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- Market pricing versus economic expectations versus economic and activity actuals.
- Pessimism versus bottom up actuals versus forward guidance expectations
The top one remains clouded as activity is in a much better state than pricing and expectations would suggest. The second one is market specific and is moving to an optimistic stance which may, in turn, alter the top triangle.
Changing the game (slightly)
- The US was unable to have four consecutive 1% gains, which it has only done once since 1982. However, the snap back is a positive too big to ignore and even if it lost 1% tonight, it will still have had its best week of 2016.
- The European bank ‘capitulation’ trade is closing as markets respond to the fact money markets and TLTRO loans are not showing any signs of distress and the ‘whatever it takes’ line is trotted out again by the European Central Bank shoring up default concerns.
- Oil remains a concern, however my Q1 oil trade closed yesterday with the March contract expiring. WTI closed at US$30.66 a barrel which is exactly what we expected. Q2 is likely to see oil shifting a little higher on intervention rumours and China’s demand shifting into summer months (organically increases). June is more likely to close around US$36 a barrel, which is a positive for risk.
One market I have kept an eye on due to its exposure to oil and its similarity to the ASX is the TSX.
It collapsed at the start of the year losing 12.4% making it one of the worst three developed indices in the world; however, it’s now added 12% in the past six days and is 1.5% from breaking even for the year on the oil rebound story. It has added 8.15% in the past four trading days alone.
Although the ASX is likely to trade flat today, technical observers will note the ASX is on track for its best weekly gain since 2011 and also broke back above the 2011 trend line that it has been trading around in late January. After last week’s ‘final capitulation’ trading which looks to have pushed a lot of ‘legacy holders’ to finally pack it in, the market’s snap back and re-basement is a positive and might signal a return to a brighter tomorrow.
These points suggest the bottom up actuals and economic and activity actuals are starting to gain a foothold.
This week is the first sign of change I have seen in 2016. However, there are a few things I am yet to see that makes this move a longer term one.
- Patient capital is yet to be deployed – most fund managers are nearing their maximum levels of cash under their respective mandates. This capital needs to be deployed to confirm the change is on.
- Central banks are still more likely to race to the bottom on rates rather than looking to normalise policy, meaning they see global economic expectations as a bigger issue.
- Technically markets are now sitting in a completely ‘neutral’ position now – will the rally become exhausted or will they get a second wind? There are no technical signs as of yet.
I also want to cover off on yesterday’s Goldman Sachs economic release and its outlook for Australian rates.
- It has downgraded its expectations and believes the Reserve Bank of Australia will be forced to move the cash rate down 50 basis points on global deflation issues. The AUD moving higher due to Aussie bond yields is out of consensus but an interesting conundrum.
- It expects two cuts – one in May (a tough call considering that’s when the Budget is due which is also conditional considering there is a chance of an early election) and July.
- The fact that Australian bonds are ridiculously attractive on a yield basis is an issue for exporters as the AUD will bounce back. However the pricing of the interbank market only sees an above 50% chance of a cut come June.
It’s an interesting miss-match and something that will move the ASX and AUD if it comes to fruition as pricing is not matching this economic expectations.