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Trader thoughts - the long and short of it

The fourth quarter is off to a roaring start. Wedneday closed with much of the same speculative reach and heavy dose of uncertainty that has been the prevailing theme for the past weeks and months.  

Market data
Source: Bloomberg

US equities extended their reach to record highs with the S&P 500 working on a seventh consecutive trading day advance - a pace that matches the index’s most robust charges since July 2013. As remarkable as the highs for these benchmarks are, there is a sense among many market participants that this is shaping up to be ‘the most hated rally in recent history’. There is little of the traditional fundamental fuel in supply for this advance but plenty of FOMO (fear of missing out), combined with abnormally low volatility. With each day that passes without the markets reconciling its disparity to value, a percentage of skepticism will cave and throw in.

Wall Street: Markets through the New York session rode the momentum built through the European session that preceded it and the carry over from the previous day. Economic data was offering a modest boost to performance, but speculative justification seems merely a function of convenience – in other words, encouraging news is promoted while unfavorable headlines are brushed aside. A good example of this filter at-work were headlines’ suggesting the US Secretary of State Rex Tillerson’s press conference writing off reports of discord with the President were responsible for further lift in shares. This is absolving an unsubstantiated threat to bring markets back to neutral, not a promotion of economic progress.

At the time of this writing, the S&P 500 was working on its seventh consecutive advance and fresh record high close while the Dow 30 was putting in for its sixth. In comparison, the Russell 2000’s extreme drive to highs, however, had faltered with the first down day in nine sessions.

PMI Figures as Timely GDP Update: Official, quarterly GDP readings are infrequent but very important economic updates for key markets around the world. Over the past year or so, however, the market moving impact of these official statistics have seriously receded. In part, that is a function of the market’s penchant to fixate on speculative momentum rather than fundamental support. However, there is also a growing interest in the forecasting ability of more timely data to project this more important and all-incompassing readings.

Some of the best correlations to the sluggish GDP figures are the monthly PMI readings from important countries. This past session, we were updated with the September measures of service sector and composite readings through Asia, Europe and the US. In Australia, the serivce sector’s readings held above the growth market (50) but slowed, with the AiG measure slipping to 52.1 from 53 in August. The Eurozone measure was an update – or ‘final’ – reading but service activity unexpectedly ticked up from the first figure from 55.6 to 55.8. The UK saw a rise in 0.4 index point rise to 53.6 as well, but it was the United States’ ISM reading that offerd the biggest surprise. The 59.8 reading handily beat the 55.5 forecast.

ISM Prices Paid Fed: A key component of ISM on Wednesday was the prices paid component, which reached the highest level since 2012. While there likely was a boost to the figure thanks to a supply shortage caused by a handful of significant hurricane damage through September, either way, the idea that inflation is coming and with inflation rate hikes is worth traders and investors attention alike.

The Fed’s preferred inflation metric, the Personal Consumption Expenditure or PCE has maintained a positive relationship or correlation to ISM services PMI over the survey’s 20-year history. Therefore, investors who are expecting higher rates in the future are likely encouraged by Wednesday’s report in the US. Inflation has been the missing component to the Federal Reserve’s argument to hike more aggressively, and the move in prices paid from May, where the index was in contraction territory to September argues the Fed will not want to be left behind. Per Fed Funds futures, the market is currently pricing in a 75% chance of a hike at the December 13 FOMC meeting.

Don’t Forget Monetary Policy: As the winds of speculation continue to charge the market forward, it is important not to lose sight of the fundamental benchmark that will act to backstop or sink a market if appetites ultimately cave. One of the most effective and prolific themes guiding the markets over the past months has been monetary policy. On that front, the Federal Reserve’s rate timetable has materially increased with the expectations of a December hike rising to 83% according to Fed Funds futures and the balance sheet reduction program already underway.

On that theme, the Yellen speech Wednesday evening and range of Fed speak Thursday look to contribute to the charge, but Friday’s NFPs will hold a special distraction for traders. Far more extreme in its standings and assumptions, however, is the ECB’s bearings. The market’s expect a plan for normalisation to be laid out later this month from the European authority, despite their obvious caution. If that is to be the case, the minutes from the last meeting (due today) should address that.

Australia Dollar: The Australian Dollar lead the majority of major currencies on Wednesday with the biggest gains seen against the haven currency, Swiss Franc and the US Dollar with gains of +0.45% and +0.3% respectively. While the market continues to digest the relatively dovish RBA meeting from Tuesday, the price of AUD/USD continues to hold above the 100-day moving average at 0.7777.

Traders will look to both Trade Balance and Retail Sales figures on Thursday to gauge whether or not the relatively-high-yielding AUD can continue to buck the recent trend of AUD weakness. Over the last month, AUD/USD has fallen by over 2% thanks in large part to the rise in US Treasury yields in anticipation for a more hawkish Fed than was anticipated for much of the year.

ASX: Despite the new highs being forged by the likes of the Nikkei 225, DAX and S&P 500; the Australia’s ASX 200 continues to fall further from pace. The benchmark has held a range for months, and again explicitly broke from pace this past session. Having dropped back to 5,640 this past session – the low end of the range and trendline for the past eight and 10 months respectively; we have to wonder what would happen if speculative appetites soured globally? 

Commodities: Energy markets took another step back after aggressively rising in the second half of September. The EIA Crude Oil Inventory Report on Wednesday showed that the US Refiners are flooding the market with Oil thanks in part to the large spread between gasoline and crude. Another insight that came from the report was the US production is further dampening the global supply balance fight from OPEC as the last two weeks of increased US production in the recovery of Hurricane Harvey in the concentrated-energy region was more than the aggregate cut for September. The price of WTI Crude Oil continues to trade around $US 50 per barrel, which is seen as a psychological support level.

The metals market remains muted on the lack of volatility in global markets. The price of spot gold rose on Wednesday by +0.25%. Gold is showing the strongest 180-day rolling inverse correlation to the US Dollar since 2010 before the US Dollar rose 11%.

Market Watch:

SPI futures down 49 points or -0.9% to 5652

AUD +0.25% to 78.57 US cents (Overnight range: 0.7830 - 0.7875)

On Wall St: Dow +0.15%, S&P 500 +0.15%, Nasdaq +0.05%

In New York, BHP +0.0% Rio +0.2%

In Europe: Stoxx 50 -0.3%, FTSE -0.01%, CAC -0.1%, DAX +0.5%

Spot gold +0.25% to $US1274.71 an ounce

Brent crude -0.25% to $US55.77 barrel

US oil -0.4% to $US50.03  barrel

Chinese markets are closed for holidays

Iron Ore delivered to Qingdao China – 62% Ferrous Content No Change, 62.05

LME aluminium +1.7% to $US2166 a tonne

LME copper +0.3% to $US6521 a tonne

10-year bond yields: US 2.332%, Germany 0.45%, Australia 2.80%

 

By John Kicklighter (Chief Strategist - IG Chicago) and Tyler Yell (Trading Instructor & Currency Analyst - IG Addison).

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