Trader thoughts - the long and short of it

In equity land, the story of the night has been the FTSE 100 breaking out to new all-time highs, although the 0.4% gain was hardly spectacular and even less so when one thinks the total value traded was 41% below the 30-day average.

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Source: Bloomberg

US equities have barely moved across the major indices, with volumes non-existent. Even if we drill into the multiple sectors there have been limited ranges, with utilities having the strongest upside move with a 0.2% gain, while energy succumbed to modest profit-taking with a loss of 0.4%. So a 60 basis point variance between the various sectors tells you all you need to know and the S&P 500, Dow and NASDAQ 100 look to be closing out 2017 with gains of 19.7%, 25.3% and 28.9% respectively and one suspects these percentages won't deviate too greatly in the two remaining trading sessions.

Aussie SPI futures caught a bid just as US equity markets opened, gaining 20-odd points into 6033, but the move has been faded somewhat and at the time of writing the futures index are up just one point. Our ASX 200 opening call sits at 6060, so a modestly weaker open is expected, but this reflects the 11.6 points coming out of the market with 21 stocks going ex-dividend on open, so there is a headwind from this factor. Still, it’s hard to get too carried away with proceedings today, and participation will be extremely poor and an extension of what we saw yesterday with a pathetic, yet not unexpected $2.78 billion of value traded through the market, which is just over half the value we’d usually trade over an average of a 30-day period. So slight tweaks to portfolios, but that’s about it.

We can turn to the US markets and look at the lead from various Aussie equity ADR’s (American Depository Receipt) and see the flat lead from SPI futures reflected here too, with BHP, CBA and NCM all basically unchanged in their respective ADR’s. Materials and energy provided the support for the ASX 200 yesterday, putting in 9.16 index points, but the catalysts are lacking here today, with copper down very modestly and looking ominously like it won’t make it 15 consecutive days of gains.

Keep an eye on the monthly chart of copper, where we can see a pronounced bullish outside month reversal in play, where we need to see a monthly close above $3.19 p/lb to complete. One suspects there are risks in January given price is quite extended here and pricing in a lot of good news, notably with China’s biggest copper producer ordered to cut production, so the bulls have to push for a move through $3.30 p/lb or the risk of a reasonable pullback is elevated here. US crude is lower by 0.5%, while spot iron ore fell 4.5%, although iron ore futures, which are lower by 0.3%, are probably the better lead.

An unexciting day may be in store, but it has to be said that the monthly chart of the ASX 200 looks outright bullish and highlights a solid platform to progress into 2018. This strong underlying trend paints a compelling picture, although the valuation argument is one to debate. Here we see the market expecting 12-month (blended) earnings-per-share (EPS) of $3.75 (for the ASX 200 on aggregate), which is the strongest earnings estimate seen since 2014, but the question for 2018 remains whether this is as good as it gets and where we get earnings upgrades to boost EPS, which in turn could lower the index forward price-to-earnings ratio from its current level of 16.18x (12-month blended). Recall, in the last decade the consensus forward P/E multiple has rarely been higher and if we use a 16.5x multiple, which is punchy, we get 6187 as a potential target. So in the absence of any earnings re-ratings, if we apply a multi-year high P/E multiple, then we have around 2% upside for the year.

Another area of interest though has been in FX markets where the USD has been seen modest downside versus all G10 currencies. The notable moves have been seen against the SEK and AUD, but it’s the AUD that interests most here, with AUD/USD hitting a session high of $0.7779. The bulls have been enthused, not just be the near multi-year lows in the JP Morgan FX volatility index, which has helped the hunt for carry, but we can also see yield differentials working in favour of AUD appreciation. Here, the yield premium demanded to hold Aussie 10-year debt over US Treasuries has widened by 4bp on the day to 27bp and recall this yield spread got as low as 8bp in late November, so moves here have helped AUD upside.

Again, we can put AUD/USD on a monthly timeframe (for the bigger picture) and see a bullish reversal potentially in play, with price trading below the November low and needing a close above the high of $0.7730 to complete. The daily chart looks quite constructive here too and there is scope for a move into $0.7810/20 in the short-term.

Keep in mind we have seen a fairly uninspiring US December consumer confidence report, with the index coming in below consensus at 122.1. One can also look at the Citigroup US economic index, which effectively measures US data relative to the consensus expectations. This index currently sits up at the highest levels since 2011 and rarely has it been higher, so in essence, it shows that US assets have been partially buoyed by positive data shocks. Again, we ask the question is this as good as it gets? Personally, I don’t see a collapse in US economics and the data flow should continue to be upbeat, but in terms of positive shocks to support asset prices then it seems we may be hitting a turning point.

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