Moves in oil majors seem informed

With global markets screaming for a level playing field, plus the investigation into spurious AUD activity in full focus, it is interesting to see BG and Royal Dutch Shell putting 25% of the points into the FTSE yesterday. 

Oil
Source: Bloomberg

Then a number of hours after the cash close, we received reports of ‘advanced’ talks between the two parties.

Our European and UK equity market calls are modestly weaker at this stage, reflecting the late session pullback in the S&P cash session and modest follow-through in the futures market today. We will get a more accurate read when Eurostoxx and FTSE futures open at 16:00 AEST, but given price action in the oil majors it seems parts of the market were informed. Of course moves from Saudi Arabia to offer a lower discount to its Asian customers, amid increased demand could be the key reason, and the calls for a bottom in energy prices has been widely discussed.

If the oil bulls do look to support European equity markets on the open, I would look closely at the French CAC and Italian MIB, with Total, ENEL and ENI having such sizeable weightings on these markets and likely to benefit from the positive sentiment towards the space.

Certainly this sentiment has resonated well in the Aussie market, with good buying coming in energy names; after a 30 percentage point underperformance with the broader market since 2014, it’s really the braver contingent of the financial markets that are buying at present levels. Keep in mind we get new figures from the Energy Information Agency (EIA) tonight, and given the recent volatility we could see oil prices up or down another 5% by tomorrow.

Locally banks are flat, with traders just unsure where they will go from here. The fence sitting view is to buy pullbacks and this makes sense given the valuations and investment backdrop; the fact the markets have a 70% probability of a cut priced in means little given the market’s poor form of predicting rates this year! However, the fact that the sector is stable has provided a platform for the broader market to advance with the unloved energy and materials names seeing better days. Again there has been talk of the index hitting 6000, but there are signs of an impending reversal with strong divergence between the 14-day RSI and price. This would be fitting with the weekly chart of the S&P 500, which is also showing technical signs that a reversal could be on the cards.

Signs of a reversal in the ASX 200

The internals of the ASX 200 are looking quite interesting, with 64% of stocks above their 200-day moving averages, however only 56% of the market is above their 20-day average. Compare this to the 3 March high of 5996 where 65% of stocks were above the short-term average, which suggests a lower participation rate among Aussie stocks. It could potentially be a red flag that the breadth is not as strong as the bulls would like. An upside closing break of 6000 would mitigate the potential reversal and would tell you a lot about the mindset and psychology of the market.

Japan is pushing higher and China is fairly flat on the day, although the power and sheer momentum in both markets is clear for all to see in any currency. The trade is to buy the first pullback in the H-share and Hang Seng market as the southbound flow from Shanghai to Hong Kong is heating up and pushing the best levels since the ‘connect’ was introduced. Regulators are trying to close the valuation gap between mainland and Hong Kong securities and the moves to lower the barriers for money managers to trade Hong Kong stocks have recently been a green light for traders.

Bear in mind that 100% of Shanghai-listed companies are above their 20-, 50-, 100- and 200-day moving averages, which shows broad participation in the recent rally and therefore is outright bullish. With new A-share accounts seemingly being opened at such alarming rates, and margin debt continuing to increase, it’s hard to see pullbacks being anything too great given the flow on new money coming into the market. Although, regulators will be monitoring this very closely.

Trading China

Trading China has never been easier, with market participants able to trade Hang Seng, A50, CSI 300 and H-share futures, as well as the ASHR (CSI 300 China A-Shares ETF), FXI (iShare China Large-Cap ETF) or 2828 (H Share ETF). However, it must be said that while this bullish move could keep pushing on, bear in mind that 25% of Shanghai-listed companies have current price to earnings ratio of over 100!

With equity traders watching oil and the big energy names, it’s worth looking at the FOMC minutes given the strong reaction that the original meeting caused. Whether the market gains new information will be keenly followed, but there is no doubt one of the major questions at present is whether we see a snap back in Q2 growth. We won’t get the answers to that question until late May, early June when Q2 data starts rolling in, so USD bulls will hold off from big positions for now.

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