Trader thoughts - the long and short of it

The ASX 200 opened on a high and tailed off quickly yesterday, so whether this happens again today remains to be seen. 15 ASX companies report today, with CSL and CBA being the two names that traders will centre on. The numbers from CBA look good, with 1H cash earnings above the street at $4.91 billion, an interim dividend of $1.99 and net interest margins at 2.11%. Return on equity sits at 16%, which is also above the street. While there is much to focus on, the numbers look good and as does the commentary about the Australian economy.

If numbers disappoint, CBA may test the $81.00 level, where the buyers have supported on at least five times since 20 January.

For the traders among us, US banks look a better short-term play, with a lovely break-out through the recent range in KBE ETF (SPDR S&P Bank ETF). Preferably one would like a little pullback and a wave of new buying to confirm the technical break, but this ETF is trending like a dream and longs are clearly preferred with a tight stop through $44.00. Fundamentally, the US banks are simply being used as a vehicle to express reflation and Trumponomics. However, last night really belonged to Janet Yellen, whose prepared comments to the Senate Banking Committee that waiting too long to tighten would be ‘unwise’ and a further review its policy stance (which she described as ‘accommodative’) at its upcoming meetings will take place.

The market reacted instantly to her optimistic remarks, or at least the algos did, with the US five-year treasury spiking 8 basis points (bp) off the bat, taking the USD with it. The USD index is now up for ten consecutive days, but we haven’t seen a day where the gains have been more than 0.4% in that run – such is the implied volatility. The wash-up of the chair's comments have been a slight tweak in the implied probability of a March hike, which now sits at 17.7% (source: CMEgroup). While there is no April Federal Open Market Committee (FOMC) meeting, if we use the April federal funds future (which has the most open interest) we can see 60bp of tightening priced over the coming 12 months. Therefore, the markets are starting to warm to the idea that we could be looking at three hikes over the coming 12 months. It’s no wonder USD/JPY has pushed up above ¥114.00 again.

Watch the upcoming US retail sales (3am AEDT) with consensus expecting the control group (the element of retail sales that feeds directly into the GDP calculation) to increase 0.4%. There was once a time when retail sales were one of the most important US data points and I suspect that could become a theme going forward if Trump genuinely can engineer true ‘animal spirits’. We can look at business investment, but the feel good factor needs to translate into retail spending which may come.

One aspect we should also keep an eye on is the Chinese money markets, as there is a growing view that the China seven-day ‘repo’ has become the key policy tool for the People’s Bank of China (PBoC). We saw this instrument push up a further 25bp to 3.25% yesterday. While it is not at concerning levels, given the amazing inflationary trends we saw yesterday, with PPI testing the 7% and once again easily beating expectations, the worry is if inflation keeps pushing higher we may see a far more intense tightening of monetary conditions. Setting monetary policy is a balancing act in the Chinese economy, so the last thing the PBoC needs is continued strong inflationary pressures that could become more of a headwind to growth. There is a new focus on China’s short-term money market to garner a sense of liquidity and thus a tolerance for lower growth in a bid to promote greater financial stability.

The AUD/USD was buoyed yesterday by the undeniable strong NAB business conditions and confidence. I felt the prospect of this data point having a material influence on the AUD was minimal, but few expected a read that was far more thematic with an economy that needs tighter monetary policy. AUD/USD has traded in a range of $0.7696 to $0.7618, but for AUD traders, the better trade (in my opinion) continues to be short EUR/AUD and long AUD/JPY. AUD/JPY needs a break of the 15 December high of ¥87.53 and then it will be on.

In the commodities space, US crude has pushed up 0.7% and all eyes fall on the Department of Energy inventory report (due out at 2.30am AEDT), with expectations of a strong build in both crude (consensus of 3.491 million barrels) and gasoline (1.699 million barrels). Modest falls have been seen in iron ore -0.6%, iron ore futures -1.3%, steel futures -0.3% and coking coal futures -2.3%. Copper has dropped 1.3%.