There have been signs of modest risk aversion through trade, but it seems as the session rolled on, an easing of tension has been seen. Firstly, in the early stages in US trade we saw the annual ‘US threat’ report (produced by the Director of National Intelligence) detailing North Korea stands ready to test its first inter-continental ballistic missile (ICBM). The market then got quite excited about headlines on social media (citing YONHAP) that ‘North Korea test fired ballistic missile’, but when the more rational heads looked at YONHAP’s website there was little to support these headlines.
The net result on the session though was modest weakness in US equities, although 69% of stocks fell on the day, with the defensive sectors healthcare and utilities outperformed. We also saw some small buying in US bonds across the curve, with a larger move lower in 10-year ‘real’ (or inflation adjusted) yields falling six basis points (bp) to 48 bp. It’s a surprise then that gold is ‘only’ trading modestly higher at $1224, given its strong inverse correlation with real yields. There was also some support for the JPY, with USD/JPY trading down to ¥113.46, although traders have pushed this up 40 pips or so from there and this should result in a weaker open for the Nikkei 225 on open.
On the theme of all things US, tonight’s US trading session should be interesting where at 10.30am AEST we get April CPI ex food and energy (consensus expecting 2% year-on-year) and retail sales. Both have the ability to move the USD around and could affect the pricing structure around the June FOMC meeting, with expectations of a hike sitting around 80%. The headline retail sales report is expected to grow 0.6% and one suspects this could be supported by auto sales and a delayed tax refund. Perhaps the metric we should be looking at more closely though is the retail ‘control’ group, which is the basket of goods that directly feeds into the Q2 GDP calculation. With expectations of US Q2 growth sitting above 3%, we will likely see revised growth estimates from economists depending on how the data fares relative to the consensus of 0.4%.
FX and fixed income traders should also keep an eye on commentary from Chicago Fed president Charles Evans (current voter, dovish) at 11.00pm AEST in Dublin and Philadelphia Fed president Patrick Harper (current voter and neutral). There is a strong focus on the Fed’s balance sheet from strategists at present and both Fed members are expected to talk on the economy and monetary policy, which in turn could result in moves in US Treasuries and the USD. Obviously depending on their views.
So with somewhat of a negative feel to the Asian open, it promises to be a fairly unpredictable and messy open. Japan, as mentioned, is eyeing a soggy open, while the ASX 200 should unwind around 5872, down six points, very much in-line with the falls seen in SPI futures. It’s interesting that we saw a bullish outside day reversal in both the ASX 200 and SPI futures on Wednesday (with price trading below Tuesdays low and closing above the high). In theory, this showed that the bulls fought back control from the bears, however, importantly, we didn’t see any conviction in the follow through buying yesterday and traders were quick to sell into the early rally, notably in the banks.
Financials therefore need close attention, as the sector has been the weakest link this week, with the sector down 1.7% in this period. One suspects that given the flat opening call that some stability will be seen on open, as will be the case in BHP, with its American Depository Receipt (ADR) closing up 0.8%. This modest expected gain in BHP is once again a reflection of the crude market, which saw small gains and built on yesterday’s strong rally. It has now been disclosed that OPEC will roll over the November output cut agreement for a further six months and perhaps we would have seen US crude trading even higher into the $48 a barrel region if they hadn’t increased their estimate for non-OPEC output by 64% to 950,000 barrels a day.
Bulk commodities are slightly lower, with spot iron ore closing down 0.6%, although this isn’t as bad as feared. Iron ore, steel and coking coal futures are lower by 1.4%, 0.9% and 1.6% respectively, although if we look at Vale’s US-listing it only fell 0.4%. Keep an eye on China’s monthly credit data (no set time), with M2 money supply expected to increase to a 10.8% growth rate (+20bp), new loans expected at RMB815 billion and aggregate financing at RMB1150 billion. Anything lower than these estimates will continue to fuel the concerns in China of regulation, deleveraging, lower liquidity and a reduced credit environment that is causing Chinese traders to move capital out of commodities and equities.