Trader thoughts - the long and short of it

The overarching narrative in global markets is transforming from one preoccupied with the trade war, to one preoccupied with Thursday morning’s meeting of the US Federal Reserve.

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Source: Bloomberg

As far as developments in the trade war go, in a week bereft other major stories, traders are demonstrating tentative signs of ease on the subject. Markets are strapping themselves in for the long haul, and a begrudging acceptance that this thing will take time to play out is the prevailing mentality. With that in mind, and with only a laugh-worthy speech from US President Trump at the UN overnight to trade-off otherwise, the dominating theme is preparing for the US Fed meeting and a possible new world of gradually higher interest rates. That’s not to say that other news isn’t coming to the fore and causing volatility in pockets of financial markets, but for market-fundamentalists, everything begins with what the Fed do with US rates.

Because of this, it has been in fixed income markets that any remarkable price action occurred during the North American session. Far from it was there a great deal of volatility, especially in terms of flow on effects to equity indices, which with the Wall Street Cash (Dow Jones) and S&P 500 down 0.2 per cent and 0.1 per cent respectively and the NASDAQ up by 0.2 per cent, once again traded mixed for the day. Rather, the structural shifts in markets and the subsequent revision of trader’s collective view on global interest rates continued to gradually play out, led by the belief that tomorrow morning we will see a hawkish Fed. The dynamic led to benchmark US 10 Year Treasuries to tease 7-year highs near 3.13 per cent, as interest rate traders firmed their bets that tonight’s Fed forecasts will imply 2 more hikes this year and at least another 1-and-a-half in 2019.

European markets during their earlier trading session were swept-up in the same theme, though it must be remarked that European equities performed quite well. European bonds drifted in the slip stream of falling US Treasuries, with the yield on 10 Year Gilts approaching year-to-date highs at 1.63, and the yield on 10 Year German Bunds ticking up to 5.4 per cent; while the FTSE 100 added 0.66 per cent for the day and the Euro Stoxx 50 climbed 0.27 per cent. The continent’s equity indices are generally still down for the month, but a recent lift in risk appetite courtesy of firmer certainty in Chinese and emerging markets has supported European shares. This greater degree of confidence has underpinned strength in the EUR, which made another play above 1.18 overnight, as calls grow louder that that currency has turned a corner and is due for a sustained run higher.

The foundations laid by these stories has SPI Futures pointing to a slim 4-point jump at the open for the ASX 200, following a day of ultimately flat trading for Australian shares. It wouldn’t be too bold too suggest that overall price action on the Aussie market was dull yesterday. Similar forces that have driven the trading-tides on the market recently drove the ASX again yesterday: surging oil prices boosted energy stocks, while marginally greater optimism regarding global growth helped the materials space extend its weekly gain to over 4 per cent. IG data has the market opening at 6195 this morning, right at a notable selling point for traders of late, and just below the ASX200’s 100-day EMA, which for several weeks has proven the key marker of resistance for the index. A break above this line appears necessary to spark a bullish turn higher; with an impetus required first to initiate such price action.

Chinese markets traded as expected yesterday: indices sold down. But perhaps to the relief of many, the outcome wasn't as severe as was feared. The fortunes of Chinese indices have hinged on the judgement of what capacity Chinese policy makers have in supporting their markets, given the likely drag tariffs will have on the export focused economy. China's equity markets are some way from being out of the woods, especially because this trade war looks poised to last for the rest of this year, at a minimum. Despite this, Chinese large cap stocks are presenting low valuations, and by some measures last week's equity rally broke the market's existing down trend. Yes, traders are still selling rallies at a well-defined point in Chinese indices, but perhaps this pattern reflects an emerging, stable range trade that these markets can settle within, before making a break higher once positive sentiment turns.

There was also lively activity in the region’s other powerhouse financial centre during the Asian session: Japan’s markets posted another bullish day, again shrugging off the various problems weighing down its regional neighbours. The improvement in global risk appetite manifested in the Yen, as that currency renewed its battle with formidable resistance at 1.1300. The weaker currency combined with (typically) dovish Bank of Japan minutes to push the Nikkei higher, which stuck fat around the 28,000 level. Though it always takes some gall to trade near new highs, particularly considering Japanese shares are underpinned by improving fundamentals, shorting the Nikkei here with the view of exiting near the market’s upward trendline may prove popular – so long as stops are appropriately placed somewhere near the index’s year-to-date highs to protect from a major topside break out.

A brief mid-week commodity wrap may be appropriate here, in light of the fact economic data and news flow is relatively light. Oil is holding the commodity complex together for the best part, demonstrating signs that a base above $80.00USD and $US72.00 per barrel in Oil - Brent crude and WTI terms respectively is emerging. The price of bellwether Copper is down on the week on fears of slower Chinese growth but remains significantly about the month’s $US5800 lows. Gold prices have been relatively unresponsive to the USD’s recent weak spell, conveying a steady balance of buyers and sellers within the yellow metal’s trading range between $US1195 and $US1207. Finally, iron ore prices are also down on the week after that metal bumped its head on resistance last week, to presently trade in Dalian terms around the 500-mark.

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