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Staying long here and having a bullish bias (regardless of how we feel about the macro backdrop) is the right trade for now. Don’t fight the tape as the bulls are finding the sellers easy to overcome and we have seen good participation and breadth, with Tech wrestling back its dominant leadership spot, backed with gains in healthcare, and financials.
It’s not just US markets, but the FTSE 100 is pushing higher and into the key sell zone of 7600 to 7550, and a break here is not out of the question. In Europe, the EU Stoxx 50 has built a base and a close through 3600 would be a buy signal that also confirms the bulls have the upper hand here to push prices higher. Certainly, the German component of the index is upbeat and we are seeing the DAX breaking to new highs. In Japan, view the Nikkei 225 on a four-hour chart and see the bullish break of the bull flag pattern, which is in effect a continuation pattern and we can expect higher levels here. We are seeing Chinese equity markets, both offshore in Hong Kong and on the mainland, moving higher, likely in anticipation of tonight’s MSCI review on greater representation for Chinese equities in the MSCI Emerging Market basket.
In the FX markets, we have seen the US dollar index pushing 0.4% higher, and for the first time in a while we have seen the USD rise against all G10 currencies. Fairly upbeat comments from New York president Bill Dudley have been noted, with US nominal bond yields rising across the curve (the US 10-year treasury is up 4bp at 2.18%). There has been no movement in the markets pricing of inflation expectations, thus ‘real’ yields have therefore moved higher, although I wouldn’t say this is a positive at all for risk appetite and should be monitored.
USD/JPY has been well traded and looks bullish, with the bulls building on last week’s bullish outside week reversal (with price trading below the prior week’s low and closing above the high). I like this pair higher and perhaps into ¥112.50, although we need a break of the ¥111.71 (2 June high) and ¥111.82 in the short-term. AUD/USD pushed to a high of $0.7629 by 10:00am AEST, but has found sellers ever since and the pair sits below the 76c level here, which is a shame as I, like many speculators, were willing the pair into the $0.7700 to $0.7750 and the markets conviction ‘sell’ zone’.
In commodity markets, the move higher in US ‘real’ (or inflation adjusted) bond yields has been taken very poorly by gold traders, with gold trading 0.8% lower on the session. Although this is not a new theme and gold has been trending lower for a number of days here. It is not a good time to be a gold bull, at least in the short-term anyhow, as the price is not looking happy and I would be expecting this move into $1230 to $1235. Gold stocks should, in theory, fare poorly in Australia today. However, we are actually seeing modest gains in US-listed Barrick and Newmont Mining, so there is hope for those holding gold equity exposure.
Oil is also getting some focus, with price gravitating to the May lows (on the continuous/undated contract). Either way, we have seen price trade above Friday’s high and close below the low, so a bearish reversal is in play, with traders focusing on the weekend news that the US rig count gained for a 22nd consecutive week and Libya continues to increase production.
It’s not all doom though, copper (+1% on the session) and spot iron ore (+1.9%) have seen gains, with the latter pushing up for a fourth consecutive day. These positive moves tend to happen when a US bank turns uber bearish.
The wash-up of all of these moves is that we are likely to see the Aussie index open largely unchanged. SPI futures did find a few sellers after Moody announced the downgrade to the big four Aussie banks credit rating, due to elevated risks in the household sector. It’s a story that of course garners headlines, but scratch around below the surface and see Moody’s rating is now on a similar footing as S&P, who have them on AA-.
Equity investors will likely then take their cues from the credit markets, but the prospect of a strong rise in the Aussie banks corporate bond yields seems very low in my opinion and the idea the banks are going to pay up for funding from this downgrade seems a low risk. If we look at the various banks, American Depository Receipts (ADR) have all closed unchanged on the session and this seems in fitting with SPI futures, which are up a mere three points from 4:10pm AEST and the official ASX 200 cash close.