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Trader thoughts - the long and short of it

This past session offered a jolt of volatility to usher in the final leg of the week. Once again, the bulk of the day’s move was found during the US trading hours.

Market data
Source: Bloomberg

While there was a carry over of speculation related to this week’s more prominent themes – a global shift in global monetary policy chief among them – there was no true lightening rod to attribute the strong intraday drop in equities and temporary surge in volatility measures.

Conditions have grown overwrought on speculative appetites for months, so dry heaves are not surprising. What is suprising is that the effort to turn such deeply seated risk beliefs occured so close to a well-known liquidity drain.

Wall Street: A distinct souring of sentiment occurred in the global capaital markets just before the US markets opened for trade Thursday. By the time the exchanges in New York opened, the bearish pressure was already in full swing. The S&P 500 lost as much as 1.4% on the day, while the tech-heavy Nasdaq Composite found a low that shed up to 2.4% of its value. Through the closing hours of the session however, some of the intensity abatted and the non-popular ‘bid the dip’ mentality reduced the indices losses to 0.9% and 1.4% respectively. That said, the European markets closed around the height of the selloff with the DAX off 1.8% and the CAC 40 suffering a 1.9% slide. More remarkable was the VIX Volatility Index’s more than 50% surge on the day at once point. The likelihood of a systemic collapse in positioning just before an extended liquidity-draining weekend (for the US) seemed a tall order though, and the volatility measure ended at 11.4 – up around 15% from Wednesday’s close.

Top Data Influences Central Banks: Friday will close out the week with important economic data on a global scale, given the shift in rhetoric from central banks about a building propensity to tighten monetary policy. Of keen focus will be Manufacturing CPI from China (exp: 51), German employment data after an encouraging CPI print that boasted large order from other European countries, Canadian GDP, and the Fed's favorite predictor of inflation, the core Personal Consumption Expenditure for May (exp: 1.4%). A large surprise or disappointment has the potential to introduce more volatility into the month and quarter end flows.

Liquidity Ahead: There will be a profound pinch on market activity through the final trading session this week and through the first 48 hours for global markets next week. The US will celebrate its Independence Day holiday on Tuesday. While this is only one country’s market holiday, as market participants go, this is the largest. International investors recognize the implications have having the largest player offline – it is difficult to transmit sentiment around the world and thereby muster a full head of momentum. This recognition often keeps all but the most opportunitistic market participants on the sidelines making for ‘wild west’ trading conditions. That is what makes Thursday’s volatility surge so atypical.

RBA Rate Announcement on the Horizon - On Tuesday morning, the RBA will provide a rate announcement, which is expected to keep the Cash Rate at 1.50%. However, that doesn't mean the AUD will be without volatility. Given the bounce of commodities at the end of the month and the global move higher in government yields, the RBA could turn the page like the Bank of Canada to say the time is approaching to consider rate hikes. Such rhetoric would amplify the ex-RBA member, John Edwards’s comment that eight hikes over the next two years are a ‘distinct possibility.' The options market is expecting volatility to be the highest since mid-June, and the moves could be amplified as the US market will be closed on Tuesday, providing the opportunity for large moves on any surprise or optimistic tone from RBA Chief, Lowe.

Australia Dollar: The Australian Dollar proved one of the best performing major currencies this past session. That is remarkable given its traditional alignment to risk trends as a ‘carry’ currency and the aggressive unwind for equities and similarly aligned markets. Further undermining the simple ‘risk-on/risk-off’ conviction, the currency’s best performance was the 0.6% move versus fellow carry currency, the Kiwi. Further, its worst showing was a -0.1% loss to the British Pound.

ASX: The ASX is likely the envy of the world closing above 5,800 on a 1.1% gain as the US Nasdaq fell over 2% intraday as capital intensive industries with lower earnings like technology are getting hit on rising yields. Higher borrowing costs are good for banks though, which make up almost 30% of the S&P/ASX 200. Add to that, commodities are seen firming as Iron Ore and Copper bounce strongly, which is helping lend strength in the second-heaviest weighted Materials sector where 94.4% of the stocks were higher on Thursday. If the commodity run moves higher, we could see the ASX do the same that could push the index back toward the 2017 high of 5,965.

Commodities: Energy and base metals are having an encouraging end to a rough quarter. Earlier this month, Iron Ore traded at 2017 lows, and the quarter marked Iron Ore's worst performance since 2015. However, Iron Ore has traded higher in 10 of the last 11 sessions, and have jumped more than 20% from the $53.36 low on hopes that China will curb supply. Crude Oil is also working on its best run in two months after working on the sixth close higher. Traders should be warned that global floating storage is at the highest levels since 2010 per Bloomberg, which suggests oversupply remains a clear and present danger for a sustained rebound.

Market Watch:

S&P/ASX 200 up 62.4 points or +1.07% to 5818.10

AUD +0.57% to 0.7684 US cents

On Wall St, Dow +0.79%, S&P 500 -0.86%, Nasdaq -1.43%

In New York, BHP +0.51%, Rio +1.55%

In Europe, Stoxx 50 -1.82%, FTSE -0.51 %, CAC -1.88 %, DAX -1.83%

Spot gold -0.35% at US$1244.95 an ounce

Brent crude +0.02% to US$47.32 a barrel

Iron ore +0.27% to US$56.15 a tonne

Dalian iron ore at 428.5yuan, +4.43%

LME aluminium (cash) +0.79% to $US1891.00 a tonne

LME copper (cash) +0.48% to US$5866.50 a tonne

10-year bond yield: US 2.27%, Germany 0.45%, Australia 2.50% 

 

By John Kicklighter, Chief Market Strategist, IG Chicago

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