On the data side we have seen UK inflation printing an in-line (with expectations) 3%, which has seen the implied probability of a hike at the 2 November Bank of England meeting move to 80%, which coincidently is the same implied probability as the Fed hiking in its December meeting. GBP/USD has been sold though, thanks largely to BoE chief Mark Carney, who has detailed that the BoE “expects inflation to peak above 3% around October” – so a one and done hike seems to be in play judging by the reaction in cable.
US data has centred on import prices and September industrial production (+0.3% MoM). Although neither have caused any real reaction, notably, if you look at the US fixed income space. Here we see the 5- and 10-year US Treasury unchanged at 1.95% and 2.30% respectively, with traders buying into modest weakness after the start of official trade. ‘Real’ (or inflation-adjusted) yields have pushed a touch higher here, with the 5-year ‘real’ yield up three basis points (bp) to 22bp, which again seems to be supporting the USD (as the least ugly house on the street) and in turn is weighing on the gold price, which sits -0.7% at $1285.
Interestingly, if we look at the yield premium demanded to hold US Treasuries over German debt, this has increased nicely of late and worth keeping an eye on as it is certainly weighing on EUR/USD.
The subject of who will lead the Fed in February continues to rage on and while it is not definitive, sources close to the White House say we should hear who will lead the US central bank by 3 November. For what it’s worth, early November is also when many are expecting to hear of a replacement at the helm of the PboC (in China), with Zhou Xiaochuan, who has been governor since 2002, expected to retire in March.
Janet Yellen will be interviewed by Trump tomorrow, although I thought it was interesting that John Mulvaney, a Republican and the White House Budget Director, detailed that Yellen isn’t his first choice. We should remember that Yellen’s chances are still reasonable given how well she has navigated the US economy through four rate hikes. Jerome Powell remains the leading candidate to take the gig.
There has also been a focus on NAFTA negotiations being pushed out into 2018, which won’t necessarily surprise as there are clear “challenges”. Commentary from ministers in Mexico, the US and Canada have been fairly heated, however, the reaction in markets has seen strong flows into the MXN and to a far lesser extent CAD and USD/CAD looks interesting on the daily given the pin bar reversal here. Keep USD/CAD on the radar as a lower low and a subsequent close through the 12 October low of C$1.2433 would be worth looking at short exposures for a c$1.2329.
The lack of move in the US fixed income market has not be in isolation, with US equity indices also struggling to show any signs of life, while credit also remains near multi-year tights and US crude closed +0.1% at $51.94.
At a sector level, it’s been healthcare that has worked, with the S&P 500 healthcare sector closing up 1.5%. Financials have struggled, with mixed earnings from Morgan Stanley and Goldman Sachs not helping, with Goldman’s finding sellers all day, after the initial pop into $244.89. By way of a guide, we have seen the S&P 500 energy sector close unchanged, with materials -0.3%. Breadth has been fairly poor with 55% of stocks lower on the day.
IBM, who hold a 4.3% weighting on the Dow Jones index, have reported after hours and the result has impressed with the stock currently up 3% after-hours. Q3 revenue of $19.15 billion and operating EPS of $19.5 billion and $3.30 both compare favourably to the streets expectations.
If we aggregate all of this news flow, it all suggests a fairly tepid open for Asia, with SPI futures trading down eight points. Our call then for the ASX 200 sits at 5882 and it’s interesting to look at price action on the daily chart as there is little doubt that after the 245-point rally in the index over the past seven trading sessions that we are seeing better supply coming into the market and traders happy to offload positions here.
Today could be an interesting day then, with a view to assess whether traders take profits from the recent run, while keeping an eye on China, with its 19th National Party Congress getting underway, although its unsure when the details of the meeting will be unveiled to the world.
If we look at the market internals of the ASX 200 then we can make an argument that we are approaching euphoric conditions, with the elastic band being pulled a little too far. Specifically, if we look at the percentage of corporate trading above their 20- and 50-day moving averages, which sit at 93% and 80% respectively, this are certainly very elevated and at levels where the index has seen profitably counter-trading. 40% of ASX 200 companies are at 4-week highs, while 17% have an RSI above 70, which are both elevated, but not at striking red flag territory just yet.
The ASX 200 also trades on 16.17x 12 month earnings, which again is lofty, relative to the longer-term average, but not above the 16.5x times I would feel gives the index far greater vulnerabilities.
While China is key today and for the remainder of this week, it’s worth highlighting that the leads for Aussie miners is not great, with copper lower by 1.2%, spot iron ore -0.4% at $62.72 and on the Dalian futures exchange, while we have seen iron ore trade higher by 1.1%, we are seeing steel futures lower by 1.1%. BHP report production numbers today, although as things stand we should see headwinds with its ADR closing -1%. Vale’s US-listing closed -1-.8%.