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Trader thoughts - the long and short of it

It is shaping up for a fairly soggy open for Australia and Asia more broadly, with Aussie SPI futures eyeing a close through the November uptrend at 5973 and sitting 24 points lower than the ASX 200 close at 4:10pm AEDT.

Market data
Source: Bloomberg

The trend break seen in the Aussie index futures doesn’t signal a collapsed by any means, but it does suggest a slight change in behavior from the bulls and also keep in mind that we do have a rather pronounced double-top in play, with a strong failure from the market through November to push price through the 6040 to 6050 region. A close in the near-term through the neckline at 5921 (the SPI futures sit at 5951 at the time of writing) and technically the index would be targeting the 5800 area, with the ASX 200 obviously trading in a similar fashion.  One for the radar, but choppy trade seems most likely in the session ahead.

European equities indices have closed largely unchanged and for a second day in a row, price has closed very near to where they opened. Call that indecision, call it a battle between those who are bullish and bearish, where the German DAX perhaps highlights this best, with the market oscillating in a range of 12900 to 13200 and has done for four consecutive weeks. Continue trading the range, but just as we saw when the ASX 200 broke out of its 5800 to 5675 (it held for 20 weeks through May to October), when the index does break the 12900 to 13200 range on a closing basis. It does need to be respected, as that spring that has been coiled up for a period of time is released. Another market for the radar, but certainly a downside break of 12,900 would be significant given the index has tested, even traded below it, but always closed firmly above it, on at least eight occasions.

US equities have held in and despite yesterday’s strong reversal off 2665, the S&P 500 has seen a tight daily range and is down 0.3% on the session. Tech, which has really taken a hit of late has found better stability and we can even see the financial sector holding ground, despite further focus on the US fixed income yield curve. It continues to flatten, with the 2s vs 10s spread now just 53bp, thanks largely to a further sell-off in US 2-year Treasuries. However, we are still seeing traders buying the longer-end of the curve (10’s and 30’s) on any sell-off, as they increase duration and their portfolios sensitivity to interest rate moves.

For what it’s worth, the market has fully discounted a rate hike next week from the Fed. Anyone with an outlier idea that the Fed won’t raise next week is going to be wrong (in my respectful opinion), especially as we are in a black out period and Fed members have no say on expected policy moves from here on in. It’s really about future rate expectations and whether the market is too pessimistic or optimistic in its pricing of around two rate hikes in 2018. Recall, the Fed’s most potent weapon in suppressing volatility and keeping the equity dream alive is its forward guidance and that is what we should all listen and trade around.

There have been a few data reports to focus on overnight, with the US October trade balance printing a slightly wider than forecast $48.7 billion. This may cause some modest tweaks from those economists running real-time Q4 GDP estimates, which currently sit somewhere between 2.5% and 3%. The services ISM index came in at 57.4, which was below the street's consensus of 59.0, but the USD has actually been a pillar of strength and let’s not forget that last month’s read of 60.1 was actually the highest since 2005, so the prospect of a weaker pace of expansion in the US service sector was high. By way of a guide, we have seen the employment sub-component at 55.3, so again, a slightly slower pace of growth in employment trends from last month, in what is such a dominant part of the part of the US economy. One for those eyeing Friday’s non-farm payrolls (consensus 199,000 jobs) this could be a good guide, although it doesn’t help us understand the real variable to watch in the jobs report; average hourly wages.

In FX markets, the USD has held in well and there seems little doubt this has had an impact of gold and silver, with the yellow metal trading down to $1260 and a test of the October low. Buyers have resurfaced, and the gold bulls will want to see this level hold or it could be a rough ride for gold bulls into Q118. The moves in the USD have been especially interesting given the US data wasn’t that great (relative to expectations), but the USD index did reclaim the 93 handle. However, sellers are stepping in and the USD looks unlikely to a close above the nine-day consolidation high. EUR/USD has been a weak link overnight, while EUR/JPY has also been offered. One can look at the daily chart of the pair and see ¥134.50 has been such a huge level for months now. Happy to stand side, have the pair on the radar, wait for the upside break and have the market compel me to trade.

AUD/USD traded into $0.7654, but is failing to close through the 27 November high of $0.7644. The pair continues to consolidate and chop around and we see price now testing the 76c handle. Yesterday’s RBA statement was clearly optimistic and there were tweaks to the inflation language that did resonate and caused good selling in the Aussie front-end of the bond market, although the markets implied probability of rate hikes in 2018 hasn’t really picked up to any great degree. The RBA, like all central banks, want to be in a position to hike, but the stars are in no way aligned. Clearly, today's Q3 GDP is the event risk, and there are risks we see this print 0.5% to 0.6%, given yesterday’s data that net exports will provide a zero contribution to the GDP print. Implied volatility hasn’t moved too much and the options market is still pricing in a 55-point move (in either direction) for the pair through to the close on Friday. This pricing structure can be a great input for one’s risk management and placement of stops.

Back on the ASX 200 and there is going to be a focus on copper stocks, with high-grade copper smashing through last week’s low and through the $3p/lb level and currently lower by 4.5%. A further move and a break of the September low so of $2.89 and things get pretty dark for copper. US crude has gained 0.3%, while steel and iron ore futures have found a few sellers.  

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