Trader thoughts - the long and short of it

After the positive flow we saw in Monday’s US trading session the bulls have failed to follow-through with the sort of vigour you would like to see to provide confidence that the S&P 500 is eyeing a re-test of the 27 February swing high of 2789 and from there the all-time highs of 2872 seen in late January.

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Source: Bloomberg

The talk has again centred on global trade, although there has been a positive feel to geopolitical issues, with North Korea (NK) seemingly winning a much-needed PR battle and Trump responding in a similar vein. That said, while we did see USD/JPY rally from 105.86 to 106.44 on the NK headlines, the pair has slipped back 20-pips or so and the geopolitical headlines are seemingly a positive humanitarian thematic but not one that will have a lasting impact on financial markets.

The main game in town, from a macro standpoint, remains trade ties and increasingly, the stability of Economic Advisor Gary Cohn given his strong free trade stance and he has long been outspoken about protectionist issues. Market participants see Cohn as a counter ballast against reckless policy and see him as the rational thinker in the Administration and a bridge to Wall Street and financial markets. So, one suspects if Cohn is to leave his post markets will not take too kindly to this.

 So with this in mind, the attention turns to a meeting that according to Bloomberg sources is set to take place this Thursday between Donald Trump and select US corporates in the steel and aluminium space. One to watch, because depending on how this plays out could be the turning point for Cohn’s political career, with speculation (source: Politico) already mounting that CNBC anchor Larry Kudlow could be waiting in the wings to fill his boots.

US economic data has been in-line with consensus, although it’s hardly inspiring with factory orders falling 1.4% and durable goods orders lower by 3.6%. Perhaps this has weighed on the USD, or at least played an additional headwind to concerns around trade tariffs, because we see the USD index -0.6% and lower again all G10 currencies. Emerging markets have performed fairly well under this dynamic and we can see gold also finding buyers here, with US Treasury’s largely unchanged on the day across the yield curve and high yield credit spreads are a touch tighter.

It’s really been the higher beta currencies that have worked, with the AUD and NZD finding the strong buyers in G10. The client focus has naturally been on the AUD, with AUD/USD working well, although we can see the rally into $0.7843 capped at the 20-day moving average and this average has defined the series of lower highs since smashing through on 1 February. So, the bulls really need to see a close through the 20-day MA for a likely push to the upper Bollinger Band at $0.7946, where one would expect a few traders to fade the move. On the downside, it seems there are buyers happy to support into $0.7750, so the bears will want a clean break here to add to shorts.

On a fundamental note, we can look at the rates market and see very little change to pricing structures right through the Aussie 90-day bank bill futures curve. The RBA meeting has been sliced and diced and most economists have honed into the change in the language around growth, with the implicit downgrade from a “bit above 3% over the next couple of years” to “the economy to grow faster in 2018 than 2017”. With the consensus calling Q4 GDP to print 2.5% yoy today (11:30 AEDT), although one could argue there are small downside risks to this call given the recent inputs, a number below 2.5% not only misses the Bank own forecasts, but also plays into the view that this change in language in the statement should be considered material.

The lack of any market reaction to this change in the RBAs language is certainly of interest, while we have actually seen both the relative yield differential between Aussie and US rates markets widen a touch over in favour of AUD appreciation. We can also look at the relative steepening of the Aussie yield curve over US Treasury’s, and see this also favouring AUD appreciation and recall fundamentally-focused FX traders will always be compelled to buy currencies where we see a relatively steeper yield curve.

One should also keep an eye on RBA governor Lowe, who speaks at 08:35 AEDT, although it would be somewhat more advantageous if we actually had the GDP numbers out before he spoke, so Dr Lowe could aggregate these into his focus and mark-to-market this to yesterday’s statement. Also, keep in mind that at 11:00 AEDT the Fed governor Leal Brainard speaks on US monetary policy and this could be a very interesting speech, especially with the Fed fund futures continuing to price in a greater prospect of four hikes in 2018, which should continue to play into my view of a flatter US Treasury yield curve between 2’s and 30’s.

The Asian equity markets will key off the small gains in US markets, where our call for the ASX 200 sits at 5972 (+16 points), while the Hang Seng looks likely to open on a completely flat note. We should see some outperformance in Japan with our Nikkei 225 call at 21,650 (+233 points). The focus from clients will naturally be on the ASX 200 though and it was certainly positive to see the index fully unwind at 5956 before buyers hit the open with a move into 5979 ensuing into 13:00 AEDT before we saw a slow grind lower into the close. Breadth was good, with 81% of stocks higher on the day amid value in-line with the recent average at $6.48 billion. A close today above yesterday’s high should be the target for the bulls.

So an upbeat trade yesterday, but whether the buyers support today's open will be of interest and as things stand the back-drop is somewhat unconvincing with mixed inputs and considerations. Here we find a spot no real trends and standout sectors in the S&P 500, although BHP and CBA ADRs are up 0.5% and 0.3% respectively. On the commodity front spot iron ore -1.2%, while iron ore futures are up 0.9% and oil is up smalls. Gold stocks should work well today with gold currently trading at $1334 and the GDX ETF (gold miners ETF) up 2.1%.

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