Trader thoughts - The long and short of it

There are a number of interesting talking points on the floors this morning, but perhaps the most prominent has centred on the moves in the AUD, which has been taken to the cleaners overnight, falling 1.4%. Perhaps my description is dramatic, but there really isn’t one smoking gun behind the falls and there are seemingly a number of factors at play.

Market data
Source: Bloomberg

Firstly, we can see price really selling off from 10.00am AEST yesterday, which makes me believe (without any proof) that this could be equity related, with an international money manager perhaps unwinding a sizeable position in an Aussie bank - one just has to look at the correlation between AUD/USD and SPI futures. We can also see iron ore, steel and coking coal futures were sold 6.6%, 2.7% and 3.2% respectively overnight and there is certainly a more aggressive view that China has seen peak growth, with producer price inflation to head lower from here too.

We must also take into consideration that by and large we have seen a move into the USD more broadly. We have seen yields across the US fixed income curve moving higher by around four to five basis points, with the curve (two and ten-year Treasuries) ultimately remaining unchanged at 101 basis points. The ‘real’ (or inflation adjusted) ten-year Treasury yield has moved higher by five basis points overnight and it’s no surprise then that gold has been sold off fairly heavily (-1.3%). It’s interesting that US-listed gold stocks have held in quite well despite the strong move in gold.

US data flow has been more upbeat, with the ADP private payrolls printing 177,000 jobs and giving us some belief that Friday’s non-farm payrolls will be close to current consensus of 190,000. The services ISM index showed growth in the service space growing at a faster clip at 57.5, with solid increases in new orders and export orders. The employment sub-component of the services index printed 51.4 and again supports the notion that we should see a strong rebound in jobs after the worrying 98,000 jobs print last month.
The FOMC meeting provided few surprises and that’s how the Federal Reserve like things.

They are part of the reasoning why the world has a love affair with selling volatility. One could even say the statement was somewhat hawkish at the margin, as they clearly believe the weakness in Q1 data has been ‘transitory’ and most economists would see that as the correct view, with Q2 GDP likely to print above 3%, at this stage. Perhaps a greater attention to any future reduction of their $4.5 trillion balance sheet was expected, but this is something we will want to explore at the June meeting. In terms of the June meeting, the market has raised its implied probability closer to 70%, with the fed fund future pricing in 17 basis points of tightening through June. At this stage 70% seems too low on the news we know, especially with financial conditions still so accommodative.

There hasn’t really been any reaction either to the live debate between Marine Le Pen and Emmanuel Macron. There has been little conviction behind the flows in our out-of-hours CAC 40 index either and if the French index were to open now, then it would be pushing 5300.
EUR/USD has largely been influenced by the US data, although we have seen EUR/USD one-week implied volatility fall and at 10% is just simply not expressing a view that we are going to see Le Pen take the presidency on Monday, which of course would promote a near Armageddon scenario.

Pricing would suggest that while the debate was an absolute slug fest, it probably lacked the depth and persuasion to move the undecided vote. One suspects if you were voting for Macron before the debate you heard little in the rhetoric to change that. The view from one (French speaking) trader was that both candidates had their strengths and clear weakness’s, and assessed the battle as a fairly even split and no clear winner.

Turning to the Asian market open and we see fairly benign conditions, with our call from the ASX 200 sitting at 5893. Yesterday’s 1% fall was ugly, especially given the value of the sell-off totalled $7.381 billion, which is some 23% above the 12 month average. The bulls will take the fact that breadth wasn’t terrible, with only 57% of stocks falling on the day. With that in mind todays open will tell us a lot about sentiment and specifically one question whether we see traders look to buy into the market after the unwind. It may have been that we saw a fund moving out of a sizeable position in the banks, and again, I have no proof and the local investment banks would need to detail this as they would have seen the flow.

So the banks will be key in whether the ASX 200 finds buyers on open or gravitate lower again and that could be dictated by NAB’s 1H 17 numbers, which are released shortly. The materials sector will probably attract increased trading capital and while spot iron ore closed largely unchanged, as mentioned, bulk commodity futures have been sold aggressive. If we look at Vale’s US listing (as a proxy) it closed -5.2%. BHP’s American Depository Receipt suggest BHP opens -0.8%, helped to a degree by little move in US crude.

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