A strong start to a new week - the bulls in control

After a disappointing US Q2 GDP report, among other higher frequency data points, traders have been provided with a strong jobs report and a belief that Q3 GDP should print around 2.5%.

  • The July US non-farm payrolls easily beat expectations with 255,000 jobs. With upward revisions to the prior two months, taking the six-month average to 189,000.
  • Hotter than forecast average workweek hours, hourly earnings and participation rate suggests this report was of genuinely quality.
  • Good news has been taken well, with the S&P 500 closing at 2182; a new all-time high. 79% of stocks closed higher on the day, on good volume.
  • Expectations of a hike from the Federal Reserve by December increased to 46.7%, although only a total of 1.5 hikes are priced in through to the end of 2018. This compares to the Fed median forecast of 2.4% Fed funds rate (by the same time).
  • The USD rallied 0.5%, gaining for the third consecutive day – the first three-day gain since late May.
  • US treasuries sell-off aggressively on the jobs report, with the five-year treasury pushing up 11 basis points on the session. Gold subsequently fell from $1361, to close at the session low of $1335.
  • AUD/USD traded in a range of $0.7664 to $0.7598. Focus today will be on China July trade data (no set time), with expectations of a slight narrowing in the surplus to $47.3b (imports -7%, exports -3.5%).
  • SPI futures rallied 31 points or 0.6% on Friday. Incorporating our ASX 200 fair value we see the market opening at 5535. BHP and CBA’s ADR (American Depository Receipts) are up 1.5% and 1.1% respectively.
  • Iron ore gained 2.1%, which should support sentiment.
  • Earnings from ASX corporates today centre on Bendigo and Adelaide Bank and News.

The end result has been that the S&P 500, after consolidating since mid-July, has broken out and printed a new all-time high. Today’s session will therefore be key as a new higher high and we could easily be staring at the world’s institutional equity benchmark trading above 2200. Momentum once again suggests being constructive on US equities despite many continuing to highlight that we have seen seven straight year-over-year declines in corporate earnings.

The strong lead from Wall Street should support the ASX 200, which has found good support off the 20-day moving average. Judging by the various ADRs, we are going to gain a tailwind of 1%+ gains in both the financial and material space. With full-year earnings front and centre this week, investors will be paying somewhat less of a focus on global developments and putting more emphasis on the investment landscape for Australia corporates, with names like COH, TCL, CBA, FXJ and TLS at the epi-centre. CBA will be the big one though, given CEO Ian Narev’s views on economics, future funding trends, housing and credit demand. The commentary could have far reaching implications for the broader market given traders really want to hear how the economy is tracking from one of the key players.

All-in-all, it should be a quieter week for event risk with the markets having had time to digest central bank initiatives and commentary from the Bank of England, Reserve Bank of Australia, Bank of Japna and Federal Reserve. The wash-up is that risk appetite looks fairly robust, but there has been a strong correlation break down in many asset classes. The USD looks strong again against the GBP and EUR, while AUD/USD continues to hold the $0.7600 level. Gold will be eyeing the 21 July low of $1310, and a close below this low would target $1250. One for the radar.

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