Trader thoughts - the long and short of it

News from the weekend has been fairly limited, although Bitcoin has seen another frenzy of buying as the fear of missing out trade bites even harder, with price now sitting at 9338 and up 13%.

Market data
Source: Bloomberg

Seemingly, in the period between Wednesday and Friday, Coinbase have detailed they saw 100,000 new user accounts, taking their total to 13.1million users. However, others feel the adoption of a futures offering at the CME and CBOE could now actually be a positive.

Obviously, in that vein, there are others who see downside risks from the introduction of Bitcoin futures (starting 11 December), but price now is roaring ahead and it feels like 10,000 is not too far away here.

Moves in FX markets on the open this morning are very much contained. This is naturally a reflection of limited market-moving news from the weekend and we can see AUD/USD sitting +4 points at $0.7622, USD/JPY -11 at ¥111.42 and EUR/USD +7 at $1.1939. With these moves in mind, one suspects we should then see S&P 500, Aussie SPI and oil futures also open on a sanguine footing and our opening call for the ASX 200 of 5990 +8, Nikkei 225 at 22638 and Hang Seng of 29,984 shouldn’t move too wildly.

There has been some consideration towards Black Friday sales, not just in the US, but across the globe, given Black Friday has spread its reach. Statistics I have seen so far from the International Council of Shopping Centers (ICSC) have been that 105,000 adults visited shopping centres on Friday (145 million over the full weekend), spending on average $377.5 in the sales. Whether the market sees these as good numbers is yet to be seen, but we know that the online numbers are up 17.9% from a year ago and this puts US retailers in focus. This could play into a strong US November retail sales print when it is released on 15 December. There were views that moves in the S&P 500 on Friday was partly accredited to high expectations of Black Friday sales, although consumer discretionary closed up a mere 0.2%, with traders playing Black Friday through Amazon; it had a strong day, closing up 2.6%.

US equities have pushed higher and set Asia up to progress, although volumes in Friday’s US equity trade were predictably awful and some 64% below the 30-day average in the S&P 500. In fact, one investment bank detailed that S&P 500 intra-day realised volatility hit 2.8%, which was the first time in at least a decade we saw volatility push below 3% - so conditions were extremely calm. It does feel as though the bulls are ahead here and the stars are aligned for further risk taking this week. We have had a few wobbles of late, with concerns about high yield credit spreads blowing out 54 basis points in 15 days, although we have seen credit investors wading back in and calmer heads realising it wasn’t the end of the world and confined to issues in a concentrated space. We have seen much speculation about the flattening US Treasury yield curve and this seems to be better understood by equity investors, were a decent degree of the move is down to the US Treasury increasing its issuance of short-dated debt. So the curve doesn’t indicate the US is going into recession anytime soon.

These issues are behind us for now and the market looks set to re-focus on more positive aspects.

In fact, the world’s economy, if anything continues to show signs of improvement and likely to continue expanding in 2018. Nowhere highlights this better than Europe, where we saw 6.5-year highs in manufacturing and service data on Thursday. If we view this data through the composite PMI, we can see this at 57.5, with strong expansion in demand, output and employment and this has to give us confidence for future growth reads. All the while the ECB has no interest in altering its lower for longer and liquidity forever stance on monetary policy. This inspiring growth comes at a time when a grand coalition between Angela Merkel’s CDU/CSU and the SPD party look more and more likely, as clearly it’s in neither parties interests to go back to polls, such was the momentum the AFD Party had at the prior election.

On a side note, EUR/USD is worth watching this week as price has broken to the highest levels since September. It’s seemingly building as a strong short-term consensus trade from FX traders, potentially for a move back above $1.2000 this week.

Other key macro themes to focus on this week include the US tax debate, with the market expected to pass its recently announced tax bill, to then start a process of reconciliation with the House plan. Watch the Russell 2000 here, which is your guide around the markets on tax cuts/reform. We can see the small cap index outperforming the S&P 500 at present and looking like it could push to new highs this week. Perhaps the highlight though will be Thursdays OPEC meeting and the market goes into this meeting high on expectations for a nine-month extension of the prior quota agreement into late 2018.

The ever growing view is that crude has downside risks this week, on the reality that we will not get the firm commitment of an extension built into markets. That said, there was no angst on Friday, with both US and Brent crude closing up 1.6% and 0.6% respectively.

The ASX energy sector was the star performer last week gaining 2.3%. However, I would be looking at one’s portfolio risk and it would not surprise to see crude undergoing a classic ‘but the rumour, sell the fact’ scenario through Thursday and Friday. Let’s see how things shape up, but energy and materials are performing well and this space still feels like it is the place to be given the global macro backdrop, but there are risks this week and that needs to be managed.

Aussie Q3 CAPEX data announced on Wednesday, which will add further colour on next week’s Q3 GDP print, so AUD naturally gets a focus. The trade to be long EUR/AUD and price here is breaking to the highest levels since early 2016. And remains a standout trade for 2018. AUD/CAD will be interesting and I would be cutting back on shorts here ahead of Thursdays OPEC meeting.

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