The focus of the night has really been three-fold. Firstly, much discussion has centred on Trump’s confirmation he will take the U.S out of the Paris Climate Accord and looking to 'renegotiate' a new deal more in the interests of the U.S. Of course, House Speaker Paul Ryan was quick to jump on this and applaud the great man, as it is of course a raw deal for the US. Every other global leader will condemn this action and the likes of Al Gore has said the American people will continue to work with the ideology that climate change is real and will set an example.
As a market reaction, it’s been a whippy night in the oil markets. While we saw a sizeable 6.42 million barrel drawdown in official crude inventory data and a sizeable 2.8 million draw in gasoline, the move away from the Paris Accord has caused a few oil traders to sell, given Trump’s actions could in theory, lead to increased oil production. Traders have also been keen to play the oil move in FX markets, with USD/CAD breaking the May downtrend and I’d be happy to hold longs here into C$1.3600 in the very short-term.
We have also seen some focus on the confirmation that former FBI Director James Comey will testify on 8 June before the Senate Intelligence Panel. It actually promises to be a fairly hectic day, with the market keen to hear any key revelations from Comey, while we also get the ECB central bank meeting and UK election exit polls in the early hours of Friday's Asia trade.
Thirdly, US data has given the equity bulls some inspiration, although they seem to have done it alone and there was hardly any move in corporate credit markets or US Treasuries on the day. In fact the US yield curve is currently sitting at 91 basis points and hardly thematic of a market wanting to load up on US banks, which is what we saw, with the S&P 500 financial sector closing up over 1%. The ADP private payrolls reported 253,000 jobs created in May, well above consensus and it gives us hope at least that tonight’s non-farm payrolls will be close enough to the consensus print of 182,000 (economists estimate range from 245,000 to 130,000). Of course keep an eye on average hourly earnings too, with consensus calling for a 2.6% increase in wages.
We also saw the ISM manufacturing report showing a nice increase in the pace of manufacturing, with the index coming in at 54.9. Both the new orders and employment sub-component saw a nice increase.
So with the S&P gaining 0.8%, on good volume some 6% above the 30-day average and good breadth (87% of stocks were higher) a positive backdrop has been provided for Asia. SPI futures have not found a whole lot of love from the US move though and we can see they are up a modest 17 points. A more accurate way of looking at the ASX 200 open though is looking at the change in SPI futures from 4:10pm AEST, rather than the change in the SYCom (or night) session. Here we can see they are up 24 points and I feel this is more reflective of where we will open, thus our call sits at 5762.
BHP’s American Depository Recept closed 0.6% higher, however Vale’s US-listing closed down 2.2% and that may suggest weakness in FMG and AGO. Spot iron ore closed 1.8% lower, however we have seen some buying coming into (Dalian) iron ore futures (+0.5%), so the iron ore futures market will be worth watching through the day. Banks should open on modestly positive note given the ASX 200 call, while health care is also looking good.
The AUD has been given a fair amount of attention from clients and while volumes have picked up, with the flows somewhat more biased to the long side on the move through $0.7400. Clearly the market is now gearing for a poor GDP print next week and we have seen the swaps market start getting quietly excited about an increased possibility of easing at some stage in the coming 12 months, with markets pricing five basis points of cuts here. This is most bearish pricing structure since November and while it is still no certainty, if we see this probability (of easing) move to say 40-50% in the weeks ahead (not my base case) then the AUD could be headed into $0.7000. In a world where most developed market central banks are laying the foundations for tightening, or at least less unconventional policy, the market senses the RBA, if anything, could be going the opposite way so we start talking policy divergence and this creates trends.
Also keep an eye on USD/CNH, as there is little doubt that when USD/CNH sold off yesterday from around 11:10am AEST that AUD/USD attracted a heavy selling. The idea of a contraction in China’s small manufacturing index, at a time when the yuan is rallying, is not being taken well by China proxies (such as the AUD). So, even though a stronger yuan gives China’s importers purchasing power, when there is increasing tightness in financial conditions this will be the more dominant driver of the AUD.
As a trade, I quite like the idea of buying GBP/AUD into A$1.7450 for a new tilt at a$1.7650. Notable after today’s break of the May down trend it looks like it wants to go higher, although there are risks in the shape of better Aussie data next week and a hung parliament in the UK election.