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Trader thoughts - the long and short of it

The uneven climb in risk trends this past week saw some of its speculative leaders falter through the US trading hours Thursday. That moderation is unexpected considering the headlines that global investors were to digest through the day.

Market data
Source: Bloomberg

The GOP released its tax reform plan looking to fulfill one of the key, economy-supporting agenda line items of the past year’s campaign – a pledge that has also played a critical role in the US market’s climb since last November’s election. The list of themes that can hearten global sentiment through the final session of the week is short, but it does include the ever-popular change in US payrolls.

Wall Street: US indices were little change don the day heading into the twilight hours of trade Thursday. Then again, the dip registered by the likes of the S&P 500 and Nasdaq were exceptionally modest and did little to truly sour the fact that record highs were set as recently as 24 hours before. Though these benchmarks have yet to seriously stumble, the drop in participation as a measure of conviction continues to weigh on enthusiasm for a subsequent run. Volume behind shares, futures and key ETFs has suffered steady down trend over the past week. That won’t trigger any immediate fear so long as VIX continues to hover around 10 and event risk doesn’t catch the market wrong footed with dramatic surprises.

US Monetary Policy: US monetary policy has dominated the entire second half of this week. The most explicit update on this very overbearing theme was Wednesday’s FOMC rate decision. However, the nature of that event was defused given the market’s clear expectation for its outcome. No hike in November but maintenance of a very high probability (98 percent according to Fed Fund futures) chance of a move at the December 13 meeting. That wouldn’t be the end of it however.

The longer-term view of US policy and its early carry currency status will be heavily influenced by who is leading the group. That stewardship will be under Jerome Powell starting next year after US President Trump announced his choice following weeks of speculation. Powell rarely deviated from Yellen’s vote and differs most clearly when it comes to regulation – he supports deregulation. And of course, the final trading day of the week brings the States’ monthly payrolls. Always good for volatility, but its dubious that this figure can materially alter the outcome of the next policy meeting much less pace for the next two years.

BoE Hikes Rates: The Bank of England rose rates for the first time in a decade, but that was not enough to keep the sellers of sterling at bay. Sterling fell against all G10 peers while UK sovereign debt known as gilts were bid as markets pushed back expectations of the next interest-rate hike to November 2018. The Aussie rose 1.5% against the sterling, and the Kiwi rose almost 2% against GBP.

BoE governor, Mark Carney was among the 7-2 majority to vote for the right hike, but the Monetary Policy Committee dropped reference that the rate may need to rise further than markets anticipate. Sterling will remain subject to Brexit negotiations, and the current market pricing in of two increases by 2020 could drop on disruptions in the Brexit process, and taker sterling down too. 

Bitcoin Surpasses $7,000: The rise in Cryptocurrencies continues to make market veterans uncomfortable. On Thursday, Tidjane Thiam, CEO of Credit Suisse and Goldman Sachs CEO, Lloyd Blankfein both commented on bitcoin as it rose above $7,000 for the first time.  Blankfein said he had, ‘a level of discomfort’ with bitcoin, but said he was also uncomfortable with mobile phones when they surfaced whereas Thiam said that bitcoin was the ‘very definition of the bubble.’

The rise of bitcoin this week at a mere 21% (weekly range: US$ 5,496-7392 per XBT) was naturally helped by news that the Chicago Mercantile Exchange announced it was planning to launch bitcoin futures soon helping to bring regulation to the lucrative market. Market participants are enthused that this development could bring billions of institutional money into the cryptocurrency market.

The Australian Dollar: The local currency was the top performing G10 currency against the USD on Thursday. The US Dollar was hit starting with Thursday morning’s FOMC (Wednesday afternoon the US) that was quickly followed with rumours of a Jay Powell-led Federal Reserve who is seen as the continuity candidate to carry the torch for the Federal Reserve.

Either way, the Australian Dollar has had a positive start to November, up by nearly 1% against the USD and seeing the biggest round of buying in nearly three weeks. The gains were on the back of AU trade and building data beating forecasts ahead of Tuesday morning’s RBA announcement where the market is bringing in a 99% chance of no change in monetary policy.

The ASX: While record highs from the S&P 500 and recent, sudden surges from the Nikkei 225 and DAX  draw the indices glory; the ASX 200 has one of the most cleanly delineated technical patterns on the asset class. The three week follow through on the October 13 break through a five-month range resistance(5,800/5,815) has extended a bullish move up to a much larger technical ceiling. Around 5,975; we find a flat trendline that has connected peaks from 2008 to 2015 to the current year. Though few usualy scale up to monthly charts. It is not difficult to miss the technical relevance. It takes a lot to make a break of this magnitude productive, and the struggle seen amongst global risk assets means this can be a difficult move to facilitate. Don’t write off a break, but do maintain some degree of skepticism when it comes to follow through.

Iron Ore that had been sold aggressively found support on Thursday. Iron Ore has been the odd man out as metals like Zinc, Aluminum, Copper, and Nickel have gained over 20% this year. Iron Ore has tacked together three straight days of gains in Dalian as traders hope to see a revival for lower-quality iron ore after the China curbs ease.

The view comes from looking at future premiums for May 2018 against January that shows after winter that China demand may break higher after the seasonal effects wane. Iron Ore has spent the last two weeks retreating gains over the summer on China’s fight to curb pollution.

Market Update:

SPI futures moved -6.06 or -0.1% to 5931.71.

AUD/USD moved 0.0041 or 0.534% to 0.7717 - Session High: 0.773 Session Low: 0.7673

On Wall Street: Dow Jones 0.12%, S&P 500 -0.13%, Nasdaq -0.24%.

In New York: BHP 1.9%, Rio 0.88%.

In Europe: Stoxx 50 -0.23%, FTSE 100 0.9%, CAC 40 -0.07%, DAX 30 -0.18%.

Spot Gold moved 0.18% to US$1276.97 an ounce.

Brent Crude moved 0.36% to US$60.71 a barrel.

US Crude Oil moved 0.29% to US$54.46 a barrel.

Dalian Iron Ore moved 1.26% to CNY442.5 a tonne.

Iron Ore delivered to Qingdao moved 0.74% to US$59.79 a tonne.

LME Aluminum moved 1.16% to US$2185 a tonne.

LME Copper moved 1.33% to US$6930 a tonne.

10-Year Bond Yield: US 2.35%, Germany 0.37%, Australia 2.65%.

 

By John Kicklighter, Chief Strategist, IG Chicago

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