Not only have the US equity indexes continue to charge to successive record highs, but the implied volatility measures across assets and borders continues to deflate to levels that would imply there is no chance that the markets could encounter an unfavorable dip in performance.
Though increasingly securitized, volatility measures like the VIX (at a record low) still act as a measure of insurance cost. Investors have to make decision about what level of risk-reward they are willing to accept in these conditions. On the one side, the complacency view of ‘if it’s not broken, don’t fix it’ can take advantage of further stretch but can be poorly acclimated to move quickly in the event that conditions fall apart quickly. Aternatively, those that abide the ‘this time is different’ mentality may miss gains to be squeezed out near-term but can avoid any catastrophic reversals.
Wall Street: US equities closed Thursday with a glow. The S&P 500 again was leading the charge with an incredible 8 straight day advance. That matches the longest series of gains since November 2004 and six of those sessions’ close was a record high in its own right.
The historical comparison of the Dow 30 and Nasdaq were slightly less impressive, but they too were pushing record highs and up to 7 straight days higher. This is the kind of performance one expects amid a discounted market or in the middle of a historical range when fundamentals materially improve. Where the economic backdrop hasn’t improved and aready at highs, this looks more like the characteristics of a blow off top.
NFPs Expectations: The battering that economic stalwart states Texas and Florida took over the month of September is expected to weaken the payroll numbers on Friday considerably. However, a weak number is seen as an outlier as US economic resilience has recently been a key theme that has helped the US Dollar move strongly off two-years’ lows that were seen a mere 20-days ago.
The spread of economists expectations for the NFP headline number is over 300,000, the widest disparity since 2010 and helps explain the uncertainty clouding tomorrow’s Non-Farm Payroll report. With so much confusion around the headline number, the focus will decidedly shift to the earnings component known as Average Hourly Earnings or AHE, which is a proxy for wage inflation. A month-on-month print of 0.3-0.4% compared to last month’s print of 0.1% m/m would likely further propel the USD higher against weaker currencies and continue the trend seen since mid-September of short-covering in the popular bearish trade of DXY that continues to unravel
Australian Data Wrap: A shockingly poor retail sales report on Thursday was enough to put a bid in AU 10-year bond futures. The unexpected fall in sales in August of 0.6% per the Australian Bureau of Statistics was the largest decline since March 2013.
The consensus forecast was a 0.3% gain. The blame for poor retail performance has spread to the households facing multiple-headwinds of low wage growth alongside record levels of debt with discretionary income being consumed by rising energy bills per ANZ. A positive light was provided by the Trade Surplus data that beat expectations of A$850 to come in at A$989, but the fall in AUD/USD helps to make the point that the retail sales mattered most for AUD traders and could impact the RBA-outlook going forward.
Sterling’s Recovery is Coming Apart this Week : The worst performing major currency this week by a large margin has been the British Pound. The currency is down against all major counterparts with a scale between 2.2% relative to the Dollar to 0.8% compared to the New Zealand currency. The source of that reversal is certainly not anticipation for the Bank of England. In fact, the conditions for that outlook have improved materially between central bank commentary and data with swaps now pricing in an 81% chance of a hike by year-end. The pin deflating the currency is Brexit concerns. The EU negotiators lamenting a lack of progress, the division in the UK government and references to ‘plans should it end with a no-deal’ scenario is worrying foreign and local investors.
Australia Dollar: The weak data from Thursday morning took its toll on the Aussie Dollar through the session. While it managed a marginal gain (0.1%) versus the Pound, the performance is undercut by the reality that it was the worst performer on the day. Among the rest of its crosses, it registered serious losses with the biggest measuring a 0.9% drop to the Dollar. Some of these crosses are also looking technically dangerous for sustained bearish momentum. Perhaps the most troubling is AUD/USD at 0.78, which was a crucial resistance for multiple years before we finally overcame the ceiling in July. The enthusiasm that followed clearly didn’t hold up.
ASX: The ASX closed little changed through Thursday’s active session, but afterhours activity has helped bolster the market commensurate with the performance in European and US markets. However, lifting the benchmark off 5,650 range support does not close the yawning gap in performance seen on this benchmark versus the likes of the DAX or S&P 500. Again, it is worth considering: what would happen to this index if speculative appetite slipped globally?
Commodities: The price of WTI and Brent Crude Oil moved sharply higher by nearly 2% intraday on positive sentiment surrounding the first visit of Saudi King Bin Salman to Russia. The two superpowers that lead OPEC+ (a moniker of a strategic alliance between OPEC and key non-OPEC energy producers like Russia) are said to be considering an extension to the pact to curb oil supplies that was originally agreed upon in November.
In a recent energy forum event, Putin gave credence to the view that Russia may agree to extend the oil-supply curb agreement to the end of 2018, but that decision would not be confirmed until the current pact is done at the end of Q1 2018. Despite the Chinese Holiday limiting open interest in global metals trading, Copper rebounded aggressively on the LME. The rise was the most in five weeks as reports from Chile showed mining activity grew 9.2% in August, which was the sharpest pace since January 2015, and is a possible sign the industry and market is finding its footing amidst the upbeat global economic data. Trading in China will resume October 9, which is expected to bring a fresh round of orders.
SPI futures down -1 point or -0.01% to 5651
AUD -0.9% to 77.97 US cents (Overnight range: 0.7795 - 0.7865)
On Wall St: Dow +0.45%, S&P 500 +0.5%, Nasdaq +0.6%
In New York, BHP +0.5% Rio +0.62%
In Europe: Stoxx 50 +0.5%, FTSE +0.5%, CAC +0.3%, DAX -0.01%
Spot gold -0.3% to $US1271.05 an ounce
Brent crude +1.83% to $US56.81 barrel
US oil +1.5% to $US50.71 barrel
Chinese markets are closed for holidays
Iron Ore delivered to Qingdao China – 62% Ferrous Content -0.01%, 61.48
LME aluminum +0.01% to $US2172 a tonne
LME copper +2.7% to $US6700 a tonne
10-year bond yield: US 2.346%, Germany 0.45%, Australia 2.78%
By John Kicklighter, Chief Strategist, IG Chicago