Bullish US price action could impact Europe

There’s been good interest around the Indian election and the near-term improvement in sentiment around China’s capital markets.

Even still, it’s important to consider whether we’ve seen a low in the USD and how much higher developed market equities can trade from here.

The price action on the S&P 500 yesterday was outright bullish, with gains seen in 86% of stocks, with sentiment swinging on a dime towards the internet and social media names. The US benchmark has taken out resistance at 1884 to 1885 and clearly next stop is a daily close above the prior all-time high of 1897. Shorting will likely be avoided right now, as you seldom get a 1% rally in the S&P with strong outperformance in the small caps and subsequently see a collapse in equities straight after. Pullbacks will likely be bought, especially when see the VIX at 12.2% and better selling in the long end of the US bond market.

US futures have pushed up a touch today and are at an all-time high, while if the cash market was to open now the S&P would be following suit with a new all-time high. In Europe, markets should open on a firmer footing and the bulls will be eyeing prior highs in these markets themselves. The FTSE looks set to test the year’s double-top at 6867 and the all-time high print from 1999 (at 6950) will be the markets next target.

The CAC and DAX also look like testing all-time highs too and could require a bit of a nudge after the open and perhaps that comes in the shape of a strong US retails sales report or German ZEW survey. However it seems that the mix of low volatility, easing central bank policy and an improving trend in developed market growth has seen traders look at equities as the asset class of choice.

Focus on the budget

Asia has certainly provided some backbone to the European open and has kept US futures elevated. In Australia the talking point has been around the budget, which is due in early European trade. Some of the information has been leaked and the market has done a good job of pricing in the likely fiscal drag. From a pure tactical standpoint it makes sense for the Abbott government to front load as much of the tightening as they can (within reason), with the idea to look to ease policy into the 2016 election.

There is the possibility of a surprise, but if you look at overnight options volatility (known as risk reversals), they haven’t really moved at all, so there hasn’t been any major buying of put protection. We have to think that the discretionary names could see hold some gapping risk, however price action in names like Myer or David Jones (both higher) is hardly thematic of market that is expecting big a big surprise.

With the market priced that the RBA will leave rates on hold for the rest of the year, we will need to see something fairly substantial to alter these expectations. It would also make sense that were we going to see any measures that would be a strong market negative then we would have heard hints already. So while we may get a surprise or two, the probability is the news won’t alter the perception around rates.

A bid from PanAust’s biggest shareholder has also given those investors who had bought the stock in January and February a get out of jail card after the 30% drop into March. Naturally the ramifications have been felt in a number of other mid cap stocks, with the materials space the sector to be leveraged to it seems right now.

USD/JPY looking more constructive

Japan has seen better buyers today, although once again this has been down to better selling of the JPY. USD/JPY has held firm and has seen a wave of buyers come into the pair on any moves to 101.20 to 101.40 since late February and now US yields have started creeping higher again the pair looks like it could be going higher from here. We’ve seen good two-way business in this pair of late, with 76% of all open positions (from IG clients) long at the time of writing.

We may not know the full extent of the voting in India until Friday, but the fact the NIFTY has rallied a further 1% today (to a new high), while USD/INR (rupee) has traded to the lowest level since August 2013, suggests the market is pricing in a majority victory for the BJP led coalition. Certainly the polls are suggesting this will be the case; however there is still an element of the market fearful to be overly bullish given the 13% and 27% miss respectively between the prior exit polls and the final count in the last two elections.

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