S&P falls from record all-time highs

There is little to report from overnight trade; the S&P fell from record all-time highs, which is not surprising considering the market is trading at 18.3 times last reported earnings. 

US
Source: Bloomberg

With this in mind, I will reiterate several key points about the S&P.

The S&P futures still have not experienced a 5% or more pull-back since November last year. The market has not seen four consecutive negative trading days in 2014 and the market has not had a 10% correction in three years. All this suggests the momentum in the US index is not turning anytime soon.

The market’s reaction to China’s trade balance also raised some interest. The record surplus of US$49.83 billion was supported by exports jumping by 9.4%, but also the further collapse of imports. This will be a major concern for the likes of Australia, Brazil, South Africa and south-east Asia, which all rely on China as the major trading partner. It also saw the oil price drop below US$100 a  barrel as the conclusion drawn from the falling imports in China is that oil supplies are outpacing demand .

However, the more interesting place to trade right now is around the Scottish independence vote. There is a clear comparison to be drawn between the Scottish referendum and the Quebec referendum in 1995. For those trading in sterling, there is already very similar trading patterns emerging.

In the past nine days GPD/USD has shed 3%; a similar amount was taken off the CAD in the lead up to the Quebec vote.  Like what is happening in the polls in Scotland, the Quebec polls went down to the wire and the CAD hit the bottom around one week before the vote, as the polls held the line for the six days leading up to the vote.

There are still two YouGov polls to be released before the September 18 vote; one will be released this Sunday and one a day before. Expect the GBP to follow similar trading patterns to the CAD if the yes versus no ratio holds at current levels and the no vote prevails  (which most binary wagers suggest it will). Post the vote, the CAD rallied over 2%, and looking at GBP/USD, it is finding some support at $1.611 and may signal the lower end of the trade.

What is also interesting are equities that have Scottish exposure. The Royal Bank of Scotland has been waning over the past few days and for good reason. RBS’ assets would outweigh the Scottish economy by almost two to one, and would therefore not be able to be bailed out if it experienced a similar event to the GFC. Standard Life, also domiciled in Scotland, is seeing funds flowing from its coffers along with Barr, Weir group and Aberdeen Asset Management.

We would expect that anything with Scottish exposure will take a hit leading into the vote, and this brings NAB into play. Clydesdale Bank has large exposure to Scotland and a yes vote would ramp up provisions of its bad and doubtful debts, which is something to be aware of.     

Ahead of the Australian open

We’re currently calling the ASX 200 up four points to 5581. With minimal data due today and mixed lead from the US trade, direction will be hard to judge. However, today would be the fifth downward trading day if it eventuates, which will be the second time this year.

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