Trader thoughts - The long and short of it

It should be an interesting day and the prospect of unpredictable flows in the FX, bond and equity markets are high as we head into the last day of the month and more importantly quarter-end.

Market Data
Source: Bloomberg

The lead passed over from the US is supportive of a positive open for Asian equity markets, and the bulls will be happy to point to the sector rotation underway in the US. US banks have found gains hard to come by of late, as traders reduced exposures from what was a very crowded trade. We can see this with the KBE (SPDR S&P Bank ETF) falling 13.7% between 2 March to 27 March. That has since reversed and we can see the bank ETF is up 3% today on good volume. Good buying can also be seen in energy and industrial names too.

In FX land, for traders who like volatility, the USD/ZAR (South African rand) has seen some big moves and there is plenty of political angst that should keep the pair moving around. There has been a third day of gains in the USD, with the US dollar index (DXY) pulling away from the 100 level helped largely by a weaker EUR. The trade of the day was short EUR/GBP (-1%) and the pair needs to break and close below the 200-day moving average at £0.8585 to really accelerate here. However, we’re seeing good buying all-round in the pound, while the EUR is the weakest link in the G10 currency bloc. AUD/USD has moved modestly higher, but has traded a tight range of $0.7680 to $0.7649 and looks fairly comfortable at these levels.
 
We have seen a move higher in US bond yields across the curve, with US ten-year ‘real’ (i.e. inflation adjusted) yield moving up four basis points and this is creating a slight tightening of financial conditions. This seems very fitting to highlight as New York Fed President Bill Dudley is scheduled to speak shortly on financial conditions and his narrative could move the dial with regards to market pricing around a potential June hike. One to watch.

On the data front, a modest revision higher in Q4 GDP to 2.1% has been noted, with consumption being revised up to 3.5%. We have also seen the Congressional Budget Office publishing its 2017 outlook and the numbers are hardly inspiring, with federal debt reaching 77% of GDP (double the level seen in 2008) and even projections it will reach 150% of GDP in 2047. Some absolutely breathtaking numbers and even if we move out into 2035, US federal debt of over 106% of GDP would be higher than the US post-WW2 debt levels. One for the bears and one for another time.

Turning to Asia and the wash up of the leads is that the ASX 200 should open just above 5900 with SPI futures gaining 10 points. If this call proves to be correct, the ASX 200 would be up 2.6% for the week and putting on its best weekly show since 25 November. Commodity leads are also mixed with oil rallying 1.6%, steel futures +2%, while spot iron ore fell 0.6% and gold fell 0.7% on the move higher in ‘real’ yields.

As mentioned though, it’s quarter-end and one questions if we see portfolio rebalancing or a last minute chase for performance that ultimately pushes the ASX 200 nicely above 5900 today. It has been a good quarter with the ASX 200 gaining 4.1%, which on a relative basis is one of the best performers in developed markets if we price other markets in AUD terms, and compare apples and apples.

Keep in mind though, that a lot of fund managers will actually benchmark themselves to the ASX accumulation index, which has put on over 5% for the quarter.

Consider that in AUD terms (this quarter), the S&P 500 is down 0.5%, EU Stoxx 50 +1.1%, the FTSE 100 -1.9% and the Hang Seng +3.7%. This is also true in FX land where the AUD (again on the quarter) has been the superstar, gaining nicely against all G10 currencies and most prominently against the USD (+5.8%). For those wanting a bit of excitement in their lives, it has become 29.6% cheaper to visit Sierra Leone with AUD/SLL gaining nicely.

The 4.1% rally in the ASX 200 has been built on a largely defensive position, with investors really finding solace in companies with predictable, defensive cash flows and earnings streams. On the quarter, we can see health care has worked really well, gaining 14.32%. If you have been overweight this sector, then you’d be doing nicely relative to any benchmark. Staples (+9.5%), utilities (+9.2%) and financials (+5.5%) have also been good places to be invested too.

Moves in the ASX 200 from 10:30 AEDT will make interesting viewing.

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