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Asia focused on the Italian referendum

It’s all eyes on the Italian referendum this morning, with the polls closing at 9am AEDT, exit polls announced shortly after, and a result expected to be known by the European equity and fixed income opens.

Italy
Source: Bloomberg

S&P futures open at 10am AEST, but FTSE futures could be worth watching as they open at midday. We shouldn’t overlook the overseas voters, where (according to La Repubblica publication) 1.6 million Italians have voted, which is more than double the number who voted for the prior referendum in April. Local press have suggested they should vote ‘yes’, so that could be a real influence.

The polls have given the prospects of a vote passing as a ‘no’ for some time and thus Matteo Renzi stepping down. We may see further concerns around Italian politics and a deeper worry around the banking sector. I am specifically interested in EUR/USD this week as the pair looks supported here and may well move back to the October lows of $1.0851 in the short-term. Of course it’s all eyes on the European Central Bank (ECB) this Thursday, where the market is fully expecting an extension of its quantitative easing (QE) program to be announced - much is now in the price. The Italy MIB 40 is also moving to the top of the recent trading range it’s found itself in since July of 17,500 to 16,000, and as the various other political events have unfolded this year, we just can’t be surprised if we a ‘yes’ vote that would cause the MIB and EUR to rally.

US data gets less attention this week, although we will see tonight’s (2am AEDT) services ISM attracting some focus. The US non-farm payrolls on Friday showed us that the world has filled its boots on a USD buying binge of late. When you see 100% priced in for a hike in December, a 64% chance of two hikes in 2017 and the USD (trade-weighted) at a 14-year high, the data now needs to beat expectations by a reasonable margin. As it was, 178,000 jobs added was in-line with expectations, while hourly earnings at -0.1% in November were below par. We thus saw good buying in US treasuries (the US ten-year fell six basis points to 2.38%) and some USD headwinds. It seems as though we have reached an inflection point in the Trump-inspired reflation trade and a period of choppy price action could be in store for US treasuries, the USD and derivatives of these markets, such as gold.

The USD index will be key this week, with price delicately poised to break below 10,066 (the November triple bottom), where a break could have ramifications on a number of other markets. For the first time in a while I am actually interested in looking at being long gold as a short-term trade. Not because the world is about to collapse, but for more of a short-term repositioning from portfolios.

In the equity space, US indices have not really provided Asia with any conviction on Friday, although the ASX 200 should open around 5460 (+16 points), which is just a tad lower than the 21 points SPI futures closed up on Friday’s overnight session. Japan, on the other hand, should open around 0.4% lower, with USD/JPY also looking like it could be vulnerable this week. I would not rule out a move into ¥111.36.

Looking at the various ADRs, we can see BHP set to open 1.8% higher, with CBA eyeing an open 0.2% lower. Commodities haven’t really given us too much to work with either, with spot iron ore 0.7% and futures -0.9%. US crude has added a further 2%, with price closing up 12.2% on the week which looks set to support BHP and the oil space, although the S&P energy sector closed up 0.1%, by way of a guide.

AUD/USD should also get good working out this week, although the technical set-up is not really giving us any real clarity around future trends and looks very comfortable at current levels. The hedge fund community is still holding a small net long bias on the pair and many feel if they are going to play AUD from the short side it would likely be against the CAD, which is being supported by the moves in crude. Interestingly, we have to go back to November 2014 to find a period where the interest rate markets were perfectly neutral on changes to monetary policy over the coming 12 months, but that is where we are now. We are going to need to see a trend emerge in the data flow to force the Reserve Bank of Australia to lower the cash rate from here. All we have heard of late from officials could be described as ‘cautiously optimistic’. After last week’s Q3 CAPEX data and residential construction numbers, we watch for today’s Q3 inventories and operating profits at 11.30am AEDT, which feed into Wednesday’s Q3 GDP calculation. Net exports as a percentage of GDP are released tomorrow and are not expected to contribute anything to the growth print.

There is a sizeable divergence in views from the analyst community and while the consensus is for +0.2% quarter-on-quarter, we can see a range of -0.3% to +0.7%. This is quite a spread and thus the market could be quite volatile on this data release.

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