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Trader thoughts - the long and short of it

The global markets continue to stretch an already leveraged view on risk trends and exposure through the second trading day of the final quarter of 2017. Global equities were generally in the green with some broad indices joining the charge, led by US markets with record highs of their own.

Market data
Source: Bloomberg

Meanwhile, volatility measures across asset classes are going the way of the VIX – which is doing its best to normalise an extreme level below 10. While not all activity measures for risk-oriented asset classes (shares, commodities, rates, emerging market, FX, etc) are pushing, nor even matching their lows for the year set a few months back, we are once again sinking into ever deeper levels of complacency.

It is hard for those in the financial industry or even individuals to yield to caution on valuations, while market prices continue to inch higher. Yet, regardless of our risk tolerance or assessment how much more return can be squeezed out, remember that the more divergent value to price, the more disorderly the eventual reconciliation.

Wall Street: In New York, equity markets were once again winning the adulation of the crowds with fresh record highs for headlines, but pace eased back. Looking across the major benchmark indexes, the Dow 30 rose 0.4% to 22,642; the S&P 500 advanced 0.2% to 2,535; and Nasdaq climbed 0.2% to 6,531. Even the broadest Russell 2000 hit a fresh record of 1,512 on an eight consecutive trading day advance to mark the most persistent pace since November 25. Yet, looking behind these numbers, we find a VIX five days below 10 (28 days this year below the extreme threshold), an average true range from the SPX that is the lowest since January 2013 and volume that is nothing less than anemic. This speculative reach can surely persist, but it will also remain very exposed to unfavorable ‘surprises’.

RBA: The unchanged rate and policy statement by the RBA had something for everyone. However, the statement was not enough to fully satisfy those thinking that Philip Lowe would bring the RBA in the same hawkish line of thought as we’ve recently heard from the Bank of Canada and the Bank of England.

The highlight of the statement was the view that a strong Aussie Dollar remained an impediment for the Bank’s inflation target. The dovish comment quickly sent AUD/USD to the lowest level in a week at 0.7786 but was quickly bought up from these levels. While keeping the rate set at 1.5% since mid-2016, the trade-weighted AUD has risen nearly 12%, and the strength was the focus of the RBA. Forward-looking indicators of the AU economy are still encouraging such as the ‘solid’ employment growth on the horizon and the gradually declining unemployment rate. However, as seen globally, the pickup in hiring has yet to left wages or reduce the burdensome household debt figures that are seen weighing on banks growth prospects.

Dollar Traders Keep a Close Eye on Yellen: Last week, Fed Chairwoman Janet Yellen delivered a shock to the market when she offered up surprisingly non-neutral commentary on monetary policy. Otherwise very practiced at offering up a balanced view and good at sidestepping leading questions on policy and markets, Yellen purposely remarked that the central bank should also be mindful about moving too slowly to normalise monetary policy.

Those remarks led to a substantial rally – but still tentative – rally from the Dollar. Nearly a week forward, progress has been made for the Greenback, but the recovery effort is still clearly nascent. It would be quite shocking were she to follow up with another unexpectedly pointed remark – unless it is corrective in nature – but traders should never write off the mere ‘unlikely’ or simply ‘unexpected’.

A Global Growth Update via PMIs: The popular PMI and other sector-measure surveys that we see updated on a monthly basis are good proxies for GDP for most countries. Given their timeliness, they can offer a very useful fundamental clue into an otherwise slow-to-update quarterly figure from a government. Through Wednesday’s session, we are looking at service and composite activity updates from Asia to Europe to the US. The CBA’s PMI (competing with trade and retail sales figures due later) hit a 7-month low at the last update. Japan’s figures have softened over the past four to six months. Most of the Eurozone figures are final readings, but Italy’s figures are new and have generally sported a strong recovery trend while the UK’s readings have softened again amid Brexit concerns. The United States’ ISM report is perhaps the most important of these figures as the service sector accounts for nearly 75% of the world’s largest economy’s output. It is projected by economists to pass unchanged at 55.1

Australia Dollar: Since accelerating higher against the USD mid-year, the Aussie will continue to look for support near 0.78. The overnight low on the perceived RBA jawboning after unchanged rates and the comment that the AUD strength is putting downward pressure on prices at 0.7786 was quickly rejected.

Since the sharp run-up in July that aligned with the base-metals rally, 0.7800 has been a level that traders feel AUD/USD should not be sold further. The recent drop in the price of AUD/USD from above 0.8100 on September 20 to the current levels some 3% lower has been driven by the still-in-doubt resurgence of the US Dollar.

By erasing early losses, 0.7800 can be looked to as steady support on the pair, and once China comes back online after the holiday, a bid in base metals may further support a continuation of AUD strength.

ASX: With a field of green behind it through the preceding market sessions, the ASX is set to open Wednesday higher – though with a relatively modest 0.3% tracking. A bounce would be welcome after the 0.5% slide through Tuesday’s close. It has now been 97 trading days that the benchmark index has held to a very clear range that is unique among all major equity indexes across the globe.

Commodities: The price of gold continues to fall back to earth as the US Dollar finds buyers who believe the Fed is going to keep their word on rate hikes in the coming years. Gold continues to hold near seven-week lows, and trading volume has been subdued with China celebrating their national holiday.

The positive sentiment in global indices is also acting to suppress price in gold as Wall Street, SPX 500, and the Nasdaq also traded to intraday records on this week. The combination of risk-seeking sentiment and a strong dollar helped to push gold spot below the 100-DMA ($US 1,273) for the first time since July 20. Aluminum was able to snap a three-day losing streak on the LME on the drop in stockpiles on the LME helping to provide support for the fundamental bullish view.

Market Watch:

ASX 200 futures up 15 points or 0.2% to 5694

AUD +0.1% to 78.31 US cents (Overnight range: 0.7786 - 0.7835)

On Wall St: Dow +0.3%, S&P 500 +0.12%, Nasdaq +0.1%

In New York, BHP +0.0% Rio +0.65%

In Europe: Stoxx 50 +0.1%, FTSE +0.4%, CAC +0.3%, DAX +0.6%

Spot gold +1.4% to $US1272.93 an ounce

Brent crude -0.4% to $US55.89a barrel

US oil -0.4% to $US50.4o  barrel

Chinese markets are closed for holidays

Iron Ore delivered to Qingdao China – 62% Ferrous Content No Change, 62.05

LME aluminum +1.4% to $US2131 a tonne

LME copper +0.4% to $US6520 a tonne

10-year bond yield: US 2.33%, Germany 0.45%, Australia 2.83%


By John Kicklighter, Chief Strategist, IG Chicago

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