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Record high closes have been seen in the S&P 500, Dow Jones and NASDAQ 100, with the S&P 500 putting on 0.3%, on volumes 11% above the 30-day average. Financials (+1.2%) have again outperformed, thanks again to moves in bond yields, although telco’s (+1.4%) and materials (+0.8%) have also provided solid point contributions.
Tech has closed on a flat note, held back by Apple that closed -0.4%, despite releasing its suite of new innovations. The move lower, premised on a modest ‘buy the rumour, sell the fact’ scenario, now becomes a buying opportunity (in my opinion) as there should be a decent upgrade cycle ahead, given the level of iPhone holders globally who have iPhones two years old or more.
As we know, if the materials and financials sectors are firing, then the ASX 200 will perform admirably, it is a fairly simple beast in those terms. The question that really needs to be answered is whether we see follow through buying in the index from around 10:15am AEST, with the market having digested and discounted all known news. I still expect traders to sell into moves into 5800 to 5850.
US tax reform has been at the heart of the moves, with Treasury Secretary Steven Mnuchin talking up the prospect of tax reform occurring this calendar year. Perhaps the bigger macro thematic already playing through markets was the above consensus read in UK CPI inflation, which increased 30 basis points (bp) from the prior read to 2.9% (vs 2.8% expected).
After China’s far stronger PPI print (+6.3%), released on Saturday, it seems the market has been caught long duration in the bond market and we have seen another good sell-off in long end bond rates. UK 10-year gilt yields have largely driven semantics here, gaining 9bp and inspiring US 10-year treasuries to push up a further 3bp to 2.16%. The US curve (2’s vs 10’s) has steepened a couple of basis points (to 83bp), while the implied probability of a December rate hike has shifted to 39% and of course, this pro-flation theme has propelled the banks higher.
Traders are simply using financials as a vehicle to express upside risks in inflation here.
In the FX space, the move in yields has clearly benefited the USD against the ‘funding’ currencies (JPY and CHF), with USD/JPY pushing above ¥110.00 and eyeing a test of the 31 August high of ¥110.67. Clearly, tomorrows US core CPI is the risk event of the week and the USD bulls need further fuel to feed the beast and that means a number hotter than 0.2% month-on-month. GBP has been the star of the show though and has broken out (technically speaking) against the USD, while is a pillar of strength against the AUD, JPY and CHF.
With tomorrows (9:00pm AEST) UK MPC meeting in play, trading sterling means being fairly tactical from here, not just because of the strong rally in the GBP into the central bank meeting, but because at the heart of this has been a rampant re-pricing from the swaps markets towards rate hikes from BoE in 2018. Whether the UK central bank can meet lofty expectations of the market and the current level of GBP positioning is the key talking point.
The lead from the commodity front is largely positive, although copper has dropped 0.9%. Gold looks interesting, with the metal pushing higher and into $1331, despite the moves higher in ‘real’ (or inflation-adjusted) US bond yields and USD/JPY.
US crude has closed up 0.5%, with further talk doing the rounds of a possible extension in the OPEC (and select non-OPEC nations) agreement, although we have seen a touch more upside after the close, with the weekly API inventory report detailing a massive 7.9 million draw in gasoline inventories, offset by crude inventories, which grew 6.2 million barrels. In the bulks, spot iron ore closed up 2.5%, while importantly we can see iron ore and steel futures (traded on the Dalian exchange) up 2.3% and 0.8% respectively. BHP should open 1% higher this morning, with Vale’s US-listing closing 0.4% higher.