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Trader thoughts - the long and short of it

The music that keeps investors buying will continue to play, just at a slower pace. That’s the message global central banks and economic data have sent around the world over the last 24 hours.

Market data
Source: Bloomberg

The weak consumer inflation data out of Australia with a print of 1.8% y/y adds further to the idea that the RBA will not be persuaded by other central bankers. It charged ahead with hawkish language only to pull back as the sustainability of an economic recovery has proven difficult.

The European Central Bank came out of the gates on Thursday with a commitment to halve the amount of bond purchases, while at the same time extending the tenor of the absolute program life. The market read this as a sign that central banks may be buying less, but are no less active than they have been in working, to ensure volatility remains low and confidence remains high.

The market reaction tells you everything you need to know with the EUR falling against the majority of G10 FX and Bunds going bid alongside the DAX. The ECB rates decision and Mario Draghi briefing that maturing debt investments will be reinvested in 2018 at a “substantial” amount “for an extended period of time.” The line from Draghi that the market appears to have liked the most is the assurance that there is no “sudden stop” envisioned by the ECB’s head. The EUR traded toward the 100-Day Moving Average for the first time since April when it traded down to 1.1675 US Dollars per EUR.

AS51 remains a shade below the year-to-date high traded at on May 1 at 5,956 with the current close at 5916.30. The futures price implies a lower open by nearly 30 points near 5,888. The heavy hitting sectors of materials and financials continue to limit the breakaway moves higher in the AS51. This is due to lower margins from financial firms thanks to hesitant RBA and highly concentrated iron ore, trailing the fast moves of Aluminium and Copper.  

Our call for the ASX 200 sits at 5940 (+0.5%), so 16 points away from the high print from May and obviously 60 from the illustrious 6000 level. BHP is set to open up 8c higher (if we use the ADR), although the S&P 500 materials sector has flown (+1.4%). Aussie banks should open on a stronger footing, but it’s all eyes on MQG this morning with the stock reporting 1H earnings.

The market expects cash earnings of $1.14 billion, on revenue of $5.29 billion and whether they can justify the full-year expectation’s set by the street is another thing. However, keep in mind MQG is an absolute super star when it comes to earnings and in the last 18 half-yearly reports, shares have only closed lower on the day of reporting once!

All eyes in Australia will be on the PPI print this morning in hopes that the recently weak inflation data was not a sign of things to come. Previous readings of PPI y/y were 1.7%, a q/q at 0.5%. PPI measures the prices received by producers at the completion of their supply chain and can echo the sentiments found from inflation data.

RBA Deputy Governor Guy Debelle added concerns to the slowing economy stating that the inflation data, as weak as it was, may be even weaker. This is due to lagging re-weightings of the index and substitution bias. Substitution bias is the idea that consumers will move to cheaper goods faster than indices like CPI can adjust.

Wall Street continues to flash green with the SPX500 and Wall Street 30 getting a lift on gravity-defying earnings. Since earnings season began in mid-October, investors have seen the Wall Street 30 rise by 2.5%. US economic data has been impressing since early September, and Friday’s US GDP print is expected to keep the positive sentiment going, thanks in large part to economic bell weathers in the US raising forecasts.

Technology firms still have a keen focus during earnings seasons. Despite, a shaky earnings season last quarter led by volatility, surrounding the often-cited quartet of Facebook, Amazon, Netflix, and Google.

The Australian dollar continues to be sold on the view that US dollars should be bought, not sold in anticipation of a new Federal Reserve head and the recent selling in the US sovereign bonds that have sent yields higher. The US Treasury 10-year yields are at the highest levels in 6-months, which brings the USD higher in the hope that tightening is providing a demand for USD.

AUD/USD fell 1.25% after the weak consumer inflation print pushed out the already lagging expectations for the next RBA hike. AU dollar is now facing the 200-DMA against the USD, but the momentum would not expect buyers to step in front of the selling that has taken place across commodity FX like NZD and CAD that have their own themes driving their selling vs. the USD. Traders utilizing the charts would likely see 79 US cents per AUD as a likely point to encourage selling against the USD in the current environment.

Commodities have received exciting news for Oil Bulls on the backing of Saudi’s Crown Prince Mohammed bin Salman regarding Oil’s “new era” that explains supply control is the key way to support prices. Recently, markets were encouraged by Russian President Vladimir Putin’s comments that Russia was open to extending cuts in alignment with OPEC producers to the end of 2018. Despite impressive compliance between OPEC on production cuts, US production showed the strongest rise in output since 2012.

Given the rise in stocks, precious metals alongside the S&P Volatility Index (VIX) fails to hold relative spikes higher. The spot price of gold is currently trading near the low of the monthly range at US$1,306.11/oz. to US$ 1,260.67/oz. Iron Ore remains under pressure on China’s concern about dirty steel mills, which has pushed miners to focus on mining higher-quality ore as lower-quality. For example, such as the 62% Iron Ore content delivered to Qingdao continues to trade 20% lower from the August high.

Volatility is picking-up in emerging markets led by the rising concerns of a debt downgrade to South Africa, after their Finance Minister signaled an intention to issue a slew of new debt to plug a widening budget gap. The troubles do not belong to ZA alone. Looking across Emerging Market FX (EMFX), traders recognize the longest selling streak against the US Dollar since April. There is traditionally an inverse relationship between trends in the US Dollar and the US Dollar-dependent borrowing Emerging Markets.

Markets Update:

SPI futures moved 10.7 or 0.18% to 5916.3.

AUD/USD moved -0.0044 or -0.571% to 0.766 - Session High: 0.7719 Session Low: 0.7656

On Wall Street: Dow Jones 0.31%, S&P 500 0.13%, Nasdaq -0.11%.

In New York: BHP 0.32%, Rio 0.23%.

In Europe: Stoxx 50 1.27%, FTSE 100 0.53%, CAC 40 1.5%, DAX 30 1.39%.

Spot Gold moved -0.79% to US$1267.45 an ounce.

Brent Crude moved 1.68% to US$59.42 a barrel.

US Crude Oil moved 1.03% to US$52.72 a barrel.

Dalian Iron Ore moved -2.09% to CNY444 a tonne.

Iron Ore delivered to Qingdao moved -1.24% to US$61.47 a tonne.

LME Aluminum moved 1.44% to US$2186 a tonne.

LME Copper moved -0.36% to US$7010 a tonne.

10-Year Bond Yield: US 2.46%, Germany 0.42%, Australia 2.75%.

 

By Tyler Yell, Trading Instructor & Currency Analyst, IG Addison

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