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Trader thoughts - The long and short of it

It was the night before the Federal Reserve hiked interest rates and all is not well in French politics.


City Buildings
Source: Bloomberg

France is showing the US up in terms of twists and controversies in the lead up to their election. Reports are now saying Marine Le Pen’s family assets were being investigated by the French tax office. At the same time, Francois Fillon has now been formally charged with a number of counts of embezzlement and you have to think his chances are slim at best.

The betting markets still have Emmanuel Macron as the strong favourite with a 58% probability of taking out the election. However, Marine Le Pen has seen a bit of money back her camp; she moved up a touch to 30.7% (source: Oddschecker). Her odds, perhaps helped by a new poll conducted by IFOP, put her just ahead of Macron to take out the first round of votes. This shouldn’t surprise us too greatly and it’s the second round run-off where analysts feel Macron will win by a fairly healthy margin. French financial assets have seen some stress, but nothing too concerning. 

All is not well in the oil market either, with oil closing down for a seventh straight day, although off the lows of the session. There has been some confusion over increased production data from the Saudi’s, but this was cleared up in headlines detailing that this noted extra production in February was said to go to domestic storage and was not raising supply on the international markets. There has also been some focus on a survey from S&P Global Platts, which detailed that Iraq has been the least compliant country (with regards to adhering to the November agreement on output cuts) and are running production around 91,000 barrels a day above its allocation. The issue here, it seems, is Iraq’s interpretation of the output quotas may be somewhat different from other nations and see the agreed cuts based on exports, as opposed to actual production.

Any view that this plays into tensions within the cartel and a more fragmented collective could really hurt the oil market.

Technically, US crude has hit the double top target, so it will be interesting to watch what happens from here, but I feel that the 25 May Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna is shaping up to be a critical event risk for the oil market. Furthermore, if traders and investors get a concerted belief that the output cuts will not be rolled over into the second half of the year, then the near record level of net long contracts (held on NYMEX crude futures by traders and investors) could be unwound rather quickly.

Despite buying off the lows, it hasn’t really helped sentiment towards the US-listed oil plays and the energy sector is lower by 1.1%. In fact, we can see fairly broad-based losses in the S&P 500, with 74% of stocks lower on the day, although volumes are again very light. There has been some hedging of equity positioning ahead of tonight’s Federal Open Market Committee (FOMC) meet with the US volatility index up 8.2%. Although at 12.3%, this is hardly thematic of an equity market expecting a breakout in volatility, unfortunately for the short-term traders out there. It’s quite poignant to say today was the 105th trading session since the last 1% sell-off in the S&P 500 – the longest run since December 1995.

We have seen the USD index gain 0.4% on the session, despite some buying in US fixed income. However, where the USD trades in the next 24-hours is the subject of much debate and the event risk ramps up from here when we come to the business at end of the week. The headlines have already started rolling in with comments from US Trade Representative Robert Lighthizer speaking at his first Senate hearing. Naturally, his comments have focused on global trade, but he has opened up the debate again on the stance of the US on whether China is a currency manipulator. Over the next two days, we will get a barrage of headlines around the Trump administration, so traders will be keeping a close eye on that.

We also get US inflation and retail sales (11.30pm AEDT) and the first results from the Dutch elections (expected around 7.40am AEDT tomorrow). However, the only game in town right now is Fed meeting and just how optimistic the central bank is on the US economy. Will we see a shift in the economic and the Fed funds projections, potentially signalling a shift to hike four times in 2017? I’m not so sure they will, despite some who have positioned their portfolios for this outcome. Keep in mind the interest rate markets are pricing a 55% chance of a June hike, with just under the 70% of economists (polled by the Wall Street Journal) calling for a June hike. This pricing and degree of confidence in a June hike are what I feel the US Treasury, USD, credit and equity markets will key off at 5.00am AEDT tomorrow morning.

Turning to Asia, it will be interesting to see how all this news and perceived event plays into today’s trading session. We’re calling the ASX 200 to be fairly flat at open around 5750, but I would not be surprised if after the open the buying dried up (given the uncertainty) and the sellers kicked in with funds perhaps hedging portfolio risk through the use of SPI futures. Energy stocks look destined to attract sellers, but the path for materials is less clear with iron ore, steel and coking coal futures up 3.6%, 0.3% and 0.3% respectively. BHP’s ADR (American Depository Receipt) is largely unchanged if we use that as a proxy for the space.

AUD/USD has traded in a range of $0.7579 to $0.7540, but there is all sorts of indecision from traders to push price around. ‘Too hard, too hard’ was the cry and there is no easy trade on the pair right now. I’m happy to stand aside until the price can close above the 7 March spike high of $0.7632 or below strong horizontal support of around the 75 handle.

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