Traders look for upside in developed markets

Developed market equities have taken a breather over the last 24 hours or so, but from a pure macro perspective, emerging markets will be the space to watch this week.

China
Source: Bloomberg

Elections in Indonesia and India’s first budget will be the big highlights here, while central bank meetings in Malaysia and South Korea will also be in focus, with the former largely expected to hike rates. China should also unveil solid trade numbers, with exports expected to increase 10.4% and imports gaining 6%, while social financing numbers and foreign exchange reserves should also stay elevated.

China on target for 7.5% growth this year

China is a source of inspiration right now to the world and clearly this is reflected in the strong outperformance in resource names in developed markets of late. Copper has naturally been a beneficiary and despite some negative commentary at the start of the year traders are expecting strong demand  going forward, with world usage growth of around 3.6%. This will be led, as one would expect, by China; whose copper usage should grow around 6%.

Iron ore is also at a key juncture, though there is little chance we see similar price action that we saw in October 2012, when prices traded below $90 per tonne and subsequently rallied 82% over the next 80 days or so. This time around it’s hard to see a 20% decline in stock piles like we saw in 2012 contribute to the strength. So while price action has stabilised, a period of sideways trade in Australia’s key commodity looks likely.

China is looking more and more like it will grow around 7.5% this year, and for those who mistrust some of the official data, it’s worth looking at Citigroup’s ‘Li Keqiang index’, which incorporates loan growth, railway cargo and electricity consumption. This index has risen from 5.45% in February to now stand at 7.2%. So as long as China is growing at or around target and developed market central banks continue to support, then sentiment should stay positive and volatility low.

The Federal Reserve still seem pivotal to movement in all asset classes right now, with other central banks happy to massage policy to counter any effects that may negatively affect their own economy. In US trade today we hear from Fed members Lacker (a 2015 voter who holds a hawkish stance on monetary policy) and Kocherlakota (a current voter and dove) who speak in the latter stages of US trade, so their views on monetary policy should shape the near-term path of the USD and US treasuries. However its fairly clear wage inflation is key and while small business compensation is rising we need to see this being reflected in total employee compensation (ECI).

A rise in real wages will be the key for a more hard-lined stance from the Fed’s dovish contingent around a rise in US rates. However, for now I feel being long risk assets, such as the S&P 500 and yield stocks, could still be a good strategy.

Developed market bonds could find buyers on sell-offs and traders could continue holding a positive bias on the AUD, NZD, CAD (despite an awful IVEY manufacturing report yesterday) and sterling. Naturally the yield on sterling is low, but the prospect of a November rate hike from the BoE will keep sterling from falling too far. It’s worth pointing out that speculative traders are holding the biggest net long position since November 2007 at 56,412 contracts, so this may be a headwind for sterling from here.

Offshore funds buy the dip in AUD/USD

It’s really interesting to see price action in AUD/USD in the last couple of days and its clear hedge funds and other leveraged have not bought into RBA governor Glenn Stevens’ comments last week. One can look at the swaps market which is pricing in just six basis points of cuts over the coming 12 months, which is at similar levels to the day before the RBA governor’s speech last week. Price action mirrors the moves in the swaps market, with a move to the former January uptrend being tested in trade today, helped by a strong NAB business confidence.

Offshore funds seem happy to buy AUD as long as Glenn Stevens’ comments are not fully reflected in the official statement. It’s also worth highlighting that Japanese Ministry of Finance (MoF) fund flow data for May that showed Japanese investors bought A$3.3 billion of AUD assets in May, the most since May 2012, with further anecdotal evidence Australia’s yield advantage (while diminishing) is still attractive.

European markets could find modest buying on open, with traders eyeing trade reports from Germany and France, while the UK produce its industrial production numbers (expecting a 0.3% increase on the month). On the US data front we get NFIB small business optimism and JOLTS job openings – a data point we know the Fed look at.

Traders will also be looking out for the May consumer credit print, which is expected to pull back to $20 billion, from $26 billion in April. Much of the credit expansion this year has come from student loans and credit for autos, so it would be positive to see increased use of credit cards. And finally, Alcoa kicks off Q2 earnings season in what could be the next catalyst for developed market equities to move progressively higher over the next month or so.

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.