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Trader thoughts - the long and short of it

A somewhat disappointing night for the bulls, which leads us to a weaker open for the ASX 200 in the last trading day of the week, with SPI futures falling 14 points in the night session.

Market data
Source: Bloom

Tech has been sold off harder than the S&P 500 (which closed -0.1%), as have transport stocks, while we can see Verizon Communications (+7%) supporting the Dow, which has closed up 0.4% on the day. Our lead though, comes predominantly from the S&P 500, which to be fair has traded in a punchy 22 point range, the biggest since the 6 July. The hour between 2:30am AEST and 3:30am AEST saw the market seemingly hit an air pocket, at a time where traders were talking about sizeable program sell orders playing through the market.

On a positive note, we have seen traders ‘buy the dip’, but more importantly, we didn’t see the S&P 500 print a firm close below yesterday’s low. This would have printed a bearish outside day reversal and follow through selling in the upcoming session would have argued the bears had wrestled back some sort of control.

Aside from a raft of corporate earnings numbers, we have seen US durable goods orders smash expectations with a gain of 6.5% (vs +3.9% eyed), which is the highest level since July 2014 and comes on the back of a revised drop in the May read of -0.1%. We must remember this is a highly volatile data point and notoriously hard to forecast, especially with aspects like non-defence aircraft orders gaining 131.2%. We also saw a 0.6% increase rise in wholesale inventories, 20 basis points (bp) above the markets forecasts. Advanced goods trade balance coming in a touch better than expected in June, with a deficit of -$63.5bn, after a -$66.3bn reading in May. It’s not hard to understand why we saw the Atlanta Fed’s internal GDP model for Q2 GDP (released at 10:30pm AEST) has pushed up 30bp (or 0.30 percentage points) to 2.8%. 

Keep in mind this model has been wholly inaccurate in the months gone by, but this calls seems fair. So the US Q2 GDP will be the event risk in upcoming trade, putting the USD on close watch and specifically USD/JPY and AUD/USD. We need to think about how these data points shape and influence the Federal Reserve’s thinking and would a number north of 3% really increase the prospect of a hike in December in their eyes? I suspect it increases the probability of a hike by two to five percentage points, bringing the markets pricing back to 50%. However, core PCE (released 1 August) and core CPI (released 10 August) I think will be the bigger influence.

Anyhow, with AUD/USD tracking lower through US trade and now back below 80c, after touching a high of $0.8065, a strong GDP print above 3% would send the pair back to the 79c level, although the 21 July lows of $0.7874 is the big level the bears are eyeing. Of course a weak print (of say 2.2% and below) is a genuine risk and would send AUD/USD through the session highs.

USD/JPY looks interesting and seems to be building a base at the 61.8% retracement of the June to July rally at ¥111.00 . If I were to be bullish, the USD would be my vehicle to express this view. We get Japanese inflation data (9:30am AEST) in Asia trade today, but it’s hard to recall when Japanese economic data actually had any influence on the JPY. I would personally like to see a move above ¥112.20 to confirm a strong view of momentum, but the weekly chart of USD/JPY looks very interesting (for perspective) and this suggests the pair has a beady eye on a very clear double top at ¥114.50. If we do see better days for the USD, which seems a big ‘if’, this would be a huge level for the pair to close through on a weekly basis.

Staying in FX land and as a side note, have a look at the daily chart of CHF/JPY, where we have seen a nice move lower on the session. I like the idea of selling this pair at ¥115.60 for a move into the June lows of ¥112.50. One for the radar.

Aside from the Japanese data, the focus from clients will no doubt fall squarely on trading the AUD. Although we have seen some good flows in US crude, which as mentioned in prior reports is looking at a test of the $50 level, where I expect the sellers to be active. It’s been a good week for oil and price reflects the improving fundamentals, and a close through $49.42 (the 200-day moving average) would get some headlines. Aussie energy names, such as Santos and Oil Search, have warmed to the moves in oil but still are not attracting strong institutional investor flows and we can see price action is positive, but far from bullish.

Perhaps energy can be a pocket of strength today though, with our ASX 200 call sitting at 5770, although when the S&P 500 was trading at session lows, our call for the ASX 200 sat down at 5748 and things were looking ugly. Other leads to think about include a 0.3% drop in spot iron ore to $70.20 a tonne, although iron ore futures have seen gains and the daily chart continues to look bullish. Goldman Sachs raising their estimates on iron ore in 2017 to $70 has seemingly got the press, which could be an interesting indicator in itself, although they retain their bearish 2018 view. Gold is largely unchanged, which is a reflection of no real moves in US fixed income markets, while copper has also done very little.

I see today though as a chance for equity investors and traders to really start to think about the Aussie earnings season, which unofficially kicks off on Tuesday with NVT. Can this be the catalyst to see the ASX 200 break the sideways range it’s been in since Mid-May? With consensus earnings per-share estimates (for the ASX 200) having been lowered by just over 2% in the last two weeks and the ASX 200 trading on 15.8 times forward multiple the bar is not set too high, but a break into 5900 on earnings alone (we would need further strength in US markets) seems a step too far.

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