Trader thoughts - the long and short of it

It’s been perhaps one of the quietest trading sessions for some time, and it's incredibly difficult to find any market that has seen or resembled any kind of genuine change on the session.

Market data
Source: Bloomberg

This lack of movement is naturally a function of the limited news flow to feed to the markets, but also a reflection that in FX, fixed income. Subsequently, the impact these markets have on commodities and equities, is all about inflation and market participants have their eye firmly fixed on Friday’s US core CPI report. We have seen some underperformance from the CAD and NZD, and the ‘bird’ seems like it could see some movement depending on the narrative from the RBNZ meeting (Thursday at 7:00am AEST).

Even though around six basis points of policy tightening is priced into the NZ rates markets through to March 2018, no one is expecting any real change in their ‘neutral’ outlook. Given the weak pace (+1.7%) pace of Q2 CPI, we could see some tweaks to the bank's inflation forecasts, but this shouldn’t surprise. Either way, NZD/USD is finding sellers and looks like one of the higher probability ways of playing a potentially stronger USD this week.

EUR/USD is the must-watch pair though and while I highlighted the potential reversal candle seen on the weekly chart yesterday, we haven’t seen the follow through selling needed to confirm the bears (or the USD bulls) have wrestled back some sort of control.  In fact, we can see a very modest gain and a re-test of $1.1800, but again this is a small move and indicative of no real movement in either the German or US fixed income markets, both on a nominal or ‘real’ (or inflation-adjusted basis).

Perhaps one highlight has been comments from St. Louis Fed President James Bullard, who is also one of the more dovish members of the board. Importantly, he is an inflation dove and feels inflation just isn’t going to rise anytime soon and as a consequence current US monetary policy settings are suitable. The market seemingly is in agreement and maintain a case, that at a 40% probability they are sceptical of another hike this year.

Interestingly, Mr. Bullard still supports ‘getting going’ with reducing the Fed’s balance sheet, and doesn’t see much of an impact on asset prices. The view around the impact of balance sheet reduction (or what has been labelled quantitative tightening) is still the subject of much debate and many feel reduced liquidity from the Fed will negatively impact markets. Judging by the fact the US volatility index (or ‘VIX’), and VIX futures sit at multi-year lows suggests traders are not too concerned by this action.

The lack of moves in the EUR/USD has kept the buyers in European equities at bay, with mixed leads out of Europe. US equities are a touch higher, and the focus is on the S&P 500 and for a closing break of the all-time high of 2484, which looks likely in the short-term. The Dow Jones index has closed higher for ten consecutive days now, although only gaining 2.5% in the process. The cheer squad is out willing the market to close up for three more days to match the all-time run of gains seen in January 1987. These days a 0.5 percentage point sell-off in US equities feels like 3% to some, if it ever comes.

They say ‘never short a dull’ market and US markets continue to grind higher; this is about as dull as we will ever see. Onwards and upwards though. Despite markets being at all-time highs, there is no euphoric conditions expressed in the market internals, while earnings have been strong, liquidity is abundant and the message from corporate CEO’s around the world was loud and clear. They are not concerned with Trump, geopolitics or trade restrictions, they see earnings growth as the main game in town and equity investors are aligned with this outlook. One just has to look at Charles Schwab’s quarterly cash balance that showed cash holdings (from clients) sitting at 11.5% of assets, which is at historically low levels. Traders and investors are all in on this market.

SPI futures are pushing up five points and we see the ASX 200 opening at 5779, with the bulls just holding the balance of power after yesterday’s strong upside move led by the financials. It will be interesting to see if the buyers step in then after the open and push the index towards 5800 after 10:30am AEST, and certainly, CBA remains the focal point ahead of tomorrow’s earnings report. On the docket today we get numbers from IFL, who just need a little bit of a push and they should break the $10.10 level and into the highest levels since June 2015. Numbers from JHX, TCL and SCP will also be in the mix.

By way of other leads, US crude closed 0.6% lower at $49.30, while spot iron ore had a good night, closing up 2.8% at $76.15, iron ore futures are still holding the positive trend higher. Copper is trading up 0.8% and this remains in focus ahead of today’s Chinese trade data (no set time), where the market expects another strong increase in both exports and imports. AUD sensitive stocks should not face too many headwinds, with the pair just eyeing a test of $0.7900, where a closing break would be very interesting. Today’s NAB business confidence print (at 11:30am AEST) shouldn’t move the AUD to any great degree.

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