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As suggested last week, selling 3-month Eurodollar futures looks like a good trade as expectations of a move from the Fed in September increase. This seems to be working fairly well, but of course it would have been assisted far more aggressively by a stronger headline print on the US payrolls, with a better rate of growth in earnings. Still, there is enough in the report to say that it just met the ‘some’ requirement with regards to improvement in the labour market.
One of the key talking points has also been around the bear flattening of the yield curve. Here, the two-year bond yield has been significantly underperforming the ten-year treasury since 13 July. The spread has come in from 178 basis points (or 1.78%) to currently stand at 144 basis points, which is fairly aggressive in a 19 day time frame. Technically, the trend is for the curve to continue to flatten, so I would continue being long the 10-year US treasury, short the 2-year. But importantly, what is this saying about future inflation expectations?
If the US yield is telling us about falling inflation or growth forces, then China’s weekend trade data will push that along. Of course, the 8.3% declines in China’s exports are a key factor but Chinese equities are rallying today on the idea of further easing measures, while there is also talk the stability fund will likely get a nice top up of capital. Momentum seems to have swung back somewhat with the five-day moving average pushing back above the 10-day, although I wouldn’t personally be trading off this signal alone. Fiscal stimulus expectations are also helping.
The strength in the ASX 200 (+0.3%) is surprising, especially the buying in the banks. ANZ specifically has outperformed despite NAB’s trading update actually beating the street’s run-rate on cash earnings. Earnings from JB Hi-Fi Ltd have reverberated through the retail space, setting off a wave of buying, backed by earnings that are of a good quality. If the cost of doing business (CODB) was a little lower then I think we could have an even better performance, but the company seems to be doing enough to produce healthy margins and good levels of gross cash flow. I would expect outperformance in this name with modest upgrades to consensus EPS likely to see follow through buying tomorrow.
The same can’t be said for Ansell which has been shown absolutely no mercy by the market for a poor outlook. Ansell naturally have a currency hedging strategy in place but this runs off in the new-year and this will leave them 16c shy of the streets EPS forecast for 2016. Equity investors just have to understand the dynamic behind the geographical source of earnings, the currency translation and the company’s hedging policy. US investors know this only too well given what we have heard from MasterCard, Apple, DuPont, Proctor & Gamble, IBM and Intel. It’s hard to own Ansell right now and the 16 October low of A$18.10 could come into play sooner than some would like.
The rise in Chinese and Aussie equity markets, amid a fairly flat Nikkei is providing some support to US futures and European market opening calls. Outside of equities, gold has opened on a flat note and the metal is clearly establishing a base - it seems to be finding solid bids on moves into $1080. Gold bulls will want to see a move above $1110 to open up a bigger move into $1126. H owever, it’s tough to be outright bullish given the trend in the USD and stability in US short-term bond yields. WTI futures will be very interesting having reopened on a slightly downbeat note, but probability would state we could be in for a bounce, which could stabilise global inflation expectations.
If we look at WTI futures, the commodity is in an absolute textbook downtrend. Other than the fact oil is now technically oversold, there is nothing to suggest being long. However, the commodity is also down for eight weeks in a row. The last time we saw it down for nine consecutive weeks in a row was 25 years ago! So, if we take that and add the fact it is now quite oversold (from a technical standpoint), I would not be surprised to see something of a bounce. I guess we will have to look out for this week’s oil inventory report, because US data (and thus the USD driver) centres on retail sales.