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US equities - stay long until proven wrong

The bulls are seemingly in charge of everything right now. Whether it’s the equity market, gold or US treasuries, no one seems to have much conviction in selling, or at least buyers are buying in bigger size.

Bull
Source: Bloomberg

Friday’s price action highlights this beautifully, and while the non-farm payrolls had its flaws, this was on the whole a stellar number and will arrest some economic concerns. I say ‘some’ as the numbers had a limited response on interest rate market pricing around future rate hikes from the Federal Reserve and worryingly, the US yield curve continues to flatten. However, the so-called Goldilocks scenario was in play, helped by a lack of upside in the USD. This has meant reacting aggressively, with the ten-year US treasury selling off five basis points on the 287,000 headline jobs print before the buyers stepped in and filled their boots, in turn causing a strong reversal. Any yield is good buying at present, which is what we are seeing time and time again, despite valuations in the bond market becoming very expensive.

The S&P 500 will be eyeing earnings this week from Alcoa, Blackrock, JP Morgan, Wells Fargo and Citigroup, but price action is very bullish right now. While there are many reasons to be bearish, price is true and Friday’s bullish breakout suggests we can see a further move into the 2150 to 2160 in the near-term. Not only did we get sensational participation on Friday with 98% of stocks higher on the day, but also the market internals look bullish with 96% of stocks currently above the ten-day average. We are certainly nowhere near a stage where there is euphoria baked into the market and higher prices are expected, although the risk of a reversal is still very much something traders need to be prepared for.

We’ve even seen a rally in European banks, which is a sector well worth putting on the radar, if it isn’t already. Notably UniCredit (UCG) had a strong day on Friday, and while it’s trading at €1.91, it has the potential for a sharp move into €2.51.

Today’s open in Asia should be fairly upbeat with the ASX 200 likely to test the 5300 level on open. BHP is likely to open 1.7% higher, with a more modest bounce in CBA of +0.8% (based on the ADR). Stocks that face headwinds to a rising AUD may struggle, with the AUD/USD enjoying a strong correlation with the S&P 500 on Friday and the pair looking like it wants to test the June highs, where a close above $0.7600 would naturally open up a move into $0.7800. Keep an eye on the SPI futures as well, as this could drive the cash market, so a close above 5257 (5 July high) would be very positive.

We are staring at positive flow in China and Japan too, with Shinzo Abe’s LDP party gaining a supermajority alongside the Komeito party in Japan. We have also seen China release June CPI (+1.9% year-on-year) and PPI (-2.6% year-on-year) but looking at the limited reaction in AUD this morning, one senses this will not alter the landscape too greatly. All eyes will fall on Wednesday’s trade balance and Q2 GDP on Friday (consensus +6.6%). We’ll also be getting industrial production, retail sales and fixed asset investment, but as we saw last week, one would be wise to pay attention to the RMB, which should find some strength when the People’s Bank of China undertakes its daily fixing at 11:15 AEST.

There are plenty of catalyst and event risks this week, but we start proceedings with the bulls reluctantly in charge and higher prices in equities and high yield credit (HYG ETF) seeming likely.

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