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A month or so ago investors were focused on setting portfolios for possible reflation in the 2H15, but it appears the opposite is true and investors are seeing disinflationary issues. This is a key reason why global equities have a distinct risk-off feel to them and we have seen a rush to risk-free assets.
Commodities therefore are now the key asset class. Of course, the commodity in question will determine knock-on moves in markets with currencies such as NOK, CAD and RUB negatively affected by moves in energy prices. While the AUD will naturally be more affected by moves in iron ore, which has been getting absolutely smashed. The feedback loop into the Chinese equity market is also strong as speculation has mounted around Chinese traders using iron ore as collateral to finance equity buying.
Of course, the AUD also comes in and out of the spotlight as a key proxy to trade China for many, with AUD/JPY seemingly the preferred vehicle – the pair fell some 7% in the last month. Better buying has been seen today after a modestly upbeat Australian employment report, with 7500 jobs created, while the unemployment rate held the 6% level.
With a strong amount of full-time jobs added (24,500) relative to a move away from part-time employment amid a higher participation rate at 64.8%, one could rate the jobs report 7/10, with marks taken away due to a lower revision in the May report.
AUD/JPY has seen a move above the 90 handle, assisted by some very oversold conditions. Specifically, the 9-day RSI was at 15, while price was over three standard deviations from the 20-day moving average. Still, just like AUD/USD, the trend is well defined and rallies should be sold.
The ASX 200 has also been hit fairly hard of late and simply cannot make a new high. There is a pronounced channel in play, with the lower bounds towards 5320. Still, after a move below 5400 in the morning, we have seen a wave of buying support and it genuinely feels that moves into 5350 look like an area investors and traders are happy to accumulate positions unless there is a sharp deterioration in the macro back-drop.
The fact we have seen more bullish price action in China today and strong upside in Dalian iron ore futures is also helping sentiment. However, in all of these markets the trend is firmly down and we will need to see a much rosier backdrop to provide conviction and see investors pay 14x 12 months earnings for the local.
Market internals have shown the selling had become quite stretched as well, and I think this has played into today’s afternoon rally. A lowly 20% of Australian stocks were trading above the medium-term 50-day moving average and there are only a few times in the last five years where this percentage has been as low as this. We have always seen a counter rally.
US futures have pushed higher through Asian trade, in line with good buying in Australia, China and Nikkei futures. The bulls will take this as a sign the technicals in the US are starting to break down. Much focus has been placed on the break of the 200-day moving average on the S&P 500. However, given the sheer length of time that US markets have been trending higher, I think we need to take timeframe out and look at the weekly and even monthly chart.
The three key levels then which I feel really could be the start of a new trend lower would be:
- The 55-week average at 2,039.
- The uptrend drawn from the October 2011 lows, which intersects at 1,982. A weekly close below 1,982 would be fodder for the bears and suggest a change in the mutli-year bull market.
The 12-month moving average at 2,039. If we see the index close out July below this level again, I think the probability of a deep, protracted move lower increases dramatically.