China falling hard, ASX a pillar of strength

US markets may have seen a more reserved move yesterday, but things in Asia are still fairly interesting in what will probably be the last day of reasonable liquidity in many markets.

Probably the key talking points on the floor today have been (in no particular order) the falls in the precious metals complex and the PBOC saving the day - injecting capital into the money markets, which subsequently causing a collapse in the repo market. There’s also been big interest in USD/JPY as it breaks to a five-year high and US bonds - with the ten-year getting perilously to the year’s high of 3% and putting a further bid in the USD. The ASX 200 has also outperformed and seems to moving to the seasonality script, with gains typically seen at this time of year.

After the FOMC meeting we are now left with a market that has a greater focus on inflation (in the US) than employment, thus it is not about liquidity anymore. The focus is now firmly on 2015 and what the world will be like with the Fed funds rate at 75 basis points. Of course whether the market chooses to be more or less aggressive with rate hike expectations is purely data dependant, and a further fall in inflation could alter everything. However, lower inflation is not the market’s (or the Fed’s) base case right now, and better economic growth in 2014 is expected to yield higher prices.

With higher bond yields comes higher ‘real’ yields (bond yields adjusted for inflation) and this is key as it is the main reason why the USD is rallying and fundamental for gold and silver depreciation.

Gold eyeing $1180

Gold continues to print lower highs and the gold bears just need to see a lower low to increase bearish sentiment even more. This of course would mean a break of the June low of $1180, although the metal is starting to look a little oversold, hence the reason why our client base are net long at current levels. Moves to $1240 (the October downtrend) should be used an opportunity to initiate new short positions in my opinion, adding to shorts on a closing break of $1180.

Perhaps the strongest correlation (or in this case inverse correlation) we are seeing with gold is against USD/JPY. This makes a lot of sense given the influence the US bond market has on both the USD and gold. USD/JPY has pushed up to 104.43, although we haven’t seen the same sort of flows into the Nikkei, which seems to have pushed modestly lower on profit taking. When you are seeing a 224 basis points spread between US ten-year treasury and Japanese ten-year government bonds, you can see why Japanese investors are filling their boots with US treasures, which of course is creating JPY outflows and keeping USD/JPY bid. The only issue I have right now with USD/JPY is that there is divergence seen on the daily chart, with the pair making a higher high, while the RSI has failed to make a new high. We need to see price to confirm it, but it is certainly something worth bearing in mind.

Bulls in control of the ASX 200

The ASX 200 is closing out the week on a positive note, ending its four-week losing streak. Volume has been huge, but this is purely artificial as it was options expiry yesterday. In this situation, options traders who had bought puts or sold calls would have had to deliver stock to the other side of the trade and subsequently cover and buy it back in the pre-market auction. Hence, we saw $2.78 billion of value going through the pre-market auction. For the rest of the day, it’s been a story of buying in financials, discretionary and energy names. The energy space is being buoyed on the back of moves in natural gas, and this is another asset which continues to get attention as well, especially with the commodity printing a higher high. Momentum- and trend-focused traders are keen to stay long on natural gas right now, enjoying the strong mix of compelling fundamentals (stockpiles fell the most on record yesterday), while the price action suggests the bulls are firmly in control. On the equity side, my equity man (Evan Lucas) likes STO and OSH.

While the ASX has found good buyers this week below 5100 and could continue to move higher in the coming week or so, the same can’t be said for the AUD, which needs to close above 0.8964, or it will print a tenth consecutive negative print. Surely we get a short-covering rally next week and end this run? From a technical perspective, the bias has to be short though; everything points to lower levels. It has to be said the pair looks oversold at present levels, but this is a sign of the strong trend, so at the very least rallies should be sold.

European markets called higher

European markets are looking set for a positive open, although better buying in the Nikkei and China would have pushed up S&P, Eurostoxx and FTSE futures and provided even more upside to our calls. Chinese equities are down for a ninth straight day (the worst run since 1994) and are seeing very negative price, despite the PBOC coming back into the money markets, injecting capital, subsequently causing a sharp move lower in interbank lending rates. It seems either equity traders don’t care, expected the move or are more concerned with selling current holdings to fund a raft of IPO’s due next month.

On the docket today traders will be focusing on German consumer confidence, Italian industrial orders, while in the UK we get Q3 current account balance, November public sector net borrow, GDP revisions (not expected to change from 1.5% yoy). Cable is still fairly supported, so I’d look more closely at EUR/GBP shorts if I wanted to express sterling bullishness. 

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