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On a ‘risk’ basis, global equity indexes edged up from the threatening slip on Friday, volatility measures hovered at their recent lows and assets further out the speculative curve were leveling out.
The newswires offered fodder of the standard economic fair (manufacturing data primarily), geopolitical barbs with a focus on the US and China’s relationship as well as light monetary policy speculation. Nothing would really stick, however, without a market to facilitate a trend. Meanwhile, where there were outlier performances – like that from the Dollar’s rebound or the biggest gold drop this year – their remained a ‘corrective’ quality to the development.
Wall Street: In a shortened session for the US markets, the name of the game was finding speculative balance. While these markets are over-extended in general through the course of months and years, equilibrium today is found at a certain (high) level of complacency. In an increasingly common split in US markets, the broad market indexes were on a different course than the tech-heavy regions.
The S&P 500 and Dow advanced 0.2% and 0.6% respectively to help deflate speculation that we are in the opening salvos of larger reversal patterns. In contrast, the Nasdaq Composite dropped 0.5 percent to keep the anxiety alive. This index is down five out of the past six trading days; but remarkably, there has been little progress to this count. US markets are offline for the upcoming session, so efforts made in the trading hours preceding this void should be viewed with some degree of skepticism.
Liquidity Sinks: When it comes to the influence that event risk or technical patterns have over the market, liquidity plays a crucial role in whether or not these developments reach their full potential. That is the struggle traders will face over the next 24 hours.
While only a segment of the global markets will be offline, the break in the circulation of speculative influence will having an arresting influence to most ambitions to charge a more ambitious move.
Investors who have been around for a while know the score when a key foreign market is offline. Tempting moves are either broken up or abruptly reversed by the time the tide goes back in. Be mindful of what you expect the markets to say about trade opportunities – especially those that should play out over a longer time frame – through Tuesday’s session.
Dollar Outperforms on Quiet Day: While the financial system was pretty quiet throughout Monday, one remarkable performance was the Dollar’s impressive recovery. Despite the fact that the US markets are the source of the liquidity drain ahead – or perhaps because of it – the Greenback mustered it strongest single-day advance since January.
While we can put a fundamental name behind this, the ISM manufacturing report offered up a better-than-expected June reading, this climb likely had more to do with the liquidity conditions than standard analyze-and-react. Looking to reduce some risk just in case something unexpected were to happen over the holiday trade, most with exposure to the Dollar would be backing out of the speculative short view that has gained traction through 2017.
RBA Rate Decision: Top event risk today is the RBA’s monetary policy decision. The broad consensus is that this event will end just as the previous meeting’s have: with no change in actual policy and alterations to language that only speculators would divine serious intention from. However, there is reason to be mindful of this event and the subsequent policy decisions of the Australian central bank given the environment.
Locally, inflation is lackluster and there are well-founded concerns that the housing market is in a bubble. However, many of the RBA’s global peers have weighed in on the instability that can be promoted under extremely accommodative monetary policy. Australia is no different in this regard. Further, there is a reason the Aussie Dollar carries status on the level of the Pound, Euro and even the Greenback – it is one of the key high-return, high-credit quality currencies. What happens to that role should the US benchmark (a safe haven) surpass that of Australia’s?
Australia Dollar: The Aussie Dollar’s performance to open the week has so far been spotty. A stronger USD rendered a drop for AUD/USD, a ‘risk’ bounce helped lift AUD/JPY, while EUR/AUD and GBP/AUD clawed modest gains for the Aussie. With risk trends on hold, the RBA decision ahead and the data mixed between manufacturing improving and inflation measures cooling; there is little motivation for traders to jump the gun.
ASX: The S&P/ASX 200 struggled this past session on a day when other global indices were mounting a low-volatility recovery. The 0.5% decline on the day was led by discretionary and financial sectors – though some of the deepest losses mid-day for banks were retraced before the close. The futures market pointed to a slight decline for the market open Tuesday.
Commodities: Along with the US Dollar, commodities were producing their own highlights on an otherwise dim day. Crude oil extended its charge higher with US-based WTI rising more than 2% while the UK-standard Brent climbed for its seventh consecutive session – the longest bull run since February 2013. A bullish inclination such as this usually receives a ‘conviction’ label, this may simply be a reversal back within range with a limited half life without further motivation. Meanwhile, Gold took a nasty dive Monday with a -1.7 tumble. In spite of the thin liquidity, this was the sharpest drop since November 23rd.
S&P/ASX 200 down 37.0 points or +0.65% to 5684.486
AUD -0.37% to 0.7660 US cents
On Wall St, Dow +0.61%, S&P 500 +0.23%, Nasdaq -0.49%
In New York, BHP +1.63%, Rio +2.96%
In Europe, Stoxx 50 +1.45%, FTSE +0.88 %, CAC +1.47 %, DAX +1.22%
Spot gold -1.57% at US$1222.14 an ounce
Brent crude +1.70% to US$49.61 a barrel
Iron ore +13.31% to US$64.60 a tonne
Dalian iron ore at 420yuan, -5.23%
LME aluminium (cash) +0.14% to $US1913.50 a tonne
LME copper (cash) -0.07% to US$5927.00 a tonne
10-year bond yield: US 2.35%, Germany 0.48%, Australia 2.66%
By John Kicklighter, Chief Strategist, IG Chicago