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Trader thoughts - the long and short of it

After a night where market participants have had to navigate through the rhetoric of various Fed speakers, the focus now falls again on US tax reform and Trump’s address in Indiana.

Market data
Source: Bloomberg

Whether the market ultimately expresses disappointment by the tax blueprint is yet to be seen, but given there has been so much speculation about the measures that are to be announced, much should be in the price and recall the levels of taxation are likely to be a best-case scenario.

Tech should be an interesting sector to watch in the coming session, as one hand we are seeing the sector move inversely to US Treasury yields, which makes sense as one uses the US Treasury as the hurdle rate to discount the future cash flows. However, when Trump details that “money will come pouring back from overseas” then US tech is the space which has the bulk of the offshore cash deposits and will be the ones who ultimately use a tax repatriation window to repurchase stock, which of course is EPS accretive.

Aside from positioning ahead of any tax reform announcements, we have heard from Fed governor Lael Brainard, who really didn’t give any insights on monetary policy with a speech on labour market disparities. Atlanta Fed chair Raphael Bostic talked up the prospect of a December rate hike, while there was some focus on his view that “I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble”. I am sure many there would be many who disagree with this comment!

The Fed chair, Janet Yellen, was the highlight though, with a speech on ‘Inflation, Uncertainty and Monetary Policy’. Without going into the speech in any depth, the wash-up is the comments were very much aligned with the recent FOMC statement, but throw further weight that a December hike is on the cards.

With little other fundamental news to drive it has in effect been a fairly drab session, with little in the way of market moves and it’s no surprise to see implied equity volatility fall. With all the Fed chatter the implied probability of a December rate hike has pushed up a touch to 70%, with the January 2019 fed funds futures contract yield now 1.605%, and thus pricing in 44.5 basis points of hikes through to the end of 2018.

The selling in the interest rate markets has resonated modestly through US Treasuries, with the curve shifting in unison and up a couple of basis points, with the US 10-year treasuring now sitting at 2.23%. The USD has found buyers in this environment, with the USD index (+0.3%) driven predominantly by a weaker EUR/USD, which should be on the radar as it has broken out of the recent $1.2070 to $1.1823 range, or what could be seen as a head and shoulder reversal pattern, which in turn targets $1.1570.

Staying in FX circles, and it’s the CAD which has been the star of the show in G10 FX, thanks largely to the Canadian finance minister who portrayed a view that he expects higher interest rates. AUD/CAD has been sold fairly aggressively despite profit taking in crude and I feel this goes lower from here in the short-term, with AUD/USD also finding good selling activity, with price moving progressively lower from $0.7947 (at 4:00pm AEST) to a low of $0.7857 in US trade. AUD/USD currently sits a touch higher at $0.7883 and has limited event risk to focus on during Asia today, so a tight range is expected through Asian trade.

US equities have closed mixed, although ultimately the S&P 500 has etched out a small gain of 0.2%. Sector-wise, we can see tech closing +0.4%, while materials closed -0.4%, energy -0.2% and financials -0.1%.  Aussie SPI futures sit 13 points higher than where they were at 4:10pm AEST (and the close of the ASX 200 cash session), so we should see the Aussie equity market open in-line with moves seen in the S&P 500.

So an open around 5684 is expected for the ASX 200, with BHP likely to open around 9c lower (based on moves in its ADR). Energy was the star yesterday, with the ASX 200 energy index hitting 9400 yesterday – the highest level since 31 May. The fact we have seen profit taking in both Brent (closing lower by 1.1%) and US crude (-0.6%) these moves may weigh on the space. That said, we have seen in slight pop in crude after the settlement, with the weekly API inventory report showing a 761,000 build in crude inventories, which seems lower than what was expected.

Pullbacks look like a buying opportunity in my opinion, as the energy space has been getting a lot of love with talk of a far more balanced market in 2018 and prices in US crude likely to hold $50 and maintain a new trading range.

In terms of bulk commodities and it’s somewhat better days with spot iron ore closing up 3% at $64.95, although the night session in iron ore futures lacks any real conviction, with Dalian iron ore futures +0.4%, steel futures -0.6% and coking coal futures -0.1%. The fact Vale’s US-listing closed +0.5% seems fair here. Watch for some downside in gold names too, with spot gold sitting back down at $1293 and the gold miners ETF (GDX) closing -2%.  

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