Trader thoughts - the long and short of it

The markets are finding their stride for the new year and that seems to entail a return of the risk-seeking appetite that prevailed through most of 2017.

Market data
Source: Bloomberg

With volume adding a measure of conviction to the positive sentiment, we closed out another wide session of buy in from global equities to the more risky end of the spectrum – such as junk bonds and emerging markets. The opening days and weeks of a new trading year are a period for reinvesting capital sidelined for risk management and/or tax purposes. It is also in that capacity a time for reflection on exposure that has flown too far afield of ‘value’. Yet, complacency and extremely low volatility are difficult to ignore for those struggling to make a decent rate of return in an environment of near-zero yields.

Wall Street: Considering shares with green across the global board Thursday, it comes as no surprise that the typical front-runner US indices were enjoying gains once again. Yet, where the Euro Stoxx 50 posted an impressive 1.7% advance and Japanese Nikkei 225 closed a 3.3% swell; the primary US benchmarks were registering advances well below 1 percent (most earning less than 0.5%). Yet, where the intensity may fall short, the general market levels are hard to beat. Record highs were registered by the Dow, S&P 500, Russell 2000 and Nasdaq. Yet, market levels are perhaps not as impressive as the VIX’s measure of market activity. Already at an extreme level, the measure of implied volatility dipped below 9.0 this past session intraday. This essentially prices in a perfect forecast of placid and positive markets over the next month. Idealistic and risky.

NFPs:  Top event risk for the final session of this week falls squarely on the ever-popular US nonfarm payrolls. Of course, the headline net change figure will receive the greatest amount of interest with a concensus forecast of 190,000 jobs added to the economy through December and an ADP private payroll reading out this past session besting a similar forecast by a hefty 60,000 positions. The media-attention this particular figure draws is good for short-term speculative respons. But for those that are tracking the underlying trends and particularly the Dollar’s response, the focus turns to the details – particularly wages. Wage growth is the foundation for inflation – an element of the economy that still concerns the Fed and has throttled their enthusiasm for more aggressive monetary policy. A hold at 2.5% growth (which is forecasted) gets us to the Fed’s target over the medium-term; but something faster would motivate a faster pace of normalization.  

Ripple and Cryptocurrency: The debate rages between the new guard and old hand investment communities about where cryptocurrencies stand in the furture of the financial system. That discussion will continue through the foreseeable future and many will take advantage of the capital ebb and tide in the interim. Keeping tabs on the interested behind this market, one of the most notable trends arising behind speculative interest is the shift in appeal away from the establishment and media-favorite Bitcoin whose market cap as a percentage of the entire asset class has hit a fresh record low of 33.3% of the the market. In the meantime, Ripple – which isn’t even uniformly adopted across the largest exchanges – is gaining ground as the second largest at 17.4%. Ethereum is steady at 12.9% while the hard forked Bitcoin Cash is loosing the enthusiasm of its similarly named predecessary at 5.4%.

Asia Carry FX: The New Year has brought risk-on sentiment that has lifted Asian carry currencies to levels not seen since 2011. An aggregation of Asian carry currencies that includes the Indian rupee, Indonesian rupiah, Philippine peso, and Thai baht against a short USD position has moved higher alongside the kiwi and Aussie Dollar.

The APAC carry currencies are trading at a level not seen since the US Dollar traded at its lowest level after the great financial crisis in 2011. The demand in the commodity bloc and spreading risk-on sentiment has helped lift the higher yielding Asian carry currencies as implied volatility, which is correlated to market fear, continues to fall across major and emerging market currencies. Another view of broader emerging market currencies is the MSCI EM Currency Index that recently notched a 20% gain from the January 2016 low and has risen for ten straight days, the best streak in seven years.

ASX200: Australian cash shares are sitting at 52-week highs after gaining 0.11% or 6.69 points to 6077. While a laggard against APAC indices with Japan rising by a world-beating 3.26%, the ASX is at 52-week highs after rising for the third straight day and being lifted by mining companies and higher iron ore prices. The leading sectors on Thursday were Energy, Health Care & IT with utilities acting as the main drag.

The implied open of BHP Billiton and Rio Tinto when pulling insight from ADRs are gains to A$30.48 from A$30.33 and a drop to A$77.50 from A$77.85 respectively.

Commodities:  The commodity market got a further boost on Thursday thanks in large part to a large crude oil inventory draw out of the US that saw stockpiles drop the most since August as shown in the weekly EIA inventory report. The price of Crude Oil is working on the highest close in three years on a close above US$61.26/bbl. Brent Crude Oil is already higher by 1.5% in 2018 and is trading at the highest level since mid-2015.

The commodities that would hurt if you dropped them on your foot (i.e., precious and raw materials) were also stronger thanks to global manufacturing activity that showed the highest activity since 2011 that favors a continual draw of stockpiles. While we’re a long way from an inflation scare, the demand surge and break higher in aggregate commodities is often a fundamental building block to inflation and reactive central banks coming onto a seen.   

Australian Dollar: The Australian Dollar is starting 2018 with an impressive run over the last 30 days of trading after rebounding off 75.02 US cents per A$ in early December. Thursday’s high of US 78.65 cents per A$ marks a 4.84% off the December low.

The lack of downside force has been a helpful component of the strong AUD performance with the largest pullback since December 8 measuring at just under 0.17% while implied volatility continues to drop as options traders are pricing in the lowest expected volatility levels over 1-yr and 6-months in three years. Another insight from options comes from the ratio of out of the money calls to out of the money puts over the span of one-year options reaching the highest ratio in favor of calls (upside bias) since October 2007. 

Market Update:

SPI futures moved 6.7 or 0.11% to 6077.08.

AUD/USD moved 0.0012 or 0.153% to 0.7862 - Session High: 0.7863 Session Low: 0.7825

On Wall Street: Dow Jones 0.65%, S&P 500 0.48%, Nasdaq 0.2%.

In New York: BHP 0.39%, Rio -0.4%.

In Europe: Stoxx 50 1.68%, FTSE 100 0.32%, CAC 40 1.55%, DAX 30 1.46%.

Spot Gold moved 0.43% to US$1319.27 an ounce.

Brent Crude moved 0.09% to US$67.9 a barrel.

US Crude Oil moved 0.47% to US$61.92 a barrel.

Dalian Iron Ore moved 0.65% to CNY542.5 a tonne.

LME Aluminum moved -1.61% to US$2228 a tonne.

LME Copper moved -0.8% to US$7147 a tonne.

10-Year Bond Yield: US 2.45%, Germany 0.43%, Australia 2.68%.


By John Kicklighter, Chief Strategist, IG Chicago

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