Trader thoughts - the long and short of it

The robust start to 2018 has taken a noticeable pause this week. That restraint is not only measured through more measured gains for the likes of US equity indices, but it has also shown in a divergence in performance for the range of global equities and asset classes.

Market data
Source: Bloomberg

While the Dow 30 may be up, the FTSE 100 and ASX 200 are down for the week. Emerging markets and Yen crosses have advanced but high yield fixed income (aka ‘junk bonds’) have spun their wheels. A shares trader would call this a ‘stock picker’s market’; but on a global scale, this is evidence of a tempered conviction in risk appetite – the foundation of all markets. Was the climb that ushered in the first two weeks of the New Year the extent of the post-holiday reinvestment and/or carry-over speculative enthusiasm? If we lose momentum, it will be a lot more difficult to further bolster conviction with assets already this rich.

Wall Street: On a ‘technical’ basis, the US indices are perched at their record highs. Yet, also on a more technical analysis basis, there has been a marked downshift in momentum which translates to conviction – or at least speculative appetite. The headlines relating to the US equities market carries the standard fare for topical events. Apple’s planned repatriation of offshore profits in response to the tax bill, along with new fixed investment projects and hiring announcements, warms the business focus. Earnings announcements from Morgan Stanley and Bank of New York kept the analysts busy with beats of $0.84 EPS versus $0.77 expected and $1.08 versus $0.91 expected respectively. Even economic headlines offered some data for those bulls seeking out justification in the lowest jobless claims in 45 years. Yet, missing amid all of this is genuine enthusiasm.

Also, ominously underreported is the steady rise in implied volatility. The VIX has risen steadily above 12 while the S&P 500 has advanced to 2,800. What has resulted is a positive, 10-day correlation coefficient of 0.87 (positive and remarkably strong). It is rare to see a positive correlation to begin with; but moreover, there are only three instances in the past 20 years where the relationship has been this aligned. Something is amiss amid distracted complacency.

China GDP As Expected:  China’s quarterly GDP and run of important December statistics fell very close to expectations and were little changed from the previous readings. No one was surprised by the cooperation from the data and the benefit to stability and subtle air of improvement that it reflected upon the Chinese government. Skepticism over the fidelity of China’s economic data is both high and well deserved. An opaque view of the world’s second largest economy offers some benefit as it can cloak growth of financial distress that can spur financial crisis. It can also work against the country as skepticism can grow – especially during periods of global concern. Nevertheless, the Shanghai Composite rose 0.9 percent following the 6.9 percent year-on-year expansion reflecting the first pickup in activity on an annual basis in 7 years. It would be useful to gauge the robustness of this series against far more obfuscated statistics on the scale of bad loans in the country.

US Government Shut Down Threats: US President Donald Trump remarked this past session that the US government “could very well” shutdown by week’s end as a stopgap budget agreement continues to elude lawmakers amid demands for immigration and other hot button cost covering programs. Both politicians and global graders have grown anesthetized to the risk that this event poses. We have seen brinkmanship on this too many times over recent years, and last minute saves have led the market to a dangerous apathy. There are lasting implications to such interruptions for a region whose government debt is the standard ‘risk-free’ benchmark and its other assets are generally very rich. Rating agencies have already warned on this steady path of threats before and have notably voiced concern about their growth and debt forecasts. Downgrades could cause irreparable damage to global concentration in US assets.

A Collapse and Recovery of Cryptocurrencies: It seems the dip-buying mentality has returned in the cryptocurrency market. It just happened after a much more painful rout this time around. From the December peak for the broader market, Ripple has suffered the worst absolute drawdown (73%) of the recently popular coins. Bitcoin’s trough was a little more than 50%. There is plenty of short-term explanation applied to this move in trading forums – South Korea’s ban contemplation, China mining crackdown fears, etc – but the intensity of this move is far more systemic. We have seen many late adopter, inexperienced traders suffer heavy losses. This has happened many times before in emergent asset classes in different periods. It is often a pivot for volatility, momentum and general market makeup.

ASX200: The generally encouraging employment data yesterday came at a technically opportune time. The ASX200’s slide met a short-term trendline support that has arisen from the past three-months chop around 6,000. So far, the index has been able to hold this line – though not without a hearty intraday test. Correlations to the winds of global shares would not likely see this index go too far afield from the S&P 500 and DAX. However, if they all start to lose traction; the Aussie index already has a head start.  

Commodities:  For the technical trader, there is a lot to chew on with the commodity market. From US-based WTI crude, we have seen a week of consolidation, which on the 4-hour time frame shapes up to be a head-and-shoulders pattern following a conspicuously aggressive run up to multi-year highs. The ‘neckline’ is roughly around 63.50/25. Gold has turned tentatively back from a test of a four-and-a-half year trendline resistance that currently stands at $1,345. Natural gas has produced a very unusual expanding wedge with a recent rejection from its resistance at 3.300. The list goes on.

Australian Dollar: AUD/USD is almost certainly looking to close its sixth consecutive weekly advance – the first run of this duration since July 2016. Yet, how much of that move is the result of a weak US Dollar and how much is it a strong Aussie Dollar? Creating an equally-weighted index of the Aussie’s seven most liquid counterparts, we find the currency much less committed to momentum and instead at the upper bound of a wedge around 11 months in the making. Like so many other markets, we are at a point where traders need to weigh their convictions versus opportunism.

Market Update:

SPI futures moved -1.25 or -0.02% to 6014.57.

AUD/USD moved 0.0019 to 0.7989.

On Wall Street: Dow Jones -0.38%, S&P 500 -0.13%, Nasdaq 0.04%.

In New York: BHP -0.08%, Rio -0.04%.

In Europe: Stoxx 50 0.23%, FTSE 100 -0.32%, CAC 40 0.02%, DAX 30 0.74%.

Spot Gold moved 0.01% to US$1327 an ounce.

Brent Crude moved -0.09% to US$69.32 a barrel.

US Crude Oil moved -0.03% to US$63.95 a barrel.

Iron Ore moved -0.09% to CNY534.5 a tonne.

LME Aluminum moved 0.14% to US$2192 a tonne.

LME Copper moved -0.62% to US$7034 a tonne.

10-Year Bond Yield: US 2.61%, Germany 0.57%, Australia 2.81%.

By John Kicklighter, Chief Strategist, IG Chicago

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