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Trader thoughts - the long and short of it

That spark of risk appetite that helped revive risk trends at the start of this week has fizzled. As Wednesday’s session progressed to the later sessions, the already tempered lift in speculative appetite completely deflated.

Market data
Source: Bloomberg

It was easy to see conviction fading from the strong ASX 200 and Nikkei 225 performance yesterday, to the more restrained DAX and FTSE 100 progress, to the virtually unchanged US indices.

Fundamentally, there wasn’t a single event or theme that the market would anchor its sentiment to. Rather, there simply wasn’t enough fuel to keep the fires stoked. That said, an ill-fitting equilibrium in markets can turn into outright risk aversion should any number of simmering issues – divergent monetary policy, concern over financial stability (China) or political issues (US) among others – catch serious traction.

Wall Street: The strong recovery to open this week has completely fallen flat. This past session, the US equity benchmarks were all but unchanged, with volume adding little to the discussion by way of conviction. Whether our reference point is the S&P 500, Dow Jones Industrial Average or Nasdaq Composite; we find the market’s current perch not far from record highs.

However, the sense of comfort with lingering in proximity to such heights has been replaced with a tangible sense of anxiety. We can see that in positioning with a more buoyant appetite for hedges through standards like options – hence the VIX leveling out at a premium to its holding a week ago. For those keeping score, it has been 379 trading days since the S&P 500 last found itself in a 10% correction from highs and 2,119 trading days since the last official ‘bear trend’ – defined as a retracement of 20% or more from highs.   

FOMC Minutes Show a Split in Policy: Top scheduled event risk through the past session was the FOMC minutes. While there were other headline-worthy events and data points – Italy’s first Q2 GDP reading, Aussie wages and the start of the NAFTA renegotiations to name a few – the full transcript of the US central bank’s meeting last month was the only headline that could truly strike a speculative nerve.

What we learned was that the group seems dead set to start its balance sheet reduction scheme in the coming few meetings (either the September 20 or November 1 events), but the path for the standard rate hikes seems to be in jeopardy. A growing concern over persistently low inflation undermines the ‘transitory’ assessment we have seen before to justify the quarterly pace of rate hikes. This is a familiar situation the world-over and could carry ramifications for other central banks, which were willing to suspend their issues with low immediate inflation to start their journeys towards normalisation.

Political Risks Rising for Markets in US: Among the various themes that can and have moved the markets, political risks is a threat that hasn’t been heavily discounted by the market. In fact, the depth of complacency surrounding this issue likely sees many of the speculative benchmarks that we follow richly priced. Relative to monetary policy that has taken pains to project transparent forward guidance, growth trends that develop slowly or financial pressure points that are neatly obfuscated; the political risks that we read in the world do not have clear scenarios or paths.

However, the slide last week with the US-North Korea tensions and the May 17 plunge on the rise of the Russia scandal shows the markets are very sensitive to political crises. This is not an opinion poll-like response by the markets, but rather a reflection of the concern that such issues can scuttle economic and business-oriented programs (infrastructure spending and tax reform) that the markets have baked into values since the election – despite seeing few steps towards their implementation.

Australian Wages versus Jobs: Wage growth was unchanged through the second quarter according to yesterday’s official data, which was a sigh of relief compared to the expected slowing. However, this gives little room for optimism, given it holds at a record low for the series. This indicator will remain in investors’ minds as the forthcoming July employment statistics cross the wires today. The economist forecast calls for 20,000 new jobs added to the economy last month with the jobless rate holding at 5.6%. If it disappoints, the ‘qualitative’ concerns of the net jobs report will be ready to weigh confidence.    

Australia Dollar: Despite the otherwise disappointing economic data this past session, the Australian Dollar has proved Wednesday’s best performing major. Gaining against all its most liquid counterparts, the AUD managed its strongest gains versus both fellow carry currencies (CAD and NZD), as well as the primary liquidity provider (USD). With AUD/USD, the 1.4 percent climb pushed the market back above 0.7850. This once-solid technical level is now so porous that it doesn’t even receive a second glance.

ASX: Through the close yesterday, the ASX 200 managed its highest close in two months. Technical traders can debate whether this current standing puts the index in a position of breakout or if it is just a more exaggerated test of the range that has been in place since May. The downgrade in risk appetite through this past session will work against bulls; however, the continued run of corporate year end reports due could offer some local motivation – for better or worse. Among the high profile listings we have ASX, COH, QBE, TLS, TTS and WES.  

Commodities: With the return of political unease, gold has revived its bid through the previous session. However, if we really want to see the precious metal return to true bull form; we need something that can uniformly weigh the world’s most liquid fiat currencies. That can be difficult to come by. In energy, US crude has dropped back below 47.25 and is now 3.8% off the high set at the start of the month. Volume behind this move remains relatively health which means speculators may not be very responsive to the standard supply-and-demand headlines OPEC tries to manufacture in order to halt declines.

Market Watch:
S&P/ASX 200 up 27.619 points or +0.49% to 5785.102

AUD +1.38% to 0.7929 US cents

On Wall St, Dow +0.13%, S&P 500 +0.12%, Nasdaq +0.16%

In New York, BHP +2.40%, Rio +2.07%

In Europe, Stoxx 50 +0.65%, FTSE +0.67 %, CAC +0.71%, DAX +0.71%

Spot gold +0.79% at US$1281.45 an ounce

Brent crude -0.83 % to US$50.38 a barrel

Iron ore +0.88% to US$84.979 a tonne

Dalian iron ore at 580.0 yuan

LME aluminium (cash) +1.33% to $US2054.25 a tonne

LME copper (cash) -0.37% to US$6344.00 a tonne

10-year bond yield: US 2.23%, Germany 0.45%, Australia 2.66%


By John Kicklighter, Chief Strategist, IG Chicago

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