Trader thoughts - the long and short of it

The mood across financial markets continued to brighten Thursday. Global shares advanced, epitomising a broad-based recovery in sentiment-geared assets, while top anti-risk alternatives like US Treasury bonds declined.

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Source: Bloomberg

Tellingly, the US Dollar also faced renewed selling pressure, hinting that ebbing worries about an aggressive Fed rate hike cycle are giving way. The narrative prevailing before a surge in US wage growth spooked the markets is seemingly back at the forefront. That envisions a broadening global recovery that will push central banks to follow the hawkish lead of their US counterpart, pushing capital flows toward riskier assets and would-be rising yields outside of the world’s largest economy.

Technology shares lead Wall Street higher: US shares scored the fifth consecutive advance as investors pushed aside fears that rapid Fed stimulus removal will derail asset prices. Technology shares telling outperformed. The sector is highly sensitive to VC funding, so ebbing worries about a steep rise in borrowing costs was duly celebrated. Energy shares were the only loser on the day, sliding despite another uptick in crude oil prices.

US inflation underwhelms: January’s US inflation data scattered fears about an aggressive Fed rate hike cycle. Inflation rate topped forecasts – sparking a brief burst of panic across financial markets – but ultimately underwhelmed. It registered unchanged from the prior month at 2.1 percent on-year, a limp result in the eyes of markets primed for fireworks after wage growth unexpectedly surged to a nine-year high. The US Dollar tumbled while risky assets soared, helping the benchmark S&P 500 index erase half of the drop from late-January highs.

Markets shrug off mixed Australian jobs data: Australian employment statistics left investors without a decisive lead on RBA monetary policy trends. The net increase in jobs printed broadly in line with forecasts (16k versus 15k expected) but details of the report revealed a sharp drop in full-time hiring. That did not sit well with the markets at first, but a heady swell in risk appetite buoyed by fading fears of an aggressive Fed rate hike cycle soon reclaimed the spotlight. The focus is now on central bank Governor Philip Lowe, who is due to testify in Parliament later today. As it stands, the markets are pricing in a 68 percent chance of one rate hike this year and expect it to appear late into the fourth quarter.

AUD/USD takes aim at 0.80 threshold: The Aussie Dollar is back on the offensive against its US namesake having slid to a six-week low on the back of disappointing homegrown data, a dovish RBA policy statement and worries about an unexpectedly steep Fed tightening path. Ebbing worries about the latter appear to be at the heart of the nascent recovery. Immediate resistance comes in at 0.8002, the 38.2% Fibonacci expansion derived on the premise that the rise from December lows is the dominant trajectory while the pullback started in late January is corrective. A daily close above that exposes the 50% level at 0.8076, followed by a major top in the 0.8125-51 zone (September 8 high, 61.8% expansion).

iron ore lifted by Chinese demand: After an aggressive drop in low-grade iron ore in September, Singaporean Iron Ore futures are finding support as price pushes back toward $78/ton. A move to $80 would be the highest price fetched for iron ore with 62% content delivered to Qingdao since April 2017. Recently, iron ore giant Kumba Iron Ore Ltd. forecasted average prices of about $76/ton in H1 2018 thanks to supportive Chinese demand. Chinese demand and a state focus on limiting oversupply of low-grade ore could continue to support prices and make short-sellers lives difficult.

S&P/ASX 200 on the upswing but real estate lagging: The ASX found footing above the 5,900 mark after rising by 67.67 points to 5,908. The rise was the largest percent increase since July and was led mostly by materials and energy shares at 2.51% and 2.11% respectively. The only laggard of the 12 sectors that comprise the index was real estate. Property is famously interest rate sensitive, and local 10-year Treasury yields are edging closer to to 3%. This is a level not touched since 2015, and only then briefly before moving lower to the nadir of 1.81% in August of 2016.

Upbeat traders trim bets on near-term volatility: Positive signs for risk are re-emerging for equity traders. This development is especially clear if you look to the VIX curve. A curve in financial markets is a way to see prices or views over different time tenors and can help investors see where a premium develops along a time structure. During the market turmoil earlier this month, the front-month VIX contract showed an aggressive premium to longer-dated VIX contracts, showing that investors were scared for now and pricing in significant volatility, but they remained calm when looking further into the future. Fast forward from last week to today, and the VIX curve morphed from a 6-month inversion (front > backdated) of ~12 points to roughly flat. That is a significant reduction in risk premium priced into options over a short period and is likely indicative that the calm before the crash in early February is likely being ushered back into the market.

HK stocks outperform despite February drop: It’s likely too early to count out H-shares despite their tumultuous drop in early February. To be fair, nearly every risky asset fell in price, but before the close of stocks ahead of the Lunar New Year, Hong Kong issues saw the largest three-day rally since October 2015. Trading there will resume on February 20, and onshore Chinese markets will re-open on February 22. The “Year of the Rooster” finished off with a 33% gain, and shares had extended as high as 41.9% before the wild drop capping the year. The MSCI All-Country World Index finished the same period up 18%.

 

Market Update:

SPI futures moved 67.75 or 1.16% to 5908.99.

AUD/USD moved -0.0019 or -0.24% to 0.7924.

On Wallstreet: Dow Jones 0.71%, S&P 500 0.68%, Nasdaq 1.11%.

In New York: BHP 0.97%, Rio 1.41%.

In Europe: Stoxx 50 0.59%, FTSE 100 0.29%, CAC 40 1.11%, DAX 30 0.06%.

Spot Gold moved -0.06% to US$1352.94 an ounce.

Oil - Brent crude moved -0.39% to US$64.11 a barrel.

US Crude Oil moved 0.66% to US$61 a barrel.

iron ore moved 1.81% to CNY535.5 a tonne.

LME Aluminum moved 1.8% to US$2177.5 a tonne.

LME Copper moved 2.5% to US$7163 a tonne.

10-Year Bond Yield: US 2.89%, Germany 0.76%, Australia 2.92%.

 

Written by: John Kicklighter, Chief Strategist, DailyFX

 

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