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The ASX 200 is the outlier and starting to underperform, although the index has found buying into 5400. If we think that the ASX 200 is a global yield play and the Australian ten-year treasury is dangerously close to breaking the 2 August of 1.81%, then we could see support start to emerge in this low volatility environment. Recall that investors will often use the government bond market as the (risk-free) discount rate by which they discount future cash flows in the form of dividends to work out the present value of a company – or what is effectively considered ‘fair value’. So, as bond yields fall, the net present value of a potential investment increases.
Moving away from the investment landscape and putting the trading hat on, the S&P 500 and the German DAX look to be the best bet now on the long side, with the German index showing a strong momentum buy on a break of 10,800. Traders will be watching out for clues the path of the European Central Bank’s (ECB) Quantitative Easing program at 21:45 AEST, although few expect any radical changes to the current initiatives. There certainly doesn’t seem much ability to control the EUR, where EUR/USD is driven predominately by the USD, although this could be said for much of the FX markets right now. The US Federal Reserve (Fed) are not going to raise rates this year if they truly are data dependant, and if they hike in December it would be an admittance that they are more dictated by the calendar. US data is showing some signs of vulnerability, but talk of a recession (on current news flow) seems to be nonsense in my opinion.
All-in-all, we are calling for a slight decline in the ASX 200, with BHP and CBA expected to open around 1.2% and 0.4% weaker respectively. I wouldn’t expect much of a reaction to come from the Australian trade data or the Japanese data, but Japanese economics is becoming more and more interesting as we head into the 21 September Bank of Japan meeting. For macro-focused traders and strategists, all eyes will be on the Japanese yield curve as a guide for both the JPY and the equity market. We are starting to see this flatten off again, which should promote underperformance from Japanese equities.