Asian markets all look set to open lower. Despite a positive performance for BHP and RIO in the FTSE overnight and investor sentiment returning to the banks, the ASX is still set to open 0.6% lower. Reports that Canada’s wildfires could take up to 1 million barrels a day out of global oil supply helped WTI oil rally 1.7%. US oil producers Continental Resources, Apache Corp., and Concho Resources also reported better than expected earnings after executing tough cost cutting measures. This should help the energy sector have a good day in the region.
Although the major focus in the market today will be Japan’s return after a three-day holiday. Currently, we are calling the Nikkei to open about 0.6% lower from its Monday close. The nascent US dollar rally we have seen in that time has certainly helped to minimise the expected losses in Japanese equities on their return to market. Senior Japanese government officials are likely praying for a massive beat in the US Non-Farm Payrolls this evening to help weaken the yen further.
The Aussie dollar rallied back above US$0.75 yesterday after Australia reported its smallest monthly trade deficit since March 2015, but gave back most of those gains to close only 0.1% higher. 1Q GDP is now set to see a roughly 0.8% addition from net exports. The rally in iron ore’s price and China’s pick up in 1Q stimulus helped with Australia exporting its largest total amount of iron ore since October. The iron ore price managed to hold above US$60 again last night as it gained 0.3%.
Markets at the moment are increasingly looking like they may be ready to roll over. The two decisive factors that could cause an equity market selloff would be a sustained rally in the US dollar and a selloff in the oil price, both of which have usually induced weakness in equities of late. On Wednesday, the S&P 500 VIX volatility index jumped above 16, its highest level since 11 April, possibly indicating that recent lack of market volatility may be coming to an end.
Another concerning element is that automated systematic trading strategies, which just follow general market trends, have begun to close out a lot of their long positions and increasingly start going short. The HFRX Systematic Index began to go short on the S&P 500 on 29 April, which is almost exactly when we started to sell selling coming into the oil price.