Fixed income driving markets

There’s not a huge amount to inspire this morning, with the S&P 500 drifting modestly lower on light volumes (18% below the 30-day average), although price is still holding above the key 2116 level.

Source: Bloomberg

Small losses have been seen in the discretionary, telco and financial space, despite Bank of America trying it best to keep the space in positive territory after reporting above consensus numbers in both top- and bottom-line earnings, and detailing strong client activity.

US equity futures have done very little in after-hours trade, with numbers from IBM (a 5.8% weighting on Dow futures) failing to drive the broader futures market. IBM is now trading lower in the afterhours, despite reporting its biggest Q3 earnings beat in five years. Netflix, on the other hand, has absolutely blown expectations for domestic net subscribers (Q3 and Q4) out of the park, with price up a lazy 18% in the afterhours.

Staying in the index space, I’d be keeping an eye on the FTSE 100, with price failing last week to break the 2015 highs on a weekly basis and clear divergence seen with the oscillators, suggesting the highs have been seen for now and a pullback could be on the cards. GBP/USD has held firm, although to be fair we haven’t really seen much in the way of volatility in the broader foreign exchange markets, with tight range in AUD/USD ($0.7581 to $0.7633) and USD/JPY (¥103.79 to ¥104.40), with the USD ultimately flat on the session. For the FTSE to push through the 7130 level, we are going to need to see a new leg down in GBP/USD, but while the trend suggests this is a possibility, I think there are risks to the upside given the whole world is short to the hilt. For index traders, I would be very cautious on the FTSE for now.

Commodity markets

The low intra-ranges have also extended into commodity markets, which won’t surprise, although good buying has been seen again in the spot iron ore market, with price gaining 1.9% to $58.30. Iron ore (Dalian) futures are probably the leading light though and they fell 1.9%, so spot iron ore may settle lower later today. Iron ore inventories are building though and threatening to test the year’s highest levels, so one should expect prices to stay in this price range for some time. Oil prices have moved a touch lower with focus on Libya’s and Iran’s output quotas, while the Baker Hughes US rig count also increased a further four rigs to 432 (up 36% since May). I wouldn’t read too much into this overnight news flow, but it does seem oil is in need of a fresh catalyst to push it through the June highs.

Local market moves

Locally, we see the Asian equity markets opening on a flat to slightly negative note, with the Nikkei the likely underperformer due to the pullback sub ¥104 in USD/JPY. The bears were in control of the move yesterday in the ASX 200, so it will be interesting to see if sellers emerge after the unwind of the pre-market auction at 10.10am AEDT. Momentum is favoured to the downside in the Aussie index though and an interesting catalyst today should be seen in the CNY (Chinese yuan) fixing at 12.15pm AEDT and moves in the Australian ten-year government bond as well. Also keep an eye on the Reserve Bank of Australia governor Philip Lowe comments at 8.10am AEDT on a speech titled ‘Inflation and Monetary Policy’.

While the ASX materials and financials sector show little in the way of focus on the Australian bond market, it’s interesting to see the utility, REITS and telco sectors are moving inversely to yield almost tick-for-tick. One suspects if we see buyers in Aussie fixed income today, in-line with moves in the US bond market, then we may see some buying in these yield-sensitive sectors too.

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