Trader thoughts - the long and short of it

The bulls seem to have taken back some control here and while we saw some positive flow and traders veering towards risk assets in Asia yesterday, we expect another positive session ahead and traders adding to risk.

Market data
Source: Bloomberg

The Chinese equity markets look interesting as a trade and the message on the ground in China is becoming somewhat more optimistic. There is a certain confidence from authorities that they have curbed the level of outflows from the economy. One just has to look at the decline in USD/CNH (Chinese yuan) from late June to see a visual representation of this trade and while the USD has been weak on a broad basis, there have been good flows into CNH and we even heard commentary from a PboC advisor yesterday that the pair may hit 6.500. Which, in effect, would be the strongest levels relative to the USD since May 2016. Stay long China H-shares, A-50 cash or CSI 300 and add to exposures on a breakout of the recent highs.

Another way to play this is through the EEM ETF (iShares Emerging Markets ETF), which has closed up 1.2% and is extremely close to breaking above the 8 August high of $44.58. Happy to add exposures on a daily close through this high on a momentum view and the concept of buying high and selling higher.

Mining stocks are having their time in the sun and while BHP closed up 2.1% in London, we can see a strong performance from mining sector in US trade. Again, we can look at ETF’s here and see the XME ETF (SPDR S&P metals and mining) gaining a sizeable 2% and this bodes well for the Aussie equity open.

The S&P 500 by way of leads is the backbone of the feel good factor, with strong gains in the NASDAQ (+1.4%) and Russell 2000 (+1.1%). The S&P 500 was looking vulnerable on the downside yesterday, but has held the 100-day moving average (currently 2419). We have pushed back above last Friday’s low of 2432.

A break above 2475 (the 17 August high) and we start talking new all-time highs again in the world’s institutional equity benchmark. It seems the bulls have latched onto an article in Politico around tax reform in the US. The cynics among us would still suggest the details of the article are too optimistic, but the headline ‘Trump’s team is said to make strides on tax reform plan’ has seemingly thrown some lift back into the market. With the main players apparently holding a consensus on a plan, then perhaps, just perhaps, the Trump administration could deliver on one of its objectives. ‘Buy the dip’ is apparently not dead.

Aside from solid gains in equities, not just in the US, but in Europe too (the German DAX closed up 1.4%), we have seen a tightening of high yield credit spreads. However, US treasuries have seen modest selling across the curve (the US 10-year treasury sits +4 basis points at 2.21%). The 2’-10’s treasury yield curve has steepened a touch, and the moves in fixed income have underpinned a 0.5% gain in the USD index.

USD/JPY has built on the gains we saw yesterday and clearly the market has defended the ¥108.82 low I spoke about yesterday and that seems important. AUD/USD traded as high as $0.7951 through Asia trade yesterday, but has found sellers easier to come by and is testing Friday’s low of $0.7910. A close through here and the pair prints a bearish key day reversal and opens up a possibility of a move lower. Naturally in this environment, we have seen implied volatility crushed and we are staring at the US Volatility Index (‘VIX’) trading down to 11.5%.

Following moves in the S&P 500 futures, SPI futures were trading at 5712 when the ASX 200 officially closed at 4:10pm AEST. Given they reside at 5741 now, we are calling the ASX 200 to open at 5775, a gain of 25 points. SPI futures will be interesting today, as a further follow-through buying from local traders and we start to focus on the 17 August highs of 5772. Although I would be fading moves here as a short-term trade, with this also taking the ASX 200 back into the top end of the 14-week trading range. Certainly one to watch, but with the Nikkei 225 likely to feed off USD/JPY moves and open around 19,483 (+100p) and China in bullish mode there are reasons for traders to buy today’s ASX 200 open.

It’s another busy day on the earnings front with names like CCL, IAG, QUB, SGR, SRX, TRS, VOC and WOW reporting numbers. These names are unlikely to be a huge influence on the broader index, but I’d expect some interest from equity focused clients here.

As mentioned, it’s the materials space that will likely get the bulk of the attention, but while US equity has provided a strong lead, keep in mind spot iron ore closed -0.4%, while Dalian iron ore futures are down around 4%. We should see some buying in energy, with US crude gaining 0.6% on the session. Copper is up a touch at 0.2%, while gold is down 0.5% on the day and has held in well given the moves in USD/JPY.

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