Trader thoughts - the long and short of it

It’s one of those opens for Asia where the markets open is really anyone’s guess, but that is largely to be expected given the Thanksgiving Holiday.

Market data
Source: Bloomberg

What we do know though is S&P 500 futures closed at 5:00am AEDT unchanged, as was the case in US Treasury futures, where a meagre 117,000 contracts were traded, relative to 1.86 million contracts in the prior session. SPI futures have traded just 3289 contracts in the overnight session, which again is predictable low in volume and ultimately sit 6-points lower, with our opening call for the ASX 200 currently at 5977 and a test of yesterday’s intra-day low beckons for our open.

European equities have also given us little to key off, and again if we look at volumes traded through the France CAC and German DAX, we can see these 36% and 18% below the 30-day average. The DAX did open on its lows of 12,921, largely thanks to the punchy moves in China’s mainland and offshore equity markets, but soon recovered and the index gravitated back to the flat line, with traders focusing more intently on both positive political developments and solid Eurozone PMI data (manufacturing), with the index rising from 58.5 in October to now sit at 60.0 – the second highest reading ever.

The news that Angela Merkel’s opposition party leader, Martin Schulz of the SPD Party, is willing to back a Merkel led minority government was also in play and suddenly we are looking at clearer options emerging and the prospect of new elections in early 2018 are diminishing it seems.

Trading the DAX is still one that is getting a lot of focus from clients. On the support side, the 55-day average (currently at 12,946) seems to be containing the moves lower of late and despite a number of tests, the index can’t close below this price average. On the upside, we have traders fading moves into 13,189, so a closing break of either of these two levels could dictate a new trend and I would be respecting this.

Staying in the European theme and EUR/USD looks interesting here. The pair broke through the downtrend drawn from the 8 September high last Tuesday, and after a re-test of this former trend on Tuesday has pushed higher on a combination of USD weakness and cracking European data.

A break of the 15 November high of $1.1861 looks likely and a close above $1.1877 would also suggest to me that the pair is headed for a re-test of the year-to-date highs of $1.21. One to watch, but the set-up on either the daily or weekly timeframe is looking constructive.

AUD/USD has seen limited moves overnight, as one would expect and since 12:30am AEDT the pair has traded in a 10-pont range. That said, we have moved back to the resistance at $0.7626/40 (the 27 October low and 20-day moving average) and this has brought out a few sellers, so it will be interesting to see if the bears will now start to re-exert themselves.

Certainly over the past five-days AUD bears have had more joy shorting the currency against the “funding” currencies, such as JPY and CHF, while EUR/AUD looks like it wants to push higher here after a few days of consolidation.

Perhaps the focal point in the session ahead is on Chinese equity markets, where from 5:00pm AEDT to 5:50pm AEDT yesterday the various equity markets fell through the floor, with the CSI 300 dropping 2% in that time, as the bid apparently came completely out of the market. On the session we saw the CSI 300 close -3%, with similar moves across the other various exchanges, with the negative sentiment pushing into Hong Kong, with the Hang Seng closing 1% lower.

By all accounts, the market has got quite concerned about the recent rise in both government and corporate bond yields, which certainly makes sense given Chinese corporates have to roll over close to $600 billion in debt that comes due in 2018, so higher yields make the cost to do this more expensive.

Of course, these moves in the bond and credit markets comes at a time when China is focused on regulation and there is focus on recent changes to wealth management products (WMP), with a number of changes designed to protect investors, although there is concern that it could slow credit growth, which of course has been instrumental in achieving the lofty GDP numbers.

So traders will be keeping an eye on China’s equity and bond markets today for any follow through moves, and if we look further afield there was absolutely no concerns in the Dalian commodity futures exchange with iron ore, steel, coking coal closing largely unchanged, and this again makes sense as it’s not really a commodity story, yet.

By way of a loose guide and if we focus on the FTSE materials space, there was seemingly no concern about moves in Chinese equities and we see the sector finishing up 0.5%, with BHP and RIO closing +1.1% and +0.9% respectively.

BHP’s ADR hasn’t traded given the Thanksgiving holiday, so there is no read through here and as mentioned, the leads from the commodity spectrum don’t really give us much to work with, even if spot iron ore closed up 3.9%. Materials put the bulk of the points into the ASX 200 yesterday, so given the China equity story this is clearly the space to watch for signs of anxiety spreading, I suspect it won’t but price will obviously confirm.

Oil is looking good though and we have seen a strong break-out in price and new highs in US crude, with front month contract trading 0.9% higher, although again there has been an early futures close.

We can also see the price premium held by Brent crude (over US crude) coming in by 44c, with traders playing this by being long US crude, short Brent. This is interesting ahead of next week’s key OPEC meeting in which expectations are super high and the risk of a ‘buy the rumour, sell the fact’ playing out is elevated.

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