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Trader thoughts - the long and short of it

It's been another night of low volatility, highlighted by the S&P 500 and Dow Jones indices trading in a nine and 87-point range respectively.

Oil
Source: Bloomberg

This low volatility is great for longer-term investors who don’t like to look at daily market gyrations, but is obviously frustrating for the short-term traders out there. Of course, in this environment, patience is absolutely required and traders shouldn’t force a position. The US volatility index (‘VIX’) at 11.35% tells you so much about how the market views future volatility, but we can also look at forward VIX futures contracts to see that the ‘curve’ is about as flat as we will ever see.

Implied volatility is super low and traders simply don’t see much to derail that at present.

The story of the overnight session has been the move lower in oil. The update from the Energy Information Administration (EIA) details how they see US output averaging 9.53 million barrels a day next year, up from 9.3 million forecast in its January report - the highest levels since the 1970s. This marries nicely with the US rig count, which has gained around 80% since May as shale gas firms bring production back on-line as price moves through breakeven levels.

We should also be cognisant of the fact that US crude futures holdings by managed money have never been more bullish on the barrel, with a net long position of 380,000 futures contracts. Clearly, a position adjustment from a very crowded trade is in play. The wash-up here would be the balance of power leaning to the idea that despite output cuts from OPEC (and select non-OPEC nations), price is starting to roll over as supply increases relative to demand.

Technically, the 10 January low at $51.59 (on US crude) seems key here, as a break may take oil to $45. Of course, if this move materialises, the impact will be felt not just in oil stocks, but inflation expectations too - although we can see US five-year inflation expectations still just holding the 2% level.

The moves in oil should impact BHP negatively today, with its ADR down 1.2%. Bulk commodities look more upbeat though, with iron ore and steel futures offsetting the moves in oil, gaining 2% and 0.5% respectively. Spot iron ore gained 3.3%, but was playing catch-up to yesterday’s moves in the futures market. All eyes will be on Rio Tinto who report full-year earnings at 5pm AEDT, with the market looking for underlying NPAT of $4.75 billion, on revenue of $34.33 billion.

The broader ASX 200 looks set for an open around 5627, with SPI futures unchanged. The bulls stepped in to the support price in the Aussie futures market yesterday and traders didn’t want the price to close below the key 5550 area I have been focusing on. A higher high today in price means we could be looking at the Aussie futures market really driving the ASX 200 (cash) market higher, with the ASX 200 potentially testing the 5660 area where we saw good supply in late January. The four-hour chart is probably the time frame worth focusing on here.

Aussie banks should open on a flat note, while WPL looks set to open down less than 1% (based on the ADR).

With the dust settling on yesterday’s Reserve Bank of Australia (RBA) meeting, the focus shifts to Dr Lowe’s speech in Sydney tomorrow night (8pm AEDT) and then Friday's Statement on Monetary Policy (SoMP), where we may see some fairly brutal cuts to the bank's GDP forecasts for end-2016 and June 2017. The wash-up of yesterday’s RBA statement is the market has priced in a slightly higher degree of tightening, with eight basis points (bp) of hikes priced in over the coming 12 months (this stood at 4bp just before the release).

The AUD/USD has traded in a range of $0.7681 to $0.7606 on the session and currently sits mid-way through this range at present. GBP/AUD has been the bigger mover on the session though, with the GBP having a fairly constructive day after Bank of England (BoE) member Forbes talked up the prospect of rate hikes – however, let’s not get too excited about the BoE lifting interest rates, as the market is still only pricing in 11bp of tightening over the coming 12 months and not pricing in a hike for 19 months. We can also add the headlines that UK Prime Minister Theresa May will visit China later this year, although this came out just after the rally in GBP had started.

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