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Trader thoughts - the long and short of it

SPI futures are pointing to a 19 point lift this morning, following a day where the ASX200 failed to make a true challenge of the 6200-level.

Source: BLoomberg

ASX: The Australian share-market stripped 0.33 per cent to settle back at a comfortable sticking point around 6170. The market is trading with a clear lack of conviction at present, range trading between 6125 and 6195 (or thereabouts) for the better part of a week. Perhaps most surprisingly, at least yesterday, was the conviction of selling coming around the 6190-mark, with the volume of sellers at that level quickly stripping the ASX of 0.2-0.3 per cent. It must be said that since bottoming out a few weeks ago after trade war fears peaked, the market has been characterized by a series of higher lows. The fundamentals appear supportive of a push higher, but the question becomes where the catalyst will come from to drive this.

Wall Street record highs: A possible answer to this question may come from Wall Street, which as of overnight, registered once more some record numbers. The S&P 500 ground along the top of its trend channel, to break its previous high of 2914 and register a close around 2930. The Nasdaq has also come within a whisker of its own record highs, trading less than a 100-points-shy of that milestone on the back of a risk-on rally in tech stocks. Most notably, the Dow Jones has started to join the party, closing a skerrick above the record highs set in January this year. The temptation in this situation is to use new highs as a justification to short the market; however, although US indices are trading towards the top of their ranges, the trend remains to the upside, so caution must be exercised when taking a contrarian view.

Greenback: Price action in the USD was one to watch overnight, as the long-held Dollar trade showed definite signs of faltering. The greenback has been sold off rather concertedly in recent weeks, forced lower by increased flows into the EUR and GBP consequent to positive fundamental and geopolitical developments in the European region, as well as the breakdown of NAFTA talks last week. The sell-off has hastened in the last 24 hours, courtesy of a risk-on mentality from traders the world over, that has seen emerging market currencies bounce, and the likes of the Australian Dollar edge toward resistance at 0.7310. The fundamentals are highly supportive of a stronger greenback, with US bond yields climbing along-side expectations of higher US interest rates. It may be a matter, perhaps, of a slower rise in the US Dollar from here, particularly if global interest rate markets show signs of convergence.

Europe: European markets are enjoying the spoils of lower trade-war related volatility, all the way from currency markets to equity indices. The trade dynamic has seen the EUR rally comfortably above the 1.17 handle in recent days, and the once suffering DAX bounce off recent lows to rally above the 12,000 level in a run towards resistance at about 12,450. This activity came despite what was on balance negative news flow out of Europe overnight, after Brexit negotiations in Salzburg stalled and lifted the likelihood of a no-deal outcome. It may be so that the combination of strong data in the region – UK Retail Sales beat forecasts overnight, adding to a string of strong data – coupled with the fact that a Brexit no-deal has been priced in to markets, has put a base under European indices.

Asia: The final Asian session for the week kicks off this morning, putting an end to a volatile week for the region. The Nikkei has held to its apparently strong fundamentals, holding onto the ground its seized over the last fortnight; and the region's current bellwether of investor sentiment, the Chinese Yuan, has remained steady in its 6.82 to 6.88 range. A recovery in Chinese equities hasn't taken hold yet despite the global relief rally, presumably due to doubts around the fundamental growth story in China. Major indices such as the CSI300 remain in a downtrend, having bounced off new multi-year lows on Tuesday. Traders have kept wedded to the strategy of selling rallies in Chinese indices this week, taking advantage of the fledgling risk-on sentiment. Though it's only been a few days, Chinese equity markets are demonstrating progressively higher lows, hopefully auguring well (for the bulls) for a challenge of the prevailing trend in coming weeks.

Trump, OPEC and Oil: The politics of oil have flared up last night, sending the price of both WTI and Brent Crude lower. Oil prices has previously climbed throughout the week, following a litany of stories that supported the view that the price of the black stuff will shift higher over the short term. For several days this dynamic has persisted, pushing Brent Crude back towards the very significant $US80 per barrel level. The proposition for traders was how long a challenge of this price-mark could last before US President Trump, who has in the past lashed out at OPEC when oil prices have reached these levels, unleashed on oil producing countries. Trump’s tirade finally came last night, over Twitter of course, with the US President tweeting that the “OPEC monopoly must get prices down now!”. True to form, oil prices fell, shedding 0.9 per cent throughout the US session.

Next week: The week ahead in financial markets lacks depth in terms of fundamental economic data. Trade will be dominated by the highly anticipated meeting of the US Federal Reserve, out of which the Fed are expected to hike interest rates by another 25 basis points. The Fed's meeting will in large part be focused on the guidance provided by Chairperson Jerome Powell and his team, with this meeting producing the much watched "dot plot" forecasts that provide clues on where Fed members see rates going in the future. In terms of the local calendar, data couldn't be lighter, with no release jumping out as being one that could seriously move domestic markets. As such, it'll probably be a week caught in the anxiety that comes with pre-Fed positioning, combined with the shifts in sentiment regarding the strength of Asian markets.

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