining remarkably optimistic that a de-escalation will occur despite scant evidence to support this. One of the most widely cited reasons for the rally year-to-date has been the U-turn performed by the Fed with the central bank changing course and investors now expecting that rates will be cut not once, but twice this year. This is an extremely dovish view considering that the central bank haven’t cut in over a decade and while US economic data has softened, it is still holding up fairly well with inflation not far from the Fed’s target. With the yield curve inverting further the warning signs are clear, and the big worry for stock market bulls is that the so-called “Powell Put” will not manifest itself as readily as it did with his predecessors.      

Despite a stellar start to the year there remains a feeling that all is not well for stock markets, with concerns surrounding the health of the global economy remaining in place as trade tensions between the world’s two largest economies have ramped up further. After a string of disappointing manufacturing surveys from Germany we’re now starting to see some weakness in the hard date with the unemployment rate rising for the first time in over 5 years in April. The monthly unemployment change for the month showed a massive jump to 60k - the first such rise in two years - and while this could be explained away to some extent by a statistical reclassification it is another potential alarm bell.

As was widely expected the Bank of Canada announced that they would keep their policy rate unchanged at 1.75% following their latest meeting. The overall tone of the accompanying statement was fairly upbeat, with the rate setters pointing out that the Oil sector looks like it is beginning to recover and pointed to a more stable housing market. However, they did caution that the escalating trade conflict casts doubt on the global outlook. USDCAD briefly rallied to its highest level since January after the decision, and remains higher on the day as the dust settles.

At the beginning of the year nobody expected that grains could become one of the hottest markets. Until then, there were many reports suggesting perfect conditions to plant major grains like wheat, corn or soybeans - the prime factor behind low prices. However, a flood present in the US in the spring delayed the planting season which is the worst one in 30 years. In this article we incorporate the above-mentioned factors and analyse two key markets - corn and wheat.