What this lower open does provide us with though is a guide as to the resilience of the bulls and while we know sentiment in global equity markets is sky high if the buyers step back in, support prices and we see another consecutive close above 6000 it will certainly be a positive.
Recall, if we go back to the period between March and April 2015 (our last case study on the market test of 6000), we can see a market where the bulls just lacked the impetus to push the index through the figure, and largely this was not helped by the fact the index was trading on a consensus forward earnings multiple of 17.5x, which is as expensive as we have ever really seen. This time around valuations are again high on 16.5x, certainly relative to the long-run average of 14.4x, so we do need to do need further fuel to feed the fire here. We know equity markets have seen limited downside moves since early October but on 16.5x and with seemingly so much good news now discounted, it does suggest the upside is going to be a tough slog.
Another aspect worth focusing on, which should be taken as a positive, was the fact that not only did the ASX 200 finish on its highs but despite the Melbourne Cup holiday, we saw a very impressive $6.145 billion of value traded through the market. As a technician, it’s not always about how a market goes from A to B, but the equality of the journey and yesterday was a massive victory for the bulls in that regard. Perhaps the clear negative that I would point out was that Aussie SPI futures traded to a high of 6008 at 17:52 aedt (yesterday), which was three points shy of the high reached on 23 March 2015.
So while we saw a new multi-year high in the ASX 200, SPI futures failed to achieve this and that takes some of the gloss of yesterday’s move. For those interested in the ASX 200 today, one should watch price action in the futures market as this could be a strong guide.
Looking at leads for the session ahead and while we have seen signs of weakness in European equities, US equity indices, such as the Dow, S&P 500 and Nasdaq, have once again seen limited ranges and again this shouldn’t shock given the S&P 500 realised volatility.
That said, the bears will point out that small caps have underperformed, with the Russell 2000 down 1.3%, while the Dow transports index is also finding better selling. Marry this weakness with a 0.7% fall in the Emerging Market ETF (EEM ETF) and US high yield credit spreads trading wider by six basis and there are a few signs that the bears are finding somewhat of a say here.
US financials have also struggled here (the sector is down -1.3%) and as we head into the back half of the week, all the focus in the US is on tax reform and the Senate text, which is scheduled to be released tomorrow night and there is no doubt there will sizeable differences between their plan and what we saw last week from the House. Tax reform is still the markets base-case for early 2018, but we are now entering a period where it will be fairly painful for market participants and of course, it means having the ability to cut through the noise.
There have been limited moves in US fixed income across the Treasury curve and subsequently, a major catalyst for the USD has gone missing. That said, we have seen the AUD finding sellers easy to come by and the currency has lost ground against all G10 currencies. AUD/USD has been well traded, but flip the chart of AUD/USD to the weekly (it’s always good to get perspective) and we can see the 55-week moving average at $0.7633 holding up play. So a weekly close through this level could open up better downside again, and this could get into gear should we see a daily close through what has been good support in the $0.7640 to $0.7625 region.
There are few reasons to own the AUD right now, with the RBA yesterday giving a largely unchanged and nuanced view of the financial landscape. As always, keeping an eye on the interest rate differential between Aussie and US bonds is crucial and whether we focus on the five-year or ten-year (or a combination of various maturities) part of the bond curve, if the market genuinely feels that at some stage in early 2018 we see the US wearing a yield premium over Australia then the game changes, the AUD becomes a funding currency.
So an uninspiring set of leads and this includes the commodity complex, which of course underpinned everything that went well for Australia yesterday. Oil prices have finally undergone profit taking with some focus on OPEC’s forecasts for higher shale production by 2021. Spot iron ore lost 1.1%, with iron ore, steel, and coking coal futures losing 1.2%, 0.7% and 0.2% respectively. Copper has also lost 2.2% and it could be a tough day for those who put new money to work buying energy and materials stocks yesterday. As a guide, Vale’s US-listing has lost 2.5%, while BHP’s ADR is lower by 1%.
So as I say, a weaker open is expected and there a few reasons to be cautious, but given the ASX 200 closed on its highs yesterday it will be interesting to see if investors overlook these leads to push the index higher and through 6000 again. That said, in my opinion, the bulls really need to see SPI futures close above its 2015 high of 6011 to get really excited here.