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Trader thoughts - the long and short of it

The risk in the kind of data light week markets are presently experiencing is that there is an increased vulnerability to external factors.

Source: Bloomberg

Bad news and good news can be exaggerated as investors search for and hold onto stories that can vindicate the prevailing sentiment. It’s this background noise that causes a veering away from fundamentals and sudden price-swings when a stronger flow of information returns to markets. At the beginning of this week, knowing that it was going to be a week sparse on data and therefore substantial information, it was understood that trade could be dictated by relatively minor stories. It’s against this back drop that the overall positivity in financial markets at a macro level has taken hold, raising the question of how supportive fundamentals will be of this view when a steady flow of information returns next week.

Wall Street added to its all-time highs overnight within this backdrop, led by considerable gains in the tech-sector. The benchmark S&P 500 added 0.57 per cent, to hold onto ground above the 2900 level, while the tech-heavy Nasdaq benefited from technology stocks’ strong performance, ending trade up around 1 per cent. US equities were undoubtedly supported by last night’s Preliminary US GDP reading, which exceeded forecasts to reveal the US economy expanded at 4.2% on a quarterly basis. US yields edged higher on the news, with the yield on US 10 Year Treasuries edging above 2.88 per cent. The subsequent whetting of risk appetite pushed the USD/JPY up over 0.4 per cent, and propelled the EUR & GBP higher, with both those currencies adding to the gains earned earlier in the session on the back of some positive Brexit developments.

SPI futures are presently indicating a 14-point jump at the open for the ASX 200, courtesy of another bullish lead from Wall Street. The Australian share-market has hit top gear this week, shaking off last week’s political turmoil to close 0.75 per cent higher at 6352, just below the decade long highs registered a fortnight ago. The ASX looks to be hugging the top of a broad upward trendline at present, however, unlike some of its overseas counterparts, the daily RSI still sits someway below overbought. There is a strong relationship between the S&P500’s activity and the ASX200’s this week, so perhaps so long as Wall Street can continue its record run, the Australian market has the catalyst to follow suit.

The ASX200 was underpinned by some solid reporting yesterday, which saw Boral and Bellamy’s leading the charge, rallying 10 per cent and 7 per cent respectively. A slight pick-up in global commodity prices drove the share price of BHP higher, with that company a major reason for the ASX’s strong performance. While a recovery in the financial sector after a sell-off last amid last week’s political disorder in Canberra provided the foundations for the market’s strength, which was only boosted in late trade following Westpac’s announcement it would be raising its mortgage rates. The precedent set by Westpac opens the door for similar out of cycle rate hikes from the other major banks, potentially supporting further share price gains across the sector.

While the ASX200 enjoyed a boost thanks to the likelihood of fatter bank margins, the Australian Dollar abhorred the news, dropping over 0.5 per cent following its release. Although the losses have been recovered overnight due to a weaker greenback, the dynamic exists now that the RBA’s policy setting will be undermined by out of cycle rate hikes. The move comes as no surprise to markets, with it being well known that rising global funding costs have placed pressure on the bank’s net interest margins. However, the development is not good news for Aussie households nor for consumer activity within the economy, which will find the burden of high private debt levels and slow wages growth even more onerous.

Oil prices could come under the spotlight again this week, after a lower than forecast print of US Crude Oil inventories overnight pushed the price of Brent Crude back over the $US77.00 per barrel mark. Reigniting concerns around supply and production levels, the price of oil is trading towards 6-week highs, at levels not seen since the last OPEC announcement of increased production. The politics of oil may begin to shape headlines again, with US President Trump surely cognizant of the price activity and its potential impact on US consumers and members of his core constituency. A significant level to watch for Brent Crude sits at about $US79.60 per barrel, just shy of the significant psychological and politically charged level of $US80.00.

The Australian session today will see the release of the week’s most significant domestic fundamental data releases: quarterly Private Capital Expenditure numbers, and monthly Building Approvals figures. The data points will provide an interesting insight into the supply side of the Australian economy, which owing to a boom in infrastructure, has fuelled economic growth in recent years. It’s expected that this dynamic will ease in coming months to years, as cyclical factors and the waning effects of low interest rates wear off. Financial markets aren’t expected to hinge too greatly on today’s numbers, but watch for choppiness in the AUD around the release, as well as a potential response in industrial stocks.

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