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There seems a strange, albeit decidedly risk-off mood in the capital markets and with this in mind, here are a few key talking points that are widely in focus.
- Bearish moves in copper, energy and iron ore continue to dominate, with further substantial moves being seen today. The recent falls have been seen as a net positive for the consumer and the global economy, although this is not being reflected in market pricing at all. In fact, we’ve actually seen negative revisions from economists to global growth of late.
- Gold and silver have also been sold off aggressively today. Gold had been falling on Friday and into the Swiss ‘save our gold’ referendum. While many had suggested it was always going to be a ‘no’ vote, it seems a few traders had bought gold futures to hedge out the risk of a ‘yes’ vote. Spot gold is now eyeing the November 7 low of $1131 and given the momentum, a break of this level looks on the cards.
- The US ten-year treasury at 2.16% tells a clear story. In fact, over 60% of global bonds currently outstanding have yields under 1%. Aggressive moves in commodities have been the talking point of late, but the real story of 2014 has been the moves in fixed income. Yields on the ten-year were supposed to be at 3.5% after the Federal Reserve closed off its Quantitative Easing program.
- The AUD seems to have rediscovered its status as the clear proxy of global growth and is looking really ugly on multiple timeframes. EUR/AUD has started to creep high and has broken out to the highest level since June. AUD/CAD is also worth looking at and in my view has strong downside potential in 2015. Surely the Reserve Bank of Australia has to show increased concern in tomorrow’s meeting.
- Chinese official PMI data for November, shows manufacturing is at its lowest level since March at 50.5. The sub-components were weak, with the new orders component index pulling back to 50.9. The HSBC print came in at 50.0 and worryingly close to contraction again. If lenders had rallied strongly last week on the idea of a reserve ratio requirement (RRR) cut in the coming weeks, then you’d imagine this broad easing measure is even closer now. You may recall the China Securities Journal suggested on November 24 that the recent rate cut would not be the start of economy-wide stimulus, so a RRR is not a certainty at all. The China CSI 300 index is up 1.7%, so once again bad news is good news and if you haven’t looked at Chinese equities (such as the CSI 300 or A50 index) then you may wish to take a closer look as the charts look very bullish.
- The ASX 200 has smashed through the November lows and looks undeniably bearish. The massive underperformance against other developed markets through November in USD terms has been noted. The energy sector has lost a further 6.1% today and has dropped 27% since September 2.
- S&P futures have pulled back a touch. Perhaps this is in sympathy of the further falls in commodities (iron ore futures are also down 1.7% today); although the poor Chinese data and 11% drop in Black Friday weekend sales may also be impacting sentiment.
- EUR/USD remains a sell on rallies candidate, however European Central Bank member, Sabine Lautenschlaeger’s weekend commentary has poured some cold water on the idea of a near-term announcement on government bond buying. She would support QE on a deflationary threat, so it seems the most like path on ECB sovereign bond buying will be buying uncovered and corporate bonds in the coming months to see if inflation expectations pick up above 2%. If not - and as ECB member Mr Constancio suggested of late - there would be benefits in full blown QE.
- EUR/USD has now fallen for five months, can we see a sixth? According to Predictive Markets the sequence of six monthly falls has not happened since April 2000.
- The German DAX has struggled once again at the 10,000 mark. Will momentum start to roll over from here? The index is overbought and judging by the €71.2 billion of inflows into German funds between January to September (the highest since 2000) it seems fairly well owned as well. I would be a buyer of an upside break.
Bringing this all back to the European open, we should see sellers getting the upper hand with good selling on open. Naturally defensive names will outperform, while government bonds should continue to firm. Equities will once again react to moves in commodity prices, although there is a reasonable amount of data for traders to wade through as well, with Eurozone, US and UK manufacturing in play. We also get speeches from ECB member Costa, while in the US, Fed members Dudley and Fisher speak.