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The robots are backing the rally

Asian markets look set to open cautiously as the impending Doha meeting and Chinese data are likely to give investors reason to pause.

Shanghai
Source: Bloomberg

Oil weakened a little, but is holding steady at a lofty US$41.50 and a number of other commodity prices similarly took a little pause on their uptrend overnight. It will be a big day for commodities at 12.00 pm AEST when we get China’s 1Q GDP, and industrial production, retail sales and fixed asset investment for March. At some point today China will also release its March credit and monetary data as well. Given the massive pickup in China’s activity indicators in 2016, solid numbers today could provide further short-term upside to the commodity complex.

There are a lot who doubt the current market rally at the moment, particularly when the S&P 500 is so close to its all-time highs. And yet, in a world where one-third of government bonds have negative yields, there is a strong incentive to increase one’s equity allocation in pursuit of positive returns. And that certainly appears to be the rationale of the robots. Commodity trading advisor (CTAs) funds, automated trend following strategies, are the most bullish on equity markets since July 2015. The HFRX Systematic Diversified CTA Index’s 21-day rolling beta (correlation coefficient) with the S&P 500 is currently at 0.3, much higher than where it was even in last year’s December Santa Rally. A high correlation with the S&P 500 indicates that the CTAs are trading in the same trend direction as the S&P 500.

Many have despaired that the recent equity market rally was accompanied widening credit spreads, particularly in the high-yield bond space. But alongside this week’s oil price rally, the high yield complex has similarly seen strong rallies with the HYG high yield bond ETF gaining 1.8% in a week.

US CPI weakened slightly in March, and it seems very unlikely that the Fed will hike rates in 2Q. The earliest possible date for a rate hike given the data flow and the market pricing is probably September. A weak USD looks set to continue through most of 2Q, and in such a scenario the Aussie dollar looks likely to continue above the US$0.75 level.

European markets had a fairly solid night of gains as harmonised European CPI came in slightly better than the market consensus. The FTSE was left out of this rally, largely closing unchanged on the day. BHP and RIO’s London listings had a mixed session returning +1.8% and -0.1%, respectively.

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