The fact that there is very little movement in early inter-bank FX trade, with USD/JPY and [currencies:AUDUSD|AUD/USD unchanged gives us little reason to believe S&P futures will open markedly different and thus our opening calls for the ASX 200 and a slight pop in the Nikkei 225 and Hang Seng feels right.
Traders have been happy to fade rallies into the 6035 to 6050 region since early November, with investors increasing cash levels here. So, the question then is whether this time is different and could we see the local market close up for a further consecutive week, in-turn breaking through this supply level. Obviously when the ASX financial and materials sectors contribute 52% of the ASX 200 weight, then we really need these two sectors to fire up and not just rely on the telco’s, which worked beautifully last week (the telco sector closed up 7% on the week), but only account for 3% of the index. We shall see, but as things stand the leads for both materials and energy (7% weighting on the ASX 200) look compelling. Although that being said, despite the S&P 500 closing near session highs (+0.6%) on the day), we did see the S&P 500 materials sub-sector as the only sector that didn’t close higher, with the sector closing -0.1%.
However, with iron ore, steel and coking coal futures closing up 2.6%, 1.9% and 1.8% respectively on Friday and copper and US crude closing +0.5% and 1.2.% respectively as well, then we should see buying in both of these sectors and BHP’s ADR is indicative of this closing +0.6%.
The focus on Friday was centred on the US payrolls report, although there was also some interest in the University of Michigan sentiment survey, and, of note was the 1-year inflation expectations sub-survey, where consumers (despite gasoline prices going lower) pushed up their expectations for near-term inflation to 2.8% from 2.5%. The US payrolls report hasn’t had a huge impact on markets of late, as it’s all about wages and in the November payrolls report wages did disappoint a tad, with average hourly earnings coming in at 2.5%, which was under the consensus of 2.7%. So despite the headline job creation coming in at higher than forecast 221,000 we initially saw good buying in the front-end of the US Treasury curve, with five-year yields dropping four basis points to 2.11% on the news. This naturally had an impact of weakening the USD, but as the session wore on we saw traders looking to sell treasuries and buy-back USD, with the USD index closing +0.1% on the day and USD/JPY (if we use this as a proxy for G10 FX) closing up two pips on the day at ¥113.46.
Pricing, if we focus on the fed funds future, around this week’s FOMC meet hasn’t really shifted as the market sees a hike as a done-deal, while we also see a 62% chance of another hike at the March meeting and effectively just under two hikes priced for the whole of 2018. Considering as we lose two dovish voters (and both could dissent against hikes this week) in Charles Evans and Neel Kashkari, to be replaced by the more hawkish Loretta Mester and John Williams and we are looking closely at a more hawkish bias from the 2018 voting collective. Throw in Trump tax reform and a front loaded fiscal stimulus, likely impacting their growth outlooks and there is a chance the median ‘dots plot’ projection (or where the Federal Reserve members see future moves in the fed funds rate) are taken up to four hikes in 2018, up from three.
If this plays out it could cause a tightening of financial conditions, with US treasury yields, USD and implied volatility higher, equities lower) as market participants are not quite on the same page here and are yet to be convinced that inflation is going to kick-up a gear in 2018. So two pertinent questions to focus on this week are whether the Fed alter its inflation language and become somewhat more optimistic, and whether the ‘dots plot’ projection signal a belief in four hikes in 2018. This is what the US yield curve, USD and the next derivatives of these markets, such as gold will trade.
Keep in mind we also get November inflation data at 00:30 aedt (early Thursday morning) and this could also be a big driver of markets, as the market has been more sensitive to this release than any other data release.
Of course, let’s not forget we also have to deal with the EU Council meeting, although we have already heard from EU Council President, Donald Tusk, who has said they will proceed to ‘Phase 2’ trade negotiations at this meeting. There is some conjecture here though, as UK representatives are seemingly after a truly bespoke deal, with The Times reporting the Brexit secretary David Davis will not pay its ‘divorce bill’ until its secures a trade deal. So GBP will be closely watched, especially with November inflation in play tonight and the BoE meeting mid-week. The EUR will also get attention, as will the DAX and German bund market with the ECB due to meet and gives its 2020 economic projections for the first time.
So Asia markets are beholden to macro forces, although Aussie November jobs report could be a catalyst for the AUD, with economists expecting 19,000 jobs to be created and unemployment rate to remain at 4.1%. AUD/USD is eyeing a break of the 75 handle, and again if we do see four hikes being portrayed by the Fed then one would not want to be too short this pair. Recall, most FOMC meetings in the past 12 months have generally been a bad time to be long USDs.
Of course, the focus at 10:00am AEDT isn’t on the S&P 500 or US crude futures open, but the Bitcoin futures open and whether this new avenue for trading Bitcoin impacts what is already an incredibly volatility market. Given the margin required when trading ‘real’ futures, participation here will really only attract high net worth’s or professional money managers, and there are real risks of ‘gapping’ on Monday mornings, given Bitcoin still trades on more traditional exchanges through the weekend. This will have to be a concern, so it does beg the question if we start to see a trend in behavior from futures traders, potentially rounding out positions ahead of the weekend risk. One suspects this will get good attention today, in what effectively marks the next evolution of the crypo-currency world.