In Australia, the ASX lost 5.5% throughout September. Given the 8.6% loss seen in August, this has really given the bears the upper hand. It also means that September has romped into third spot as one of the worst months to be long in Aussie stocks over the past decade. Will October fare better?
Well, if you look at the market from a pure historical performance point-of-view – which any financial participant will tell you is no guide to future profitability – the ASX 200 has rallied in October consecutively for the past five years. What’s more, the gains have been strong, averaging 4.1% during that period. Naturally, one shouldn’t buy the market or take an outright positive view on Aussie stocks just because the index has performed well historically, as the macro backdrop is vastly different. However it is something to keep in mind, especially given US markets (the key lead indicator for Australia) tend to do well at this time of year.
China is effectively seeing quantitative tightening (given its use of FX reserves to support the CNY given the recent outflows), while many emerging market nations (such as Saudi Arabia) are repatriating funds to support the current account. This all points to a tightening in financial conditions. We did see a modest improvement in US financial conditions overnight and this has supported risk, however, the index is still in negative territory (on the Bloomberg financial condition index) and we should therefore still expect headwinds to global equities. It’s also worth pointing out that financial conditions have been deteriorating for the whole of 2015 and this index is widely look at by institutional traders.
It’s also interesting to see good buying support coming into the SPI futures (December contract) and while most will point to the ASX 200 closing below the August low – importantly the same hasn’t been seen in the futures. SPI futures came within 17 points of the 25 August low of 4864. In fact, we have seen some modest mean reversion with the SPI futures trading over two standard deviations from the 20-day moving average. For the ASX 200 to trade to the key 2011 uptrend support (at 4850) which many traders are looking at, we will need to see a lower low in the SPI futures. However as things stand, we are calling a modestly higher open at 4949.
[shares:GLEN-UK:Glencore] (GLEN) rallied 17% overnight and once again, the feedback loop between GLEN’s equity and commodities continues. Here, increased counterparty risk, and therefore the idea of new margin restrictions, ultimately leads to the perception of the forced selling of inventory from Glencore’s trading desk. So the gains in the equity has seen some relief in commodities, commodity currencies and resource names. This move in GLEN should be replicated in the Hong Kong listing and should underpin Aussie resources, with BHP’s American Depositary Receipt (ADR) suggesting an open of 1.8% higher. Commonwealth Bank of Australia’s ADR is modestly higher as well. As long as financial and resources open on the front foot, then the broader market can stage somewhat of a recovery.
Economic data on the docket is not going to alter sentiment dramatically, with Japanese industrial production and retail sales (both released at 9.50am AEST) in focus. In Australia, we get private sector credit and building approvals (11.30am AEST), but unless we get a strong miss/beat, then I feel that AUD/USD will be largely unchanged on these numbers. Keep in mind that the market is placing a near 50% probability of cuts from the Reserve Bank by year-end and this seems fitting with current sentiment.
Watch volumes on the move higher today to give us some sort of belief that the index can consolidate or whether traders will look to sell rallies in the Aussie index. Traders are now becoming fairly accustomed to the market being up 1% one day and then down 2% the next. There is very little belief that we can see 5000 or higher in the short term.