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Duo action risks

The macro duo of the FOMC and Greece continue to create jitters – it will be a daily theme for the next month; in the case of the Fed, the next three to four months.

Federal Reserve
Source: Bloomberg

Vigilance is the best word and way to describe my strategy currently. 

What’s spiking my interest:

US data overnight was surprisingly weak – although not country-wide. The Empire State manufacturing index declined 1.98, estimates were expecting a 5.2 expansion from the 3.09 in the previous month.

Industrial production was hit hard as well – most point to the USD strength and a slide in mining – the data was down 0.2% last month; estimates were for a 0.3% growth figure.

The US data just adds to the indifference – the US economy’s expansion clearly isn’t uniformed; employment is booming, economic activity is varied (sales solid, production not) and growth at last print was contracting.

The FOMC meeting on Thursday should be a possible catalyst for direction – No ‘lift-off’ scenario but the ‘communication’ should give some indication of a possible timeframe for lift-off.

Grexit: Here is what we see as the biggest risk – Bank deposit run-ons. If the IMF and the ECB get a whiff of a mass run on, it will pull is cash tranches - sharpish. It is a real risk: last night €400 million fled Greek banks 60% above the average of the past few weeks of €250 million. No IMF or ECB funding will be needed or given if Greek banks are insolvent - period.

From the equity perspective the S&P has weathered the macro distractions rather well - it is far from having a correction. In fact, it’s been 1,350 days since the last 10% down move in the US for a 94% return. Even with a Fed lift-off scenario, it would require some strong selling and Greece for the US appears to be a distraction.

China is also an interesting scenario. The CSRC yesterday banned all OTC margin lending, leverage and collateral asset trading – not unexpected. However, the volumes through Chinese markets currently are mind boggling – in the past five days A-shares (Shanghai and Shenzhen) have averaged a daily turnover of US$323 billion that is double the daily average of the S&P.

Leverage is a key part of China’s current market turnover. OTC isn’t a huge part of that leverage trading, however, it is still a sizable potion to be taking out of the market. If the CSRC was to regulate leverage trading that volume would evaporate and a 10% correction would happen in a single session.

Australia is at an interesting inflection point. The sell-off in the morning session yesterday was quickly and healthily reversed in the afternoon. The reasoning came down to the banks - the fundamental stats are staking up for some buying support. However, the minutes today may stifle future expectations if macro-prudential rules where further discussed.

RBA minutes – language, language, language – targeted monetary talk, talk about macro-prudential regulations and talk about ‘rate effectiveness’ key to the ASX, the AUD and future rate expectations. This is why I see possible disappointment in the minutes today from a trading perspective. 

Ahead of the Australian open

We are currently calling the ASX flat at 5536 - the banks are likely to be a support space for the market, materials a drag. BHP’s ADR is pointing to a 1.1% decline on the open this morning.

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