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The big consensus trades have been long Europe, Japan and China, while underweight US stocks exposed to a stronger USD. Short energy and euro, AUD and GBP have also worked well and I see no reason why this can’t continue in earnest into Q2.
I suggested short GBP/USD trades on 20 March at $1.4950 to $1.4983 and this trade has worked quite well and momentum focused oscillators suggest the pair gravitates towards the $1.4700 area. EUR/USD is also vulnerable and could see the pair head lower into this Friday’s payrolls report, although the risk is we get a weak report which causes another rethink of the long USD consensus trade.
ASX 200 closing out a strong quarter
Asia is closing the quarter on a firmer note, although this is yet to really filter through to stronger opening calls for Europe and the stellar move in Australia is largely due to catch-up after a strong underperformance yesterday. Still, a 9.5% rally in the ASX 200 in the quarter (in AUD’s) is about as good as you will see with the discretionary, financials and utilities all putting on over 13%. Energy predicably has gone backwards losing around 6%.
The falls in the AUD have helped with AUD/USD falling 6.5% on the quarter, although the rally in the ASX 200 if we price in USDs is a more modest 2.5%. With the interbank market now pricing a 68.4% chance of an April cut and the swaps market 74%, the AUD is likely to find upside hard to come by and rallies should be sold. Most in the market are asking why the Reserve Bank should wait and there is genuine merit in that view, especially with its key export in freefall. So, we could be easily staring at a cash rate of 2% next week and naturally long Aussie bonds continue to work well, with short-dated yields now at record lows.
As long as commodities stay low and US bond yields demand an ever increasing premium to Aussie bonds then AUD/USD will head towards $0.7000 this year.
China is enjoying yet another rally, with property stocks pushing higher again, and marking a move of over 100% since October. This market can’t be stopped, it is red hot right now and whether traders play the ETF market (I like the FXI – iShare large cap ETF), or through futures markets like the A50 cash, Hang Seng or H-shares (IG also offer the CSI 300) then it really doesn’t matter as the bulls are dominating across the board.
Sentiment on fire in China
This is a sentiment driven market and when you see a record 1.14 million new A-share accounts last week you know that rampant speculation is underway. Unlike many developed markets, this level of herd mentality can be hugely powerful and recall in 1991 the Shanghai Composite rallied for 65 straight sessions. Moves to support property are certainly positive and should stabilise growth so that we see the ‘around 7%’ target hold true. The fact authorities have to cut down payment for second and first home buyers is positive given real estates share of Chinese GDP, but it’s also concerning that they have to do this in the first place.
The bigger market mover for me though is the measures the regulatory body (CSRC) are putting into practice to move money from one market to another. The regulators are concerned about the 50% increase in valuation discrepancy between the A-share and H-shares markets since July and are keen to see this premium narrow. The A-share market is dominated by domestic players, although foreign firms can participate if they qualify and we’ve seen the actual quota these firms can trade increase of late. The valuation on this market has pushed out to 15 times forward earnings, while Chinese companies trading in Hong Kong (the H-shares) are trading on 8.5 times earnings (and a 3.5% yield).
The fact authorities have removed the need for domestic players to qualify to trade the H-shares market should see funds look at closing this valuation gap and in theory should see portfolio reallocation. Long positions in the FXI ETF and short the ASHR (Deutsche A- Share ETF) would make sense given the potential for portfolio rebalancing. However, both are in storming uptrends at the moment and it’s easier just to be long under current conditions.
Perhaps tomorrow’s manufacturing PMI (49.7 expected) will install some much need reality, as Chinese equities don’t reflect economics and there are a number of massive headwinds for the Chinese economy over the coming 12 months. But then again, find a market that does reflect economics at present.