Tales of the unexpected

2015 has thrown up surprise after surprise and if there is one thing to take out of the year it has been to expect the unexpected and that the markets script can change at any moment.

Oil
Source: Bloomberg

We’ve seen some major consensus trades being tested over the last 24 hours and traders are scratching their heads and questioning their convictions. Oil has naturally been at the heart of everything of late, however, the close yesterday above the top of the year’s trading range of $56.08 has been noted and if you look at the 10-, 20- and thirty-day averages, they are all in alignment and headed higher. Only a few weeks ago numbers of $20 being talked about and given the short-term momentum, one could envisage a new range of $60 to $70 could be in play soon.

Brent prices have rallied 17% from the March lows but I think the interesting thing here is European five-year inflation expectations haven’t really moved higher and are still 31 basis points below the European Central Bank’s target of 2%. Another 10% upside in oil doesn’t seem justified given the huge and ever-growing inventory levels, but there’s no denying the technicals are growing more positive, so we could see inflation expectation picking up soon.

Naturally, the key beneficially of the higher oil prices has been energy stocks, which are performing nicely and on better volume as well. On the FX side both the key petro currencies, CAD and NOK are looking quite compelling and again both have been touted by strategists as going significantly lower this year. USD/CAD looks like it wants to head to C$1.2180 level in the short-term, having closed below the bottom of the year’s trading range C$1.2352 yesterday. On the NOK side, the best trade here looks to be short EUR/NOK, with the pair breaking through the long-term uptrend drawn from the 2013 low. Trend and momentum indicators are highlighting clear vulnerabilities here.

Stability seen in iron ore futures

Staying on the commodity theme, iron ore futures look like stability has returned in what has to be seen as a frenzy of bearish news flow. Of late, we have seen bad news story after bad news story break and, naturally, that is going to happen when prices stay under many producers’ break-even levels for a prolonged period. You have also seen a handful of investment banks chasing the spot price lower, cutting forecasts which have been factored into their models. Still, it seems a little early to say iron ore is out of the woods just yet and if a gun were put to my head I’d own the CAD over the AUD (as a proxy of iron ore) and an oil company over an iron ore play, although that would be highly down to the company’s fundamentals and technical set-up.

On the subject of the AUD, the other big consensus trade has been favouring a rate cut from the Reserve Bank in the May meeting and today’s March employment data will have the market questioning whether a May cut is going to happen at all. There’s no denying today’s jobs data is hugely positive and despite the employment series being super volatile, the economy has created enough jobs to pull the employment rate from a revised 6.2% to 6.1%, despite the participation rate increasing. Given the size of the Australian economy, surely this would be akin to the US recording over 500,000 jobs at a monthly payrolls report. It’s fairly clear the market saw the jobs report effecting the May decision, with the market now pricing a 56% chance of a cut, down from 79% this morning. AUD/USD rallied to $0.7782 and has printed a higher high and a move to the top of the recent range of $0.7880 could be on the cards as a result.

ASX 200 approaching a watershed moment

The ASX 200 found sellers on the jobs data, which just shows how bizarre markets are. Pull off a blockbuster jobs report and yet stocks sell off on idea of a lower probability of easing. Still, this isn’t a new issue and this has been thematic of how markets have traded for a while and highlights how little economic reality has mattered of late. All eyes remain on the triangle pattern and for price to dictate play. A break of 6,000 should target 6,200.

A strong sell-off in Aussie fixed income has resulted in a powerful widening of Aussie two year bond yields over US two year yields, with the premium blowing out to 129 basis points (from 118bp). If next week’s Australia Q1 CPI has a reasonable surprise to the upside (consensus 1.3% on headline, 2.2% trimmed mean) then this spread will push out and AUD/USD will pull into what has been a key sell zone of $0.7880 to $0.7900.

Elsewhere, China has found iits mojo again, with the mainland markets outperforming the Hong Kong markets somewhat. US futures have started to move slightly higher and it promises to be a big session for US markets, which in turn will shape the lead for Asia tomorrow.

The S&P cash market is looking dangerously like it wants to break the February downtrend, but the event risk ramps up today with March housing starts, building permits and manufacturing survey from Philadelphia. On the earnings front we have Goldman Sachs, Citigroup and Blackrock and American Express after the close. Fed speakers includes Lacker, Lockhart, Mester and Fischer.

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