Points of note
- Neel Kashkari replaces Narayana Kocherlakota as head of the Minneapolis Fed. This makes four out of five regional 2017 voting Fed members previously from Goldman Sachs
- Increased political narrative is being seen, notably from Portugal and the UK, with the Conservative Party seemingly at war over David Cameron’s demands in his negotiation with the EU
- The FTSE cash index is down four days in row, but it’s finding support at the bottom of its recent range. I would look to sell a break of 6260 for 5900
- EUR/USD prints a lower low of $1.0673 on expectations of a deeper deposit cut from the European Central Bank (ECB). The German two-year bund is now trading at -35 basis points!
- The correlation between gold and EUR/USD. Which one to trade?
- Copper is currently at $2.21 p/lb, with everyone eyeing a break of $2.20 p/lb. China is key here as we are not seeing the same sort of concerns in the US yield curve.
- AUD/USD trades a daily range of $0.7064 to $0.7019. I would sell rallies into $0.7150
- The ASX is likely to unwind at 5073, a potential fall of 0.5%
- Westpac consumer confidence due at 10:30 AEDT, with China retail sales (consensus +10.9%), fixed asset investment (+10.2%) and industrial production (+5.8%) at 16:30 AEDT
From a global macro perspective, the political issues in the UK have had little influence on markets. Although, there is no doubt in my mind that once we know a date for the UK referendum (the Brexit), then traders will start paying close attention to the polls and buying UK volatility will be the clear trade. For now though, it’s a question of watching the various negotiations. GBP/AUD is back testing AU$2.15 which shows the time for expressing concern about the perception of a massive hit to UK FDI is not now. Timing (as always) is key here.
In Europe, the debt markets are speaking volumes. Whether you want to look at Euribor, three-month USD libor or the German two-year bund the market is now screaming a belief that the ECB is going to cut the deposit rate from -20 basis points, to something closer to -35 basis points. Naturally this will have a short-term negative effect on the EUR, but there is also a view that this could be simply passed onto the consumer and higher mortgage rates could be seen in Europe. Will this policy backfire?
The fact that the German/US yield spread did not increase despite EUR/USD trading to a low of $1.0675 suggests traders have been sellers on the idea of the ECB driving money abroad, causing capital outflows, and therefore a weakening of the EUR. However, it’s hard to get too excited about selling EUR’s here given what is now priced in and expected to be detailed at the 3 December ECB meeting. I would be selling rallies in EUR’s and specifically against the JPY.
Turning to today’s trade and Asian equity markets are likely to see a fairly benign open, although there will be close attention on the Chinese data dump expected to be released at the close of the SPI futures. Given the trends we have seen in China’s inflation readings, the world will be keen to see if further stability is prevalent in some of the more high frequency economic numbers. The fact China are keeping the CNY stable despite EUR selling off rapidly must be hurting at a time when they would love to deport its deflation at a faster rate.
Price action in the CSI 300 will be of interest, as the equity market will still be open and bullish momentum seems to wanning somewhat. After rallying 30% in 47 sessions, the resumption of the IPO process will have some bearing, although this will be offset by the excess liquidity in the market. However there seems to be some confidence that traders will buy pullbacks in the market and this can be seen by the widening of the China A-shares market of the H-shares (China stocks listed in Hong Kong).
The ASX 200 has had a strong underperformance of late, notably against the Nikkei and Eurostoxx. I would continue holding a long Nikkei/short ASX bias for now and the long-term trend (seen in the ratio analysis) is fairly telling, even when converted to AUDs. A slight dip in the ASX 200 is expected on open. From here, it could be telling to see if traders support the open, or whether we see follow-through selling for a potential test of yesterday’s cash session low of 5047. Naturally, a break here means we will see the local market target with a 4 handle.
Expect BHP to open 1% to 1.5% lower, with better stability in the banks. In FX, while I don’t see it happening through today’s session, I would be a willing seller of AUD/USD into $0.7150 – the 38.2% retracement of the October sell-off and October downtrend.