Global equities are starting to look vulnerable

Price action in global equities markets is starting to look less convincing, although there is still a chance we get that traditional melt-up over the remainder of the month.

The S&P 500 may have lost ground through yesterday’s session, courtesy of weakness in the auto space and aided by a spike in WTI prices. However, it was positive to see the index hold the short-term 21 day moving average at 1785.96 and the bulls will be hoping that level holds like it did in early November for a move to new highs again. In fact, it seems that a number of markets that have indirectly benefited from the Fed’s easing cycle saw a much larger shake-out, with European markets being sold off even more aggressively.

All eyes on today’s US data

We now enter into what is a key few days for capital markets. While we get revisions to European services data today, traders and economists will be using today’s US ADP private payrolls, services ISM (notably the employment sub-component) and the new homes sales report to attain a clearer understanding of this Friday’s non-farm payrolls report and subsequently; position funds ahead of the ensuing rhetoric from the FOMC later in the month.

It’s interesting because last month’s employment sub-component of the US services ISM report diverged slightly from the ADP payrolls report and we actually saw a strong non-farms print. So with this in mind, we will be very keen to watch out for the employment sub-component of the services ISM for a good lead into the upcoming payrolls, and if it follows the expansion seen on Monday in employment in the manufacturing space, then we should see a market positioning for a payrolls print on Friday closer to 200,000. Whether this sends global equities lower will be interesting, however one thing seems assured; the USD will like it, with the US curve continuing to steepen. Gold naturally will head towards $1200.

Asia is struggling today

Asia has struggled today and it’s hard to put this down to a view on the future actions of the Fed, because USD/JPY has also struggled. The pair missed out on a bearish daily reversal at the trend highs by 20 pips or so yesterday, but has continued to find sellers through Asia as Japanese funds take profits. However, it’s also interesting because we’ve seen good flows into the USD against the AUD, GBP and CHF. The Nikkei is down 2%, although it is coming off overbought levels and thus should be seen as a healthy move, and as we’ve seen for various periods this year, a 2.0% move is not uncommon. Chinese equities on the other hand have done reasonably well, with shipping stocks in vogue.

Below trend growth seen in Australia

The main focus today in Asia has been in Australia, with Aussie Q3 GDP in play. The AUD/USD found some short-covering in US trade and, from a positioning perspective, probably could have squeezed to A$0.9220-A$0.9250 had we seen a GDP print modestly higher than forecast. Thus when we saw the annualised print at 2.3% (some 30 basis points below consensus), that was the signal to the market to sell the bounce (with AUD/USD falling to A$0.9045). On a quarterly basis, growth was driven by a 0.7% contribution from net exports (we knew that already given Monday’s current account balance), while 0.4% of the growth came from final consumption expenditure, with offsets coming from changes to inventories.

So with growth running at 2.3% (annualised), some 70 or so basis points below what the RBA would consider ‘trend growth’, it seems the RBA’s non-urgent bias is now fully justified. My view yesterday was that the bank had this bias ready to take full advantage of the policy divergence which is causing huge trends in forex markets (with the AUD at the heart of this), with traders having a bias to sell currencies where a central bank has an easing bias, while buying ones with a more neutral bias, or in the case of the RBNZ; a tightening bias. Now it seems that the easing bias is firmly justified, despite good retail sales and limited concerns around future capex intensions. The tricky part is when to get in and get out.

It’s interesting to see that the market is still pricing in 16 basis points of hikes over the coming 12 months. I personally can’t see this playing out (from we know at the moment), and don’t see a similar thematic as sterling; where the market is pricing in a rate hike by the end of 2014, despite rhetoric from the BoE that this won’t happen.

ASX 200 needing to break 5282

The ASX 200 wasn’t negatively affected by the GDP print and has seen good buyers off the lows today. Gains in BHP have clearly assisted, with the miner coming off short-term oversold levels. The ASX 200 needs to clear supply around 5282 on the hourly chart, and while Chinese stocks have helped today, a strong Nikkei would also have helped.

So it’s all eyes on US data today and the reaction not just in the long end of the US bond market, but also if there is any reaction at all in the Fed funds future. European data is also of interest for a market looking set to open on a flat note. WTI prices could once again work against the market and, given yesterday’s break of the September downtrend, a move to the 98.24-99.01 region could be on the cards in the short term. It’s always worth keeping an eye on the AUD crosses too, with GBP/AUD and EUR/AUD on fire.

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