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These markets are absolutely knackered and a pullback of 2-3% would be extremely healthy. Whether it comes is another thing though!
We had every opportunity yesterday to roll over and head lower on open; I had seen elevated risks that this would play out. However, after opening and trading into 5885 (in the ASX 200), we saw the bulls coming out to play and buying into material stocks, which ultimately put in five points into the index by the close of play.
The Nikkei 225 put on any even more impressive display, with the market opening on its low, closing on its highs and gaining for a 16th straight day. It seems that the bears just have absolutely no say and investors do not want to take profits, despite the recent run, and this tells you all you need to know about sentiment, implied volatility and portfolio risk management.
Today’s leads are a great overview of everything we have seen in recent times though. Solid economic data (US flash PMI’s easily beat expectations), strong earnings, predominantly from Caterpillar, McDonalds and 3M, further speculation around Trump’s pick for the Fed chair role and a decent level of noise around US tax reform.
Certainly, most of the news flow seems to have focused on Trump’s ailing relationship with Senator Corker, but there is also focus on the broader Republican Party struggling to agree consensus view on what has been labelled the “Big 4” in tax reform – rates, brackets, deductions and deficits.
The market is still eyeing Thursday’s House vote on the Senate’s Budget Resolution, where some feel this could set up an important vote on tax reform before Thanksgiving. One to watch.
US fixed income has been interesting to watch and trade as yields have risen across the curve. However, it’s the US 10-year treasury which has so many talking given this benchmark has pushed up three basis points (bp) and is now sitting at 2.41% - the highest close since May. This looks like such a key technical level and if yields continue to move higher here, especially when the 10-year ‘real’ (or inflation-adjusted) yields now sits at the highest level since 17 July, this has to be seen as a USD positive.
However, the USD has not found any major traction here, with traders really reluctant to be too exposed to EUR moves ahead of Thursdays ECB meet. As mentioned Trump’s pick on the future Fed chair has been in focus and while it is just the opinion of Senator Scott, when Trump asked the Senate to signal who they supported as Fed chair (by raising hands), the result was seemingly in favour of John Taylor. This has given further wind to the selling in bond markets and helped push the likes of USD/JPY a touch higher.
Aussie SPI futures have closed nine points higher, following moves in the S&P 500 and we are calling the ASX 200 to open at 5918. If we look into the sector moves in the S&P 500 (by way of a guide), we can see US financials continue to push higher (the XLF ETF is a trend followers dream here), energy and material names have seen modest gains of 0.3% and 0.6% respectively. Industrials have put on 0.5%, so the sectors we need to work have done so.
I am surprised by energy though, given we have seen Brent and US crude close up 1.7% and 1.1% respectively on talk that OPEC may extend its quota program until the end of 2018, while starting the discussion of how to strategically taper this program at some stage in the future.
There will be some prepositioning into ANZ ahead of their earnings numbers tomorrow (due 8:00am AEDT), so it will be interesting to watch price action in this name. BHP should open around 0.2% higher, with some of the pure plays seeing more pronounced gains if we judge the 3% gain in Vale’s US-listing. Spot iron ore closed +0.7%, copper +0.4%, while in the Dalian futures exchange we can see iron ore, steel and coking coal futures having a mixed performance closing -0.1%, +0.1% and -0.9% respectively.
The focus locally though has to be on the Aussie Q3 CPI at 11:30am AEDT, which will be a rates and AUD play and unlikely to promote a move in the ASX 200. Traders are giving this some breathing room though and the options market is priced for no more than a 40-point move today, so they don’t see this as a volatility event. We know the speculative market is still long AUD’s, so this may play into the trade, but the moves we have seen in AUD/USD through 78c obviously suggest this elevate net position is being reduced. One suspects this has been largely helped by the fact that the yield premium to hold Aussie bond over US treasury’s has declined quite sharply of late, notably the yield differential between the Aussie 10-year treasury over the US 10-year treasury has come in from 61bp on 5 September to now sit at 36bp.
A quarterly ‘trimmed mean’ inflation print of 0.3% (consensus of 0.5%) or below then should take this yield spread even lower and cause the AUD/USD to test the 6 October lows of $0.7733. However, a move above 0.7% should support the pair and cause a 20-30 pips rally or so. Recall, the market is pricing a 42% chance of a hike by June, with the first full hike priced by November 2018. So while there are a number of ‘one-off’ factors in the inflation print, which is why economists and the Reserve Bank prefer to use the trimmed mean print, we need to work out how this print affects the RBA’s thinking
AUD/NZD is also on the radar, with the pair at the highest levels since April 2016, although this is more about NZD weakness.