Trader thoughts - the long and short of it

There are not many corporates that can have an effect like this. However, given NAB, WBC and ANZ report on a different calendar, the trends and outlook portrayed by CBA could be a thematic that plays out in other stocks. So Aussie financials will be the must-watch space this morning.

CBA is expected to print some fine numbers, with the consensus sitting for cash earnings of $9.804 billion, on revenue of $25.819 billion. Net interest margins (NIM) are expected at 2.10%, representing a drop of three basis points on the year, but should show signs of stabilisation through the second half, while naturally asset quality and its capital levels will be a consideration given they are likely to have the biggest deficits to the CET1 minimum target of 10.5% (set by APRA for January 2020).

There is no particular directional trend in CBA’s share price at present, so there is a limited risk that too much is being expected. The report will then be interesting, not just because of commentary around the recent negative news flow, but also for a deeper dive into trends around housing for more macro-focused traders.

SPI futures were at 5682 when the ASX 200 cash market officially shut yesterday. Given this now sits at 5685, suggests a largely uninspiring open for the ASX 200. SPI futures are actually in a really interesting place now and for those trading the ASX 200 cash, they should have the Aussie futures market on their radar, as the battle lines are clearly pronounced.

In trade yesterday, we saw the high of 5735 corresponding with a firm rejection of the June downtrend. This is the sixth time the index has rejected trend resistance drawn from the June highs. A closing break of the trend is needed to push the futures into 5800, and this would naturally push the ASX 200 into and above 5800 too. Clearly, a break of 5600 is still a possibility (in the SPI futures) and this would be a wholly bearish development.

The ASX 200 cash daily chart currently looks like the sort of pattern an electrocardiograph machine (EKG) in a hospital would send off when a patient is being monitored. This is why we can smooth it out using moving averages.

It’s all about CBA this morning and the impact on a financial sector that really needs to find a spark again and push through 6700. Aussie banks are holding in though and one can look at the credit markets where credit-default swaps (CDS) are trading at the lowest levels since September 2014. They are certainly are not finding the same love as European banks though, which are flying right now. Look at a chart of BNP Paribas or through an ETF like the BNK (Stoxx financial ETF).

European equities, as a whole, have found modest buyers overnight. However, perhaps the more interesting aspect of the night has been the move lower in EUR/USD into $1.1750, with a lower low printed on the daily chart. European equities will outperform here if we see EUR/USD, EUR/CNY and EUR/GBP lower, but much still rides on this Friday's US core CPI. I would also be keeping an eye in the German 2-30 yield curve as the key driver of EUR. There have been a few noises of funds, which are looking closely at putting on trades that take advantage of the outperformance of longer maturity German bonds and a flatter yield curve. This would hit the EUR valuation. One to watch.

In fact, staying on the FX theme, we have seen a further covering of USD shorts, albeit very lightly. In US trade we saw job openings (in the monthly JOLTS report) rising to new highs in this cycle, with 6.163 million new job openings seen. The market was looking for 5.75 million, with the number of the quit rate moving down a touch to 2.1%, so these were good numbers.

The Federal Reserve do look at this report closely, so while this isn’t an inflationary data point, which of course is what markets are super sensitive too, it is another sign the US labour market is in a good spot. We have only seen small selling in US fixed income (the 10-year treasury is up 1bp at 2.27%), so the moves in the USD have been limited. We can see USD/JPY largely unchanged, while AUD/USD is only down 10 pips or so from 5:00pm AEST yesterday at $0.7915.

US equities are down a touch and the run of 10 consecutive higher closes in the Dow (-0.2%) has come to an end. Perhaps I jinxed the move yesterday by highlighting it! Traders continue to watch developments and the dynamics between the US and North Korea, with Donald Trump giving a stern warning not to threaten the US and that they would respond with ‘fire and fury’. This won’t be helping sentiment, and would have caused some buying in JPY and covering of short positions in VIX (or the US volatility index) futures. Although traders have generally not expressed a strong risk aversion bias, here the comments suggest Trump is getting closer to a breaking point. I would certainly be watching the VIX, because as I said yesterday, if there is an unexpected shock the VIX could absolutely fly.

In terms of commodity moves, as a guide for the Asia open, we can see spot iron ore falling 0.9% to $75.46. Iron ore futures are far more interesting though and while price is down modestly in the session, it’s strongly off the lows and we have seen a bullish candle printed on the daily chart. A higher high today in price and the bullish move should continue in iron ore futures. Oil has pulled back 0.6% at $49.11, but it has been a messy night for news flow with the EIA raising its 2017 and 2018 US crude output estimates to 9.9 million and 9.33 million barrels a day respectively.

On the other hand, we are hearing the UAE, Kazakhstan and Iraq will fully comply with the OPEC agreement. This will be in view today, with the meeting between OPEC and non-OPEC nations in Abu Dhabi.