Trader thoughts - The long and short of it

Global markets seemed to take the Federal Open Market Committee (FOMC) rate hike and Janet Yellens' follow-up commentary as a very surprising dovish overture, with the forward dot plot of member expectations of rate movements as largely underestimating the market's view of inflation and growth in the near future.

Market Data
Source: Bloomberg

Have we now entered a world where the market is going to lead the way, with the first indication being a further rally in equities (evidenced immediately after the FOMC announcement)? The important observation at this point is the all-time high in the S&P 500 and the Dow 30 set the first of March has not been breached. US markets remain in a holding pattern ahead of quadruple witching in the option and futures market tonight.

National Australian bank (NAB) raised investment loan rates to 5.32% when many are calling for a further RBA rate cut. Clearly the bank is not concerned about the borrower’s ability to meet this increase or the rate increase to bring on loan balance sheet pressure. So the growing question for investors now is whether the hard asset valuations will move to a much higher inflation trajectory in the coming 12 to 18 months, with market providers of credit doing the work of the central banks ahead of time.

From an equites market and possibly a hard asset and real-estate standpoint, a further inflationary breakout in valuations to higher levels will bring in the late-comer investors, with the fear of missing out as prices move higher. Business operators with relatively cheap money available would be looking at purchasing the commercial plant and equipment, while current rates appear low compared to expectations of future hard asset valuation and the cost of money increases. This metric recently showed a 6% increase in construction plant and equipment from US based Caterpillar, whose stock price is up 50% over the past 12 months, currently at $93.0.

The equities market will now be competing with hard asset real inflation, as money managers make the decision around the best place to be invested.

The AUD/USD at 0.7675 has settled lower overnight after yesterday’s 40 point move higher and finding resistance again at these high 76 cent levels. At these levels, sellers are happy to enter the market keeping a lid on further gains. It would be hard to see a case for a higher AUD move as the RBA would have taken on the higher move in unemployment numbers just released. Again, this also highlights the different view between the central bank and the market, where Australian ten-year bond yields sit at a 2.8% level held for 2017.   

Today’s equity market is looking to open flat with no leads from the ADRs of BHP and CBA, with BHP showing a lower open at $24.69 from yesterdays close of $25.12. CBA’s ADR points slightly higher at $84.78 from yesterdays close of 84.54. The Australian futures market is offering a lower open, down eight points.

Traders today will be weighing up if the current gains in the materials and financials sector can be held with the potential for short-term profit taking to entering the market. Our resistance level of 5833 in the Aussie 200 remains in place and a balancing act of holding for a breakout the bullish are wanting against the potential for a momentum move back to the 5700 point level. My preference is for a further consolidation at these levels with a push higher on a weakening Australian dollar. 

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