Markets look to Apple for direction

US markets are still very much in limbo and I feel the market needs to see Apple’s earnings on Monday (after the US close) to find direction.

Apple
Source: Bloomberg

On the subject of Apple it's interesting to see just how correlated the S&P 500 and Apple are at present. We need to remember what an absolutely cracking record Apple has when it comes to beating consensus estimates and whether that is because the sell-side analysts purposely lower the bar is not for me to call. However, when you see the tech giant beating consensus consecutively in the last eight quarter and seven of the last eight on revenue, you know the balance of probability suggests upside risks this time around as well.

My personal bias is to be long Apple and cutting back on positions on a closing break of $122.80 (the 38.2% retracement of the January to February rally). An upside break of $128.40 (the March downtrend) would get me more excited and would coincide with a more compelling picture in trend and momentum indicators. On development of a break of $128.40, I would expect a test of the high of $133.60, where a closing break would even suggest adding to the trade as momentum focused traders increase exposure.

Still, I get the sense that earnings estimate of $2.14 and revenue of $55.70 billion, on gross margins of 39.44% seem low ball. Of course, capital management will be key and the market expects a blow-out number here.

Asia has seen clear diverging paths at an index level. China has seen good follow through buying after yesterday’s rally and I like the price action in the A50 futures market (the top 50 mainland stocks where the futures trade in Singapore), with the index continuing the March uptrend. It seems a matter of time before the bulls push the index through 14,000 with conviction despite increased talk of defaults and subdued economics.

Japan has pushed higher, with the Nikkei hitting a high of 20,164. JPY weakness has helped boost exports by 8.5% and also had a hand in reducing imports by 14.5%, which ultimately resulted in Japan recording a bigger than expected surplus - its first surplus in three years. Little reaction has been seen in USD/JPY, which in turn is trading right in the middle of the April sell-off, but it seems the improvement in economics has been welcomed by equity bulls.

The AUD has clearly been the big FX mover today, helped by a strong sell-off in the Aussie bond market. EUR/AUD has been the big mover with Aussie bond yields moving wider against German bunds (with the two year moving to a 2.18% advantage). AUD/NZD is defending the parity level with some vigour and has pushed up from a session low of NZD1.0052 to NZD1.0127. There is huge confusion around the 5 May Reserve Bank meeting and todays Q1 inflation, with the trimmed mean pushing to 2.4% (when rounded up) and towards the middle of the RBA’s target will only add to that confusion. The swaps market is now pricing a 53% probability of a cut, down from 66% at the beginning of the day and it seems that if Glenn Stevens does cut rates it will be the most reluctant cut in recent memory!

The ASX 200 clearly didn’t like it hitting a session low of 5818.3 and through the 30 March lows of 5828. The buyers moved back in though, but a close below 5828 could bring out better sellers and tell you a lot about the psychology of the market. Iron ore futures look interesting and while we saw a strong move higher in electronic trade overnight, we have seen follow through buying today. Dalian front month futures are trading at RMB394 and judging by the strong supply that seems to be coming into the market at RMB400, it seems a break of this level could have strong ramifications for the AUD. Will this stabilisation in the iron ore price be a factor for the RBA? Perhaps, as will the strong March jobs report and business confidence, however I still think the balance of probability favours a cut in May, although like last month it will be close.I guess this uncertainty will ultimately lead to liquidity thinning out on 5 May and the algo traders can go to work causing spurious spikes in AUD/USD and the rates markets.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.