Trader thoughts - the long and short of it

The week’s blockbuster event dropped over night: the release of the FOMC’s Monetary Policy Minutes.

Market data
Source: Bloomberg

Fed minutes: Equity markets have staged a tentative turnaround globally this week, but it has all been occurring in the shadows of what could be gleaned from last night’s Fed minutes release. When all is weighed up, the document reaffirmed the Fed’s hawkishness, revealing in-depth discussions ranging from cutting the word “accommodative” from the central bank’s language, to debating the possible need to hike rates above the “neutral rate”. A spike in volatility in financial markets wasn’t forthcoming on the back of the release, most likely because traders have been analysing it in a far different context to the one in which it was written: the meeting precipitated the recent equity market rout, and therefore appreciate circumstances have duly changed.

US markets: However, the detail in last night’s minutes establishes the new environment within which future Fed policy discussion will take place – both for the Fed itself and amongst market participants. Reaction’s to the Fed minutes were relatively dull overnight, seemingly due to a reluctance from traders to jump-the-gun. Benchmark US 10 Year Treasury yields climbed modestly to 3.17% and the USD has taken advantage of a weaker bid on the Pound and Euro to climb slightly. Wall Street has suffered somewhat, erasing earlier gains on earning’s optimism to trade more-or-less flat-to-down for the day. The trade dynamic gives a curious impression for equity indices, a struggle between an apparent binary: a battle of forces, if you will, between optimism regarding solid earnings growth and pessimism regarding the impact of higher global rates.

ASX yesterday: SPI futures have absorbed the lead on Wall Street and translated it (currently) to a 13-point drop at the open for the ASX 200. No cause for alarm naturally, following a day where the Australian share market put-in a broad-based rally, to bust back within the upward trend channel it abandoned during last week’s equity sell-off. The ASX 200 was registering an oversold reading on the RSI leading into yesterday, and a basic breadth reading of 74% yesterday across the index recognized the sell-off was a tad overdone. The growth stock heavy health care sector ran with the lead of US big tech, to top the markets winners; while the only sectoral laggard for the day was the materials space – though that can somewhat be discounted by the unlucky timing of news from BHP regarding that company’s production downgrades.

ASX day ahead: The day ahead will probably be a grind for the ASX 200 given a weak Wall Street lead, but a hold within its trend channel, the bottom of which is around 5890, should be considered a win for the bulls. As always, the core strength in the market was underpinned by a bounce in the banks yesterday, a theme that may well continue today given the boost in global bond yields, but will likely fizzle in the weeks and months ahead. Activity around the Asian region was also settled, with Chinese equities for one catching a small bid on rumours that a further cut to China’s banks reserve-ratio-requirement may be imminent. The general relief-rally provided the fuel for a pop in the MSCI All-Asia Index, pulling that index away from its near-18-month lows.

Aussie employment: The major event risk for Aussie markets today will be domestic employment data, out of which the ABS is forecast to print a steady unemployment rate of 5.3% and an employment change figure of 15.2k. Only the most extreme outcome to this release will shift the dial in financial markets, especially that of interest rate markets, which continue to price in no-move from the RBA until early-2020. A sprinkle of volatility could be seen in the AUD/USD, as that pair hugs support just above 0.7100, but as always, will probably take a stronger lead from activity in the greenback. The spread between US 2-Year Treasuries and 2-Year Australian Government Bonds has narrowed of late, supporting the AUD/USD – however a repricing of interest rate expectations for the US Fed could widen this spread once again, potentially pushing AUD back towards previous lows at 0.7040.

Europe: Taking a glance at other risks entering the end of the week, European markets continue to remain a source of uncertainty. European bureaucrats have gathered for a multi-day summit in Brussels, to discuss the many seemingly intractable issues facing the continent. A Brexit deal this week is becoming a diminishing prospect and is showing up in pricing across the region’s financial markets. Adding to the tension is a slight spike in anxiety relating to the Italian fiscal situation, stoking fears of greater animosity between Europe’s leaders and a general instability the European Union’s political structure. Credit spreads have widened in sovereign bond markets as a result, weighing on the Euro and Pound (which also receded on the back of weaker CPI figures overnight), sapping strength from the major European equity indices consequently.

Oil: Oil markets deserve a mention, given the human-tragedy that is defining much of the volatility found in the price of the black-stuff now. Fundamentals first: US crude Oil inventories surprised to the upside overnight, sending the price of Brent Crude to the $US80.00 per barrel mark. The real developments in all markets this week centre, however, on the alleged murder of journalist Jamal Khashoggi by the Saudi Arabian regime. Putting aside (the far more important) humanitarian implications of this situation, speculation has increased that the Saudi’s will exploit the leverage they possess in the form of their massive oil reserves to suffocate scrutiny on the subject by members of the global community. The details of the matter are far too nuanced to do justice to here, but the approach taken by global leaders to the Saudis and the subsequent Saudi response could prove one of the major determinants of oil price volatility moving forward.

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