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Interestingly, we can see Aussie SPI futures sitting up 19 points (+0.34%), suggesting the ASX 200 cash market should unwind at 5675 and holding the bottom of the multi month range for dear life. Could today be the day we see a more convincing break of this trading range and to establish a new range of say 5600 to 5400? Or are we set to see the bulls come alive and support prices with the prospect of holding through the weekend? My best guess is there are downside risks to the opening call, although the market will tell us exactly how they are feeling from around 10:15am AEST.
The overnight leads from Wall Street are wholly uninspiring, with the dust settling after yesterday’s FOMC statement, with the S&P 500 ultimately closing -0.3%. Volumes have been in-line with the 30-day average, with small gains in financials and industrials, while tech and healthcare took out the points. The S&P 500 materials space closed down a mere 0.2%, despite the carnage in commodities, but whether that is a genuine read-through for Aussie miners is yet to be seen. There has been limited news flow to be fair, with a focus on tier two US economic data and further geo-political headlines, with the highlight being ‘Trump to impose more sanctions on North Korea’.
Outside of equities and we have seen limited moves in fixed income (the US 10-year treasury sits unchanged at 2.27%). However, the interest rate markets, we have seen modest selling across the Fed funds future curve, resulting in a 67% chance of December hike, with 46 basis points of hikes priced through to the end of 2018.
There has been some covering in EUR/USD shorts, taking the pair into $1.1943 and pushing the USD index lower by 0.3%. For EUR traders, keep an eye on speeches later today from ECB members Benoit Coeure (5:15pm AEST) and Mario Draghi (6:30pm AEST) and whether they reveal any new colour or push back on the current exchange rate. The bigger moves in G10 FX, however, have come from the AUD and to a lesser extent the NZD. AUD/USD has seen the bulk of the client flow, with a sizeable 1.2% sell-off – the third biggest of the year. Intra-day, if we do see follow through from Asia-based traders then key support sits at $0.7880 (top of the Ichomoku cloud), so the bulls will want to see this hold. GBP/AUD has had the bigger move, with a huge gain of 1.9% and is testing the 7 July highs of $1.7123.
Today is the last day to position FX portfolios ahead of the New Zealand election, where the incumbent National Party has seen increased support of late, which has supported the NZD, specifically against the AUD. GBP becomes front and centre too with Theresa May speaking tonight at 11:15pm AEST in Florence, laying out the government’s position on the ‘Brexit Bill’. Sources are suggesting the UK are willing to pay €20 billion during a transition, but only if they gain access to the single market. Whether the EU accept this is not clear, as they were pushing for a €60 billion payment, but the speech could reveal much about the UK’s stance on their Brexit plans.
So despite a lack of genuine news to sink our teeth into there are some interesting cross currents to negotiate. Aussie financials will continue to be a key driver of the ASX 200, and it’s clear all the recent talk of potential rate hikes in 2018 from the RBA is not good for banks. Fine, they can re-price loans and business can absorb these changes, as corporate debt in Australia is in good shape.
The same can’t be said though for the household balance sheet and if banks see higher funding charges from moves in wholesale funding markets then they have a limited cushion by which to push this onto a highly levered mortgage holder. The demand for new credit will clearly take a hit and there could be an impact on banks net interest margins. The idea that many have genuinely taking on way too much debt, without due consideration that interest rates can actually go up, then a rate hike cycle (not that I am predicting it), and to quote a Warren Buffet saying, will be a classic case of ‘only when the tide goes out do you discover who’s been swimming naked’.
It’s mining that should see the moves though, as suggested, and the angst is a one-two combination of a steeper Fed funds curve and the potential for USD strength in the short-term. On the other hand, concerns around an abundant steel and iron ore supply have been in play for a while, while the Steel Business Briefing has just reported that Chinese mills have cut hot rolled coil prices (HRC), due to weakening demand.
Spot iron ore has closed -5.1%, iron ore futures sit -3%, while steel and coking coal futures are lower by 2.3% and 4.1% respectively. By way of a guide, Vale’s US-listing closed down by 2.6%, while steel stocks such as AK Steel closed -1.8%. At this stage BHP’s ADR is lower by 10c, seemingly supported by its exposure to oil, with US crude closing +0.1% at $50.74.