Trader thoughts - the long and short of it

The markets were certainly more content with the world overnight, putting to the back of mind the events of last weekend and the challenging start to the week. The prevailing themes remained in major part a so-far-so-good earnings season on Wall Street, couple with the unfolding story of China’s surprise stimulus program, announced on Monday. Implied volatility retreated amidst this dynamic, with the VIX dropping (just) below 14, although some of the risk haven activity witnessed at the start of the week linger – the Japanese Yen is still in favour and US Treasuries appear to be holding onto a small risk premium.

SPI futures are pointing a 0.2 per cent climb at the open for the ASX200, as the positive thematic galvanizes renewed optimism in investors. Trading in yesterday’s session certainly epitomized the global sentiment shift, paring the lion’s share of Monday’s losses and reigniting the journey the ASX began the week prior. The confidence that characterized the day’s trade was established by a strong lead from North American markets, but the real boost throughout the trading day came as markets digested the potential impact of a new Chinese stimulus program. The materials space led the way courtesy of this, adding 1.32% for the session, to help the ASX200 close 0.6 per cent higher at 6265.

The PBOC’s announcement on Monday of unexpected stimulus measures appear to be being received well by markets. Discounting the initial shock of such extraordinary measures, market participants have shown trust thus far in the judgement of Chinese policy makers, who seem keen to convey a determination that trade war hostilities and a general economic slowdown will not derail the Chinese economy. The benchmark Shanghai Composite Index posted its third successive day of gains yesterday, with early indications of another ahead today, and China sensitive indices such as the DAX climbing over 1 per cent overnight.

Wall Street traders built on this activity during the North American session, driving the Dow Jones and the S&P500 0.8 per cent and 0.5 per cent higher – at time of writing. The positivity was engendered by the out of hours release of earnings from Alphabet Inc, the parent company of Google, which managed to greatly exceed expectations, thanks to an increase in advertising revenue for that company. The subsequent rally in Alphabet Inc. shares was enough to push the NASDAQ to another all-time high, although the gains for that index were unwound during the day. The attention will consequently turn to earnings reports out of Amazon and Facebook in the coming days, with any further vindication of the US tech boom to likely push US indices higher again.

Australian traders will have their attention firmly fixed on the release of CPI data by the Australian Bureau of Statistics at 11.30AM. As far as data goes, it doesn’t come much more significant than inflation figures for the Australian economy, which has been plagued — like much of the developed world — by sluggish price growth for several years. The trend is expected to continue today, with forecasters predicting a quarter-on-quarter CPI figure of 0.5% per cent, that will take annualised inflation to only 1.8 per cent — once again below the RBA’s target band of 2-3 per cent. Unfortunately for Australian economy bulls, according to pundits, the lion’s share of this price growth will be attributable to external factors, mostly a notable rise in fuel prices.

If this proves true, expect little response in financial markets, particularly relating to interest rate markets, which is pricing no move from the RBA until the start of 2020. When it comes to the Australian Dollar, barring an extreme upside surprise to the headline print, a break outside of what has become a tight short-term trading range for the AUD/USD looks unlikely. The AUD/USD has kept quite range bound lately, with gains capped around 0.7420/30, and support emerging at 0.7310.  Although an upside surprise to today’s CPI print could push the AUD/USD above that resistance, such a rally in the pair is unlikely to change trend, with the top of the trend channel around 100 points higher at 0.7520

A surprising element to the overnight session was the perplexing rally in the price of Bitcoin. Belying recent conceptions that the virtual currency is simply a speculative instrument in times of high risk appetite, the crypto has bucked the spike in volatility and risk aversion at the start of the week. It has now rallied over 35 per cent from its recent lows, breaking a downward trendline in the process and reopening up a challenge to resistance at about $US8601. Analysts a scratching their heads as to the exact reason for the strength in Bitcoin given broader market sentiment, with some pointing to the possibility of a Bitcoin ETF going live in the US as soon as August. For the price watchers, look for hold in the short term to medium of support at $US7610/15 to provide evidence of sustained strength in Bitcoin.