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The weekend news, which focused on calming comments from Central Intelligence Agency Director Mike Pompeo and National Secretary Advisor H.R McMaster, was seemingly enough to suggest that the highly likely scenario is we won’t see conflict.
In the absence of anything else, tangible traders pushed up S&P 500 futures from the open of trade yesterday. It was also positive to see the Korean Kospi close up 0.6%, while traders have taken a step back and looked at the Korean credit default swap (CDS – this gives the buyer of insurance against bond default) on a multi-year chart and seen that while the index has moved up of late, it’s still at very low levels; historically speaking.
The good-will portrayed in S&P 500 futures has supported European equities (the DAX closed up 1.3%), while we have seen selling of bonds, with the US ten-year treasury up a few basis points to 2.22%. Gold has found sellers *(-0.5%) in this environment, although this is just holding the five-day moving average, at $1278 at this stage.
High yield credit spreads, which have been a leading indicator for equities and the HYG ETF (iShares high yield corporate ETF) has pushed modestly higher and closed Thursday's gap. I would be keeping an eye on the HYG as price action is certainly not that convincing at this stage.
Implied volatility has been crushed, so the excitement seen in the US volatility index (‘VIX’) last week has dissipated, and currently, resides at 12.37% (-20%). It seems that last week’s move has been confirmed, as re-positioning from a market had very short volatility structures. So a calm has descended over US equities and if we look at the daily chart of the S&P 500, the bulls will obviously want to see if the index can close above 2483/4, where the trend should extend. Small caps have worked nicely here, with good outperformance on the session from the Russell 2000, although the index really needs to break 1400 for a re-test of the recent high of 1452. One for the radar.
We have even seen some buying of USD’s, with USD/JPY the primary vehicle to express a bullish move here. USD/JPY looks interesting on both the daily and weekly timeframe, with price finding better buyers on Friday at the 14 June low and then subsequently printing a higher high today. It looks like it potentially could close above the former April uptrend. GBP/USD has seen net selling and looks like it wants to make a move lower here, with good bids seen into $1.2960/50.
So if the price can take chew through these bids then I think we can see $1.2600 come into play. AUD/USD has also moved a touch lower and again the daily chart looks interesting here, especially if we can see a move through $0.7836, which is strong horizontal support. One for the radar, with Aussie Q2 wages (consensus +1.9%) on Wednesday and employment data on Thursday. A break of $0.7836 takes AUD/USD into $0.7700.
By way for a lead for the Aussie materials and energy stocks, things are not looking so rosy here. US crude is trading 2.6% lower than where it was at 4:10pm AEST yesterday and this needs to be priced into Aussie energy stocks. The XLF ETF (Energy Select Sector SPDR Fund) in the US has lost 0.2%, but this would be far worse if it wasn’t caught up in a bullish broader index move. Some have attributed this move to the poor (relative to expectations) China industrial production report, amid signs of USD strength.
Perhaps, but I would place more weight on views from the EIA around US shale output expected to hit 6 million barrels a day in August and September, and let’s not forget the US rig count increased by three rigs last week. Technically, US crude has broken through the recent consolidation from late July, so the bulls will want to see some further strong inventory draws this week.
Spot iron ore closed down modestly at $74.71, however, the moves in Dalian iron ore and steel futures have been more pronounced. Assessing price action, we can see two sizeable down candles on the daily chart and clearly there has been a liquidation of long positions from the bulls after last week’s comments about a stable steel industry from the CISA. If holding an FMG or AGO, I would be cautious here and be keeping a firm eye on iron ore futures as the selling could accelerate here.
SPI futures were trading at 5673 at 4:10pm AEST and the time of the official close of the ASX 200. Given SPI futures now reside at 5690, it gives us good reason to feel (with the fair value adjustment) that the ASX 200 will open at 5647 (+17 points). So a positive start to the day, with earnings due from FXL, GPT, CQR and a trading update from ANZ. As mentioned yesterday, keep in mind that tomorrow is ‘Liberation Day’ in North Korea, so anything is possible here and traders will be watching out for headlines that could cause risk aversion.
Another area of focus has been headlines around the Trump administrations enquiry into China’s trade practises and the use of US intellectual property. There have been headlines on Trump signing an executive order against China, although there is a longer timeline that needs to play out and the market will want to understand the sanctions. It doesn’t seem good for US/China relations either way.