The trading session for global equities either saw moderate movement within broad ranges like the ASX or were simply drained of life, as with the S&P 500. The volatility measures, however, remain the most black and white reminders of the extreme degree of quiet currently plaguing active traders looking for opportunities.
The severe drought in activity is present across virtually all assets including FX, commodities, fixed income and equities. However, it is the VIX that continues to act as the favourite whipping boy of speculators’ lament. The index dropped as low as 8.8 Wednesday in the New York session and closed out at 9.6 – that is now 10 straight days below 10, a level considered an extreme threshold.
Wall Street: The benchmark US equity indexes closed this past session with gains – but the progress was technical at best. There is no conviction in its climb. The day’s range for the S&P 500 was extremely small – as a percentage of current spot price it accounted for only 0.28%, which is in the lower extreme of inactivity for the index that we have seen over the past years. Furthermore, the climb that we have seen from this particular index has further lost conviction via statistical measure.
Looking at a comparison of the average of the past 5 days’ trading range (ATR) to the past 20 days, we find the second steepest decleration in 5 years. That doesn’t bode well for bulls looking for hand holds to the next leg higher. Meanwhile, the fading conviction in the Nasdaq’s move is even more severe. The afterhours report of Facebook looks like it could have helped some of the drift that followed Google’s report, but the initial reaction was a surprise drop on what was a beat for the figures. While FB shares regained in afterhours trade, it suggests sentiment in the tech sector particularly may not be so sanguine.
Fed Holds Rates and Course to QE Reduction: As expected, the Federal Reserve held its benchmark rate unchanged at a range of 1.00 to 1.25 Wednesday afternoon in Washington DC. Given all of the group’s four rate hikes have occurred on what are considered the ‘quarterly’ meetings – the last three successive quarters – it was highly unlikley that Fed was willing to deliver any surprises and further volatility to the financial system. In the statement that accompanies decisions and has in become a speculative highlight all its own, the central bank did little to clear up the skepticism surrounding its forecast for another rate hike in the second half of 2017.
That wouldn’t be where the market is looking for Dollar guidance regardless. The focus is on the trailblazing effort to impliment a normalization policy – to start selling off its massive balance sheet. The group repeated that it expects to impliment the program it laid out last month ‘relatively soon.’ Global investors should watch the progress of this move. Given the dependency of speculative reach on the massive global influx of central bank support over the years, the tipping point for complacency may be much closer than many are aware.
Aussie CPI Doesn’t Dampen Speculation: There is considerable speculation behind the Aussie Dollar’s outperformance these past weeks. While there have been some encouraging economic prints from the local economy and encouraging updates from China, the AUD/USD climb seems too remarkable given the inputs. A key part of the currency’s performance is a swell in carry trade appetite that has also shown through in two other popular and liquid carry currencies: the New Zealand and Canadian Dollars. All have risen risen significantly against their more liquid counterparts with an added intensity following the BoC’s rate hike.
Given the appetite for yield of late and the recognition of capital gains that come in the early phases of policy changes (see the US Dollar in 2014), opportunitists are on high alert for any waves they can ride in. While the RBA has shown little appetite so far for that first rate hike, the markets remain unperturbed on their speculative views. The 2Q CPI figures crossing the wires at 1.9% - below the target range – puts some statistical weight behind skepticism, but appetite for returns is difficult to put off when motivated.
Through Bitcoin’s Rally And Tumble, Volatility: The market’s favourite cryptocurrencies have lost the wind behind the epic advances they staged through May and June. Yet, in the absence of a clear direction remains the unchecked danger of volatility. The premium that can be afforded in deep financial integration of the blockchain behind these assets has been intregrated for now. What we have now is the hallmark of speculators taking the reins. Headlines will continue to spur abrupt moves, but until we get back to clear discussions of Bitcoin being accepted at a government level in a major financial hub – or being threatened by regulation – expect volatility without reliable trend.
Australia Dollar: Next to the New Zealand Dollar and the Norwegian Krone, the Aussie Dollar was this past session’s strongest performer. Given the standings of the aforementioned three at the top of the charts and the Dollar and Franc at the lower end, it seemed the markets were following their appetite for yield in FX performance. Yet, given the strained backdrop for this reach in equities and other asset classes, we shouldn’t put too much expectation on this particular motivation for trend.
ASX: The ASX continues to trade in the broad range it has carved out over the past two months. Even for those that don’t consider themselves primarily technical traders, it is hard to miss the right shoulder that this congestion is posing in a broader head-and-shoulders pattern throughout 2017. A break of 5,650 could pose a very dramatic shift in priorities, so traders be wary.
Commodities: The big names in commodities have lost some of their luster. Oil’s remarkable break and climb Tuesday was throttled this past session with limited speculative ambition to its projection. Gold moved up to a new six week high, but it was copper that continues to steal headlines. The incredible surge to 2-year highs has extended to this past session and the remnants of the failed head-and-shoulders pattern still echos on the charts.
S&P/ASX 200 up 50.028 points or +0.86% to 5776.625
AUD +0.66% to 0.7990 US cents
On Wall St, Dow +0.45%, S&P 500 +0.03%, Nasdaq +0.16%
In New York, BHP +1.35%, Rio +0.20%
In Europe, Stoxx 50 +0.51%, FTSE +0.24 %, CAC +0.56%, DAX +0.33%
Spot gold +0.82% at US$1260.23 an ounce
Brent crude +1.39 % to US$50.90 a barrel
Iron ore -0.57% to US$77.94 a tonne
Dalian iron ore at 523.5 yuan
LME aluminium (cash) +0.99% to $US1909.25 a tonne
LME copper (cash) +3.28% to US$6197.25 a tonne
10-year bond yield: US 2.29%, Germany 0.56%, Australia 2.73%
By John Kicklighter, Chief Strategist, IG Chicago