Trader thoughts - the long and short of it

Hitting 6100 is a big ‘if’ and while Aussie SPI futures are trading 0.3% higher (or 20-points) at 6034, the market has been reluctant to push the futures index through 6045. 

For those who watch the ASX 200 cash, we will need to see a break of this supply zone if the ASX 200 is to test the figure. If we focus on the moves in the ASX 200 yesterday, granted we had an extended auction, the full unwind of the index did not eventuate until 10:20am AEDT, but after the market had priced all known news, we saw the index trade in a tight range of 6067 to 6058. And that is with Aussie financials tailing off and doing their best to derail sentiment.

So our call for the ASX 200 currently sits at 6082 and judging by the fact BHP’s ADR is up 1.4% and CBA’s up 0.4%, we can see that we have a fairly strong guide for two sectors that alone account for 53% for the index weight. We can then search within the S&P 500 and see energy flying high, with the S&P 500 energy sector putting on 2.2%, while financials and materials have gained 1.1% and 0.5% respectively. In fact, while we have seen the S&P 500 come off its highs of 2993, we can still a 0.4% gain for the S&P 500, with 63% of stocks higher on the day amid volumes some 10% below the 30-day average. One also suspects if we are going to find a further 18-points to take us to 6100 it will have to be a by-product of poor volumes and less liquid conditions that give exaggerated moves to any buy orders.

A positive day seems in store then, and it feels as though the ASX 200 will close out 2017 with a gain of around 7%, which is above the consensus estimates at the start of the year and a return many would have taken. The ASX 200, of course, has underperformed many other developed markets, but that is to be expected when the Aussie banks have lacked a strong upside catalyst this year and the financial sector is lower by 0.5% this year, although is up 7% if you had reinvested all dividends and subsequently look at the total return. We also know that many with a more international mandate will use the ASX 200, as a vehicle for yield and with that in mind one can look at the Aussie index retuning 13% on a total return basis and then things suddenly look more appealing.

Either way, the returns this years have exceeded what was expected in late 2016 or hopefully investors super should be somewhat larger than 2016.

I mention energy and that it was the outperformer in the US, but we should be cognisent that the daily chart of US crude and Brent are worth putting on the radar, as both look fairly bullish. Brent crude especially looks set to test and perhaps break the ceiling that has been in play since early November, so a close in the coming sessions through $65 would suggest a resumption of the bullish trend and it feels as though equity traders are prepositioning for that. Copper has also been well traded of late and this is also not far off year-to-date highs and looks bullish too, while in the bulks we can see rebar futures +2.1%, which has put upside pressure in iron ore futures too.

In terms of news flow, and there has a few bits of hitting the wires, but nothing that traders are reacting to any great degree. US Q3 GDP printed slightly below expectations at 3.2%, but we are all focused on Q4 now (released 27 January), so the Q3 growth read is in our rear view mirror and is old news.

The Catalan election is in play as I type, but there is no concerns expressed in the EUR, while the iShares MSCI Spain ETF is still 0.6% on the day. The European fixed income markets are closed right now, but Spanish bonds have performed quite well into this election, certainly relative to Italian debt. US jobless claims (printing slightly above consensus at 245,000) has not been a market driver for months now.

One questions if the upcoming data flow will be more impactful though, with US data the central focus. On the docket we get November US personal spending (consensus +0.5%) and personal income (+0.4%) in play at 00:30 aedt.

We also see November core PCE announced at the same time, with economists expecting another slight tick higher into 1.5% and this could create modest moves in short-term US treasuries, which will be a trigger for moves in the USD. November durable goods are also released and again this could be an input for Q4 GDP, which is likely tracking around 3% at present, while there could be some focus on the University of Michigan survey, notably the 1-year inflation aspect of the survey, which last read was pushed from 2.5% to 2.8%.

There is also focus on the US House voting on the stop gap bill due shortly, with the Senate voting in tonight’s session and this promises to be a messy affair and could impact the USD.

G10 FX has been mixed on the session, with the USD index largely unchanged and that is a reflection of EUR/USD finding little change and holding a tight range of $1.1890 to $1.1849 range. USD/JPY has pushed nicely back above ¥113 and this should help the Nikkei 225, which has been on the radar for a few days now, as the set-up which actually looks remarkably like that of Brent crude, and is a buy on a close through 23,000 in my opinion. Perhaps the two pairs that are of strong interest are USD/CAD and AUD/USD, with both the CAD and AUD having comparatively strong days.

On the daily chart, we can see USD/CAD breaking the 50-day average and eyeing a test of the low of the two-month trading range, where a downside break will be open up new shorting opportunity. AUD/USD hit a bid from 9:00pm AEDT and looks set to close through the five-day consolidation, with the five-day average headed higher and now containing and sell-off. While it’s hard to hold positions through the festive period this is a compelling set-up and argues for a move into the $0.7733 (6 October pivot low) and higher. Obviously tonight’s US data is a risk, but the bulls are certainly controlling the move here and this actually comes at a time when US interest rate expectations have increased a touch and we see a 60% chance of a March hike and importantly two rate hikes now fully priced in 2018.