Trader thoughts - the long and short of it

The open for the Aussie market is certainly looking constructive, with SPI futures gaining 34-points in the Friday night session and closing at 5921. This close is a whisker away from the year-to-date (YTD) high of 5945 printed on 2 May, while our ASX 200 opening call of 5936 is subsequently eyeing a break of the YTD high of 5956.

So naturally, the target for today for the bulls is a close through these highs. Should this materialize, it would portray much about the level of control the bulls have here and while short sellers are having a tough time of late, if you are an investor and looking to increase cash allocations within portfolios, you may ask yourself, “Can I sell at higher levels”?

There is certainly enough event risk for both macro- and micro-focused investors, and traders to contend with this week. On the micro-side, we get 24% of the S&P 500 reporting, including Apple on Friday morning at 7:30am AEDT, but one questions just how much inspiration on the earnings side is baked into markets, given we have seen 8.4% aggregate EPS growth from the 55% of S&P 500 corporates due to report, where 78% have beaten on earnings.

Personally, it feels to me as though we may get one last push higher from earnings this week, but good earnings are quite a mature theme here. Locally, we have NAB reporting on Thursday, with this name trending nicely at present, although Friday’s price action suggests the bulls would be looking at perhaps tightening stops here.

While we get central banks’ decisions in the UK and Japan, there is certainly a focus on the US. This is not just because we have a House tax bill due mid-week, or because we have the FOMC meeting on Thursday (5:00am AEDT), where sometime after we should hear that Trump has appointed either John Taylor, or Jerome Powell as the new Fed chair. The talk in the media on Friday is that we are looking at a probable Jerome Powell appointment, which goes someway to explaining why US bonds were bid, with the US 10-year Treasury closing six basis points lower at 2.40%.

The fixed income community looked like they were increasing duration and there is a wide consensus trade that the Treasury curve is going to resume a bull flattening position, with traders pricing in a higher degree of hikes over the coming two years.

This should weigh on future inflation trends. Whether this trade is influenced by Powell’s appointment is yet to be seen, but keep in mind that we also get the ISM manufacturing report on Thursday morning (1:00am AEDT), which currently sits at the strongest levels since May 2004 and Friday’s non-farm payrolls, where economists are calling for a massive payback of 310,000 jobs.

Another interesting point is that Trump should detail the Fed chair before he heads off to Asia, where domestically his approval rating (according to a poll from the WSJ/NBC) dropped five points in September to 38%. That’s a new low for Mr. Trump and certainly compares poorly, relative to other presidents at this stage in their tenure (Obama was at 51% at this stage, Clinton 47%).

Of course, the key talking point on the agenda will be North Korea and Trump will try to galvernise the region on the issue, especially with US General Jim Mattis saying over the weekend that he will not accept North Korea as a nuclear power. It would be hugely inflammatory for missile tests to occur during these meetings, but that is what we almost expect from North Korea.

The USD remains a key focal point, given this event risk, with many noting the key technical upside break in the USD index last week, with EUR/USD also looking vulnerable to further downside. There could be some focus tonight on inflation prints in the US tonight (11:30pm AEDT), with core PCE expected to remain at a subdued 1.3%, with personal spending (consensus sits at +0.9%) and personal income +0.4%) also due.

Keep in mind that the market has discounted a lot into the interest rate markets, with the probability (implied in the Fed funds future) sitting at 85% and 57bp of hikes priced in through to end-2018. AUD/USD has found some support on Friday, but the trend is lower here and I wouldn’t be surprised to see traders looking to sell into moves above 77c.

So as mentioned, we are expecting a solid open, with US equities having a strong day on Friday, notably in the NASDAQ 100, where names like Amazon, Intel and Microsoft flew. Volumes going through the S&P 500 or NASDAQ were well above the 30-day average and this sets us up nicely. One small headwind though, is the fact that all the buying was in tech and discretionary, with capital rotating out of financials and materials, which is really where we would have liked to have seen the outperformance.

That said, we expect these sectors in the ASX 200 to perform fairly well today given the moves in the SPI futures. Energy should be interesting, given the comments from the Saudi Crown Prince Mohammed bin Salmon, suggesting he was interested in extending the production quota agreement into late 2018. Brent and US crude have gained 1.9% and 2.4% respectively. The next OPEC meeting is on 30 November, so oil prices should stay firm into that meeting.

The lack of any real movement in the early Asia FX open this morning, suggests we shouldn’t see much of a move in S&P 500 futures (and various other futures markets) open at 10:00am AEDT. Further focus remains on the commodity space given the recent USD flows and here we see gold sitting at $1273, although it does seem to be building a base into $1265 and could see a touch more upside at the start of the week into $1285/90.

Bulk commodities look vulnerable on the other hand, with spot iron ore closing at $60.08 and eyeing a test of the October low of $59.65. Dalian iron ore and steel futures closed -2.3% and 0.55 respectively, so we should see BHP is eyeing an open around 0.4% lower.