Trader thoughts - the long and short of it

Finally some signs of life in the market. At a certain point, low volatility becomes more burden than boon, as there is no return for taking on the risk normally associated with navigating the market.

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That said, global equities steered lower through Thursday’s session with a measurable escalation of intensity through the US session – quite the contrast to the tepid celebration of Dow’s and company’s climb on the one year anniversary of the US election. Whether short-term trader or long-term investor, seeing the VIX Volatility Index rise back above 10 should be a welcome development. This popular ‘fear’ measure has closed below 10 on 42 different occasions this year. For context, it has only dropped below that low extreme 9 other times in its history and then only during holiday conditions. When there is an assumption of no return, no enthusiasm and no consequence; something is wrong.

Wall Street: Following the course of retreat carved out by the Nikkei 225, DAX and FTSE 100 before it, US equity indexes opened Thursday with a gap down. In fact, the S&P 500 posted its fifth largest bearish gap on the open for the year. In turn, that index would further stretch through its low to hit the support on a channel that has served as the most recent, two-month stretch of its bullish run. Yet, before bears grow too confident and disengaged bulls pull the plug in a panic, we have yet to see any meaningful breaks. There are still only 4 days over the past 12 month period that have registered a more-than 1 percent daily decline – one of the most inactive yet bullish periods on record. All rides come to an end, but that doesn’t mean it has to be today.

US Tax Policy: The US share markets got a jolt on initial US news of a corporate tax delay. A report surfaced overnight that Senate tax writers are proposing delaying a US corporate tax cut until 2019. The US S&P 500 fell with a specific emphasis on technology shares leading to the largest drop in 2-months. The move lower in equities on the priced to perfection market that we touched on yesterday potentially unravelling saw US Treasuries run higher while the US Dollar dropped.

Recently, investors heard optimism from US corporations in their quarterly earnings report on the potential income boosts from tax reform so pushing out the tax cuts is not something the market wanted to see. US President Trump recently expressed confidence in a tax plan being released by US Thanksgiving (November 23), but it appears that a holiday miracle is not in store this year and stocks may take this dose of political reality as a reason to sell and take profits. The major US markets of the Dow, S&P 500, and NASDAQ are up 18.6%, 15.15%, and 25.1% respectively, so it remains too early to get negative despite the largest drop for the latter two markets since late August.

Next Week: There is relatively little on the global economic docket to leverage any serious promise of forging a new trend from the languid capital markets. However, the tide will rise again starting next week. Looking out past the weekend there is a range of events and data that can spur sentiment and rate speculation. However, the most prominent theme has to be the wave of scheduled speeches by members of the largest central banks. In particular, all traders should keep an eye on the panel at the ECB Conference Tuesday that will have Fed Chair Yellen, ECB President Draghi, BoE Governor Carney and BoJ Governor Kuroda in attendance. Messing with the calibration of global stimulus growth can be seriour threat to the low-yield market advance we’ve experienced. Recognition that this firefighters are out of water should another financial crisis flare up could be even more problematic.

Bitcoin Volatility Remains, Trend Sidelined: News yesterday that Bitcoin would avoid the Segwit2x hard fork was hailed as a win for normalcy in the fledgling cryptocurrency market…but that hasn’t translated into lift to the high-flying asset. It has been the standard case that status quo is used as fuel to sustain and even accelerate trends (Chinese growth, European elections) while unquantifiable change cuts them short (Brexit). That isn’t the case here. Following the temporary setbacks with events like the one that created Bitcoin Cash, it seemed there was an interest in seeing this change go through as some form of ‘dividend’ event. It’s failure was therefore met with disappointment. Bulls shouldn’t fear though as the CBOE’s and CME’s push to introduce regulated futures and ETF products based on Bitcoin will bolster the market’s legitimacy. The question then becomes: is this as attractive a market to traders if it is in the world of ‘normal’ markets?

The Australian Dollar: Aussie Dollar continues to oscillate but is becoming more attractive to bargain hunters. Despite the low volatility, traders can look to the options market to see the AUD/USD one-year risk-reversal has recently touched a nine-year high on the session showing that traders do not want to pay for out of the money downside protection too aggressively. While the AU-US sovereign bill spread continues to tighten with the 3-month bill narrowing within 50bps and longer out on the curve, there remains a fear that a steadily hiking US Federal Reserve will erase the longer-term AU debt yield premium.

After a 5% drop from the September high, AUD/USD is seen as resilient despite the low volatility. Traders should not forget the seasonal factors at play though that has seen the AUD fall in 7 of the last 10 Decembers while 1-month implied volatility has ended the month of November higher in each November in the last four years. Caveat emptor.

The ASX: The four-day streak higher for AS51 shares will have to earn its fifth straight rise. At the open, the 6,000 level is expected to hold, but the overnight leads show the ASX 200 down 33 points to 6010 with an overnight fair value low of 6000. Yesterday’s close brought the index to a 52-week high with the 0.55% gain or +33.16 points to 6049.43. Internally, the AS51 was supported by real estate and IT leading the charge higher and only energy acting as a laggard. BHP looks set to open slightly lower with Vale’s US-listing following suit.

The most impressive global equity move overnight was difficult to spot if you only looked at closing prices. After trading at the highest level since 1992, the Nikkei fell 3.5%, and a clear catalyst was absent. Over the last two months, the Nikkei has been a bull market benchmark and was 2% higher in the session before the sudden drop and close at -0.2%. Naturally, traders will wonder if this will kick off further warning signs of valuations, but the positive data trends on a global level make this unlikely for now. Any aftershocks could make it difficult for the ASX 200 to hold above 6,000 for long.

Commodities The promise for new trends in commodities has been intense at certain points, this past week, but conviction seems as elusive here as it has been in the financial markets. US-based WTI crude had every opportunity to turn the corner on its year of congression following last week’s break above $55 and the strong follow through effort Monday, but the move has since proven spent. The initial charge had dubious connections to US inventory figures or OPEC headlines, so scrambling for support in these venues now would likely come up short. Meanwhile, gold’s more modest break above $1,285 has inspired no such flush of initial volatility, so the slow turn in a wide wedge makes no promise of quick profits. Inflation, risk or anti-currency – gold doesn’t rise for free.

Market Update:

SPI futures moved 33.16 or 0.55% to 6049.43.

AUD/USD moved 0.0001 to 0.7679.

On Wallstreet: Dow Jones -0.75%, S&P 500 -0.89%, Nasdaq -1.1%.

In New York: BHP -2.58%, Rio -3.01%.

In Europe: Stoxx 50 -1.16%, FTSE 100 -0.61%, CAC 40 -1.16%, DAX 30 -1.49%.

Spot Gold moved 0.38% to US$1286.26 an ounce.

Brent Crude moved 0.91% to US$64.07 a barrel.

US Crude Oil moved 0.9% to US$57.32 a barrel.

Iron Ore moved -1.81% to CNY460.5 a tonne.

Dalian Iron Ore moved 0.1% to US$62.32 a tonne.

LME Aluminum moved -1.08% to US$2109 a tonne.

LME Copper moved 0.42% to US$6855 a tonne.

10-Year Bond Yield: US 2.32%, Germany 0.38%, Australia 2.6%.

 

By John Kicklighter and Tyler Yell, IG Chicago

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