After much talk of algorithms causing mayhem, immoral short sellers accelerating the downside move, QE4 back on traders’ radars, bubbles popping everywhere, and yield curves, credit spreads and the oil predicting global recessionary forces, we are seeing developed market equities roar ahead. On the point of oil, the WTI and brent prices are just over 8% higher than the Australia cash close yesterday and the S&P energy sector gained 4.9%.
Traders also have the weekend’s Jackson Hole Symposium and further rhetoric from some of the world’s most influential economists and central bankers to look forward to. Specifically, the highlight is Federal Reserve vice Chair Stanley Fischer, who speaks on Saturday (2.25am Sunday for Australians). Expect Mr Fischer to talk up the prospect of inflation moving to the Fed’s target range, with a view that the market volatility of late is a high barrier to really influence the Fed’s mindset. In saying that, I don’t expect him to be hawkish and I suspect he will provide a calming influence to markets.
First up though, we get Fed members Kocherlakota and Mester giving views on US monetary policy tonight.
There has already been somewhat of a calming move, helped by comments by a stronger US durable and a 3.7% growth rate. At a central bank level, European Central Bank (ECB) executive member Peter Praet detailed that they can, if needed, increase its asset purchases. This view somewhat echoes comments from Larry Summer, who has been advising on the Fed undertaking a fresh round of asset purchases in the US to bring down real interest rates. Noises from the Bank of Japan have not been very constructive on increasing its Quantitative Easing (QE) program, however Mr Kuroda feels the Japanese economy is improving and is a keen advocate for the Fed lifting rates sooner. I take this as bullish.
So turning to today’s open, it’s clearly a day where you will be rewarded for being long in equities. Buying fear on Monday was the trade, and the technical and market internals were screaming oversold. If markets are using oil and credit markets as key directional catalysts, then the positive moves overnight throw real backbone behind the short-term upside. We have even seen buying in emerging market currencies and Asia-based traders will take further solace from the fact the S&P 500 closed at its high for two straight days.
We are used to markets moving swiftly lower, but such was the ferocity that we are seeing arguably just as an aggressive snapback. It took the ASX 200 15 days to fall 14% from the 4 August. If we open at 5305 (which is our call), then the market would have rallied 377 points, or 7.6% in four days. A move through 5328 means the index would have recouped 50% of the 14% loss in just four days – which is very aggressive. BHP’s American Depository Receipts (ADR) suggests an open of 4% higher, so while I expect broad based gains, energy, materials and industrial sectors should lead the pack.
Chinese markets could underpin Asia once again, with the Stabilisation Fund speculated at buying blue chip stocks yesterday. I thought it was quite fitting that the Chinese authorities want a stable stock market ahead of the 3 September war commemorations and while it hasn’t occurred of late, this time around I suspect the authorities are going to get their wish. In the very short-term, I would not be betting against the Chinese wishes here.
As things stand, the ASX 200 is eyeing a gain of slightly less than 2% this week, so there may be a few traders feeling like they’ve missed the boat. Will we see a bout of FOMO (fear of missing out) kick in today? This could well be the case; therefore, price action shortly after 10.30am AEST will be key. Of course, the open of the Chinese futures market and People’s Bank of China (PBoC) CNY fix at 11.15am AEST could be a catalyst for volatility and market direction. But for now, the ASX 200 is on the up. We should reclaim the former 2013 uptrend line break and the index is eyeing a move back into the triple top neckline around 5400. Still, this is a fickle market and we could see a turn at any stage. Keep your friends close but your stop losses closer.