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Trader thoughts - the long and short of it

The market’s are – so far – living out the expectations set by seasonality statistics. Last week’s volatility, charged by a round of major central bank announcements, continues to deflate into this week.

Market data
Source: Bloomberg

While we are not currently at the multi-year or record lows for the range of volatility measures for equities, FX, commodities, emerging markets and other key asset types; we are within stones throw. Historically speaking, June sees on average the lowest reading for the VIX of any calendar month. 

Yet where activity may seem to be fulfilling deeply held beliefs by the seasoned trading rank, the backdrop speaks to less complacency and obliviousness than the popular measures suggest. Where key equity indexes are pushing to record highs and volatility measures to their lows, open interest behind Euro, VIX and Pound futures – all seemingly bound to range – while open interest behind the favourite S&P 500 emini futures leveled out a few years ago, despite the continued charge higher. What does that mean: a seemingly quiet surface, but concern and exceptional exposure beneath the surface.

Wall Street: Trading through the US session offered little resolution to the speculative impasse. The Dow’s and S&P 500’s range on Thursday was the smallest since June 5th. Volume similarily spoke to a tepid convictions with both indices seeing a progressive decline in turnover that had built up over the previous weeks. The lack of trading isn’t surprising given the level of volatility. And, the level of inactivity follows a distinct lull in important event risk. The global calendar of scheduled events this past session was topped by the RBNZ rate decision and the EU summit. The Kiwi central bank didn’t cause any ripples in the waters that have recently churned with the Fed’s hikes and balance sheet plan, as well as the split in views from the Bank of England.

Off docket, the US Senate’s health care bill proposal has generated little of the speculative response we had seen six months ago. A considerable amount of confidence was built into the markets following the US election results on the belief that Donald Trump and a Republican congress would push through business and economy-friendly programs. However, as each week passes without progress on these premium-laden forecasts, the ‘Trump trade’ risks losing the traction it has enjoyed.

China Still Glowing: Chinese equity markets are still glowing from the news earlier this week. The world’s top ETF purveyor MSCI had decided to accept a range of A-shares from the country’s stock market into its popular emerging market products. This is the financial market equivalent of the IMF’s acceptance of the Yuan into its SDR basket. In other words, it legitimizes the country’s markets and solidifies its place as a global player. That said, the world will accept its risks along with its opportunities. An official at the China Banking Regulatory Commission warned that a some large companies could pose a systemic risk to the country’s banks. It is unusual to see such concerns aired openly, which has global investors even further unnerved.

Global PMIs: A Friday in a quiet week is typically a gentle slide into the weekend liquidity drain, but this week the bar is already set low for activity and this final session actually carries this week’s densest round of event risk. At the top if the docket are the PMI figures for Japan, Europe and the US. These are essentially timely proxies for the rarely released quarterly GDP reports from the government statistics bodies. Traders would do well to keep an eye on these figures and their trends.

Key Ratings Updates Ahead: Another highlight through Friday’s closing hours that could carry substantial weight are the sovereign rating updates from Moody’s for Greece, France, Germany and the United States. Of greatest concern are Greece and the US. The former is struggling to gain the IMF’s confidence to participate in its ongoing rescue, and the outlook for recession has kept the country’s debt below investment grade and off the ECB’s viable purchase list. The latter’s forecast was bolstered by expectations of economic-fueling tax and infrastructure plans that have yet to come to pass – and instead the specter of shrinking trade relations continues to creep in.

Australia Dollar: The Australia Dollar was this past session’s worst performing ‘major’ currency against the majors. The local currency dropped against all of its most liquid counterparts, with a distinctly sharp slide against its most prominent, comm-bloc counterparts (the New Zealand and Canadian Dollars). Looking at anticipation, the one-week implied (expected) volatility reading for AUD/USD is just above 6.5% - the lowest since August 2014.

ASX: The ASX is set for a slightly modest jump on the open. The strength of the financial sector this past session will not find much international support to help sustain its climb through Friday’s session. Similarly, the info tech sector – Thursday’s second best performing sector – found limited traction through its European and US counterparts prior to today’s open.

Commodities: General commodity ETFs continue to dive. The Powershares Commodity Index – largest aggregate ETF by total assets – is on pace for its fifth consecutive weekly decline. A strong driver in this slide is crude oil. Similarly on pace for its fifth weekly bearish close, this commodity has cleared what was considered important support at 44 mid-week and in turn showed the market is willing to throw its interest in week-to-week inventory updates into the fire to follow its speculative fears.  

Market Watch:
SPI futures up 10 points or +0.1% to 5653

AUD -0.11% to 0.7543 US cents (Overnight range: 0.7576 – 0.7535)

On Wall St, Dow +0.13%, S&P 500 +0.19%, Nasdaq +0.27%

In New York, BHP +0.30%, Rio +0.52%

In Europe, Stoxx 50 +0.04%, FTSE -0.11%, CAC +0.15%, DAX +0.15%

Spot gold +0.29% at $US1250.13 an ounce

Brent crude +0.94% to $US45.24 a barrel

Iron ore -.10% to $US54.90 a tonne

Dalian iron ore at 422.5 yuan +2.36%

LME aluminium -0.57% to $US1857.75 a tonne

LME copper +1.48% to $US5742 a tonne

10-year bond yield: US 2.146%, Germany 0.252%, Australia 2

 

By John Kicklighter, IG Chief Strategist, Chicago

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