The IG trifecta

The S&P 500 and Dow Jones indices have no interest in doing anything other than move sideways at the moment, such that the big players have positioned portfolios, are hedged and happy to react should we get an upset.

Source: Bloomberg

The 63 pip range we have seen in the Dow Jones index overnight shows that no one is prepared to put new money to work, especially with Trump having the wind to his back.

When you see articles such as the one in the Washington Post titled ‘ Professor who’s predicted 30 years of presidential elections correctly is doubling down on a Trump win’, you question if this is another re-run of Brexit.

One also questions if US markets should be down closer to 1% if it weren’t for the US election given US crude prices are over 3% lower than yesterday’s ASX 200 close. The barrel has lost nearly two thirds of the 20% rally seen between 21 September and 10 October, and momentum is accelerating to the downside. Traders have unwound any goodwill towards OPEC at a rate of knots. While we knew there was execution risk around the allocation of output cuts agreed in the September OPEC meeting, this is now being realised. It’s no surprise to see the S&P 500 energy sector down 1.2%, but at least the moves are contained across other sectors, whereas in previous bouts of oil weakness, the whole market was dragged lower. One could suggest that a 9% increase in the US volatility index (‘VIX’) suggests traders have buying portfolio protection (by buying ‘put’ optionality) than selling their underlying equity holdings.

As the saying goes: “Hedge because you can (and it’s cheap) and not because the market forces you to.”

It’s a big day for Asia as we start a new month, with event risk ramping up - although probability suggests we actually see limited moves today. With Australia’s sporting capital on holiday today for the Melbourne Cup, volumes through the ASX 200 will be poor - last year there was a pathetic $4.377 billion traded through the market. Many will be relieved that we close out the month of October, with the Aussie index losing 2.2% as one of the poorer performers over the month. October was supposed to be a great time to be long Aussie stocks, with the index rallying for the past five consecutive Octobers in a row! Do the opposite of what feels right and you’ll do OK - this has been the drum I have been banging all year. So if the ASX 200 has not had a positive November since 2009, and only seen two positive Novembers in the past decade, then this market is probably a buy just on contrarian grounds!

Still, while on a headline basis the ASX 200 should open around 5307, we have iron ore futures breaking through CNY500 per metric ton (up 1.2% overnight), copper prices looking firm ahead of today’s China manufacturing and service sector data (12am AEDT), while, as mentioned, oil has been hit hard. BHP’s ADR (American Depository Receipt) suggests the miner should open unchanged.

AUD/USD has traded in a tight range of $0.7619 to $0.7582 and the dynamic in play here is a market that is still quite long AUDs, with the interest rate markets pricing a 5% chance of a cut for today. Importantly traders also need to assess whether the statement justifies the 40% chance of a cut over the coming 12 months – this is what the AUD will be most sensitive to. This pricing all seems perfectly in-line with recent commentary. One suspects the six economists who are calling for the cut today have had this call for many months and have kept their calls in place with the shaky employment data and poor core CPI print released of late. A cut today from the Reserve Bank of Australia (RBA) would see AUD/USD drop 100 pips straight off the bat given the low probability being priced by markets and the current holdings by speculative funds.

Of course, the bigger issue today is who wins the Emirates Melbourne Cup at 3pm AEDT. Hartnell is the one I’m hearing a lot about, with his odds naturally reflecting that. A bit of each-way action on Assign and Who Shot The Barman interests me too. So the trifecta today is Hartnell, no cut from the RBA and the ASX to close under 5300. Good luck all. 

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