ASX 200 breaks key resistance but risk awaits

There are a number of focal points that traders will be watching today, not least the confirmation that Francois Fillon will face off against Marine Le Pen in the 7 May French election.

Source: Bloomberg

We have a number of bullish set-ups in global indices at present. Obviously, we’ve seen this front and center in all four main US indices (S&P 500, DOW, NASDAQ and Russell 2000), the Nikkei 225 and also the Chinese CSI 300, which is near the year’s highs. However, we can now add the ASX 200, which, after pushing through 5500, is eyeing the year’s highs of 5611 itself. We haven’t even hit the annual seasonal purple patch, where over the past 20 years the ASX 200 has rallied on average over 2% into year-end from 17 December.

The ASX 200 weekly chart paints perhaps the clearest picture of the positivity, with the price having closed firmly above the August downtrend. Last week it was all about materials and energy, with both sectors gaining over 5% a piece, but this week there are a number of event risks and a more cautious stance may be warranted. We start the day, however, on a modest positive given copper gained 2.5% on Friday. In the bulks, we have seen iron ore, steel and coking coal futures push up 2.7%, 2.9% and 2.4% respectively.

Oil, on the other hand, had a strong move lower into the US close on Friday from news that Saudi Arabia was not attending a meeting with non-OPEC countries as there was a lack of consensus on this week’s OPEC output cut agreement. With a large number of US-based traders off work for Thanksgiving price will find it easier to have more aggressive moves, but the risk traders are sensing is a re-run of the April OPEC meeting in Doha, where absolutely nothing was agreed upon and oil price fell heavily. By all accounts, the Algerian and Venezuelan oil ministers are pushing things along, as clearly no OPEC nation wants to see US crude fall below the 14 November low of $42.95, and even through $40.00. It is, therefore, a real risk for oil stocks, which did very well last week, so I would not be surprised to see traders looking to hedge exposures here this morning.

BHP’s ADR closed -1.8% on Friday and the moves in oil seem to be the dominant force here.

The influence that the rebound in iron ore, steel and coking coal has had on the AUD/USD is key as well, with the AUD being the strongest G10 currency last week. On Friday, the pair closed above the former September low of $0.7442 (range of $0.7401 to $0.7468), although the stronger performance last week was long AUD/JPY, which rallied a cheeky 3.4%. For those trading AUD/USD, this week as mentioned keep an eye on iron ore futures as a guide, with Thursday’s Q3 private business CAPEX also a consideration. The economic calendar in the US is also quite punchy and while some have positioned portfolios for a “Trumpnomics” inspired reflation trade, for the USD to find further buying from here we need to see a further improvement in the current US data flow.

Specifically, watch the US ISM manufacturing (released 2 December at 2am AEDT) and Friday's US payrolls (consensus 175,000).

Keep an eye on the Aussie banks today as well given we are seeing the impact of “Trumponomics” now play into housing costs. We’ve seen it in the US where 30-year mortgages have risen around 50 basis points since the US election, thanks largely to sell off in longer-term borrowing rates, but this has now spilled over into Australia. It is now imperative that we all focus on the fixed income market, as we are seeing a genuine tightening of financial conditions. How many are actually prepared for rates to go higher?

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