Trader thoughts - the long and short of it

Risk trends across the global financial spectrum stabilised this past session, but it didn’t pace much in the way of significant recovery.

Market data
Source: Bloomberg

This is somewhat surprising considering the US government seems to have bought reprieve from the next debt crising bearing down on the country. Yet, despite the encouraging news, US equity indexes showed little progress beyond the intial gap higher won through the Wednesday open. Meanwhile, the onus of North Korea tension and a mixed backdrop of global monetary policy – normalisation that exposes increased risk taking versus a scramble back to the extreme end of the curve to suggest a troubled future – are still rolling around in investors’ minds.

Wall Street: Most of the action for US equities was seen on the open – meaning it was more a reflection of the bounce in sentiment registered in European hours, rather than significant course correction into the New York hours. Through the end of the session, the S&P 500 closed up 0.4% (2,467), the Dow 0.25% (21,808) and Nasdaq 0.3% (6,393).

This performance was generally in line with the outcome for Euro Stoxx 50 Index. For volume, the day’s turn over was still elevated from the previous three week’s average; supporting the seasonal shift that is often attached to the August to September transition. Furthermore, the VIX remains at 11.7. A higher resting rate for implied volatility likely speaks more to market activity and opportunity for traders, than fear and risk to investors. This popular volatility measure is still well below the past three-year average of 15.

US Debt Ceiling Relief but North Korea Risks Linger: The most surprising news through this past US session was President Donald Trump’s unexpected support of the Democratic Party’s proposal to fund the government and increase the country’s debt limit three months.

This effectively disarms the impending threat of a third debt ceiling standoff in the US in six years. Back in 2011 and 2013, the brinkmanship drew the country right to the edge of a financial cliff that threatened to throw global markets into a crisis, as the world’s preferred ‘risk free’ assets (Treasuries) were cast deep in shadow. The first standoff earned the US a cut to its sovereign credit rating from Standard & Poor’s, which maintains a serious blemish to the country’s pristine safe haven status. It was remarkable that there was not more of a rebound in risk assets following this news. Perhaps there are concerns that GOP republicans would not support the initiative or maybe the concern truly rests with the unresolved North Korea escalations. Yet, it is just as likely that we are seeing that complacency – which has been the primary feature of the financial landscape – can curb risk taking as readily as fear at this stage.

Surprise Bank of Canada Hike: The Bank of Canada surprised the markets on Wednesday when Governor Poloz and crew announced another 25 basis point hike to the benchmark rate that brings the Loonie’s yield to a competitive 1.00%. This was not completely unexpected as the group moved at its meeting in July and the market afforded a 44% probability of a subsequent move according to overnight swaps.

That said, the audacious pace compared to a far more constrained Fed and other global peers who are not comfortable with even discussing normalisation makes the Canadian Dollar look even more stately as a carry currency. The response was remarkable with USD/CAD dropping over 2% immediately following the news. The currency posted gains against all of its major counterparts, but some of the drive eased back through the remainder of the session. At this point, the Loonie is the only traditional, liquid carry currency that is raising rates and it’+s now moving at a faster pace than the Fed. The premium this affords the currency is significant, but how much reach this affords depends on how aggressively the market is reaching for yield.

ECB Moves to Deflate Expectations: With the Bank of Canada and Reserve Bank of Australia policy decisions setting the extremes for how market moving such events can be (the former extremely, the latter not at all), the European Central Bank seems to be interested in following the RBA’s lead. The Eurozone policy authority once again used its unofficial channels to guide market expectations. Last week, unnamed officials ‘familiar’ with the situation suggested more voting members were concerned with the climb from the Euro.

This past session, a similiarly described source let leak to Bloomberg that a plan to reduce its balance sheet would not be reached before October. It’s highly unlikely that these are rogue leaks from staff. Rather, this is almost certainly an effort of forward guidance to help shape market reactions without having to put the bank’s credibility on the line, if it fails in the endeavor. Watch for the ECB decision later today as this is arguably the developed world’s most dovish effort.

Australia Dollar: While the Aussie Dollar registered some significant movement against the New Zealand Dollar (gains) and Canadian Dollar (losses), this progress was almost exclusively the reflection of more motivated counterparts. From the most liquid pairings – AUD/USD, EUR/AUD and GBP/AUD – there was virtually no change on the day.  The robust 0.8% Q2 GDP reading from yesterday’s session that was also slightly cooler than economists’ consensus that seemed to hold little lasting influence.

ASX: The ASX 200 due to have a strong open Thursday, with the general stability from the previous US shares session carrying over. Wednesday, the best performing sectors were energy and industrial with the worst showing from financials.  Looking at the S&P 500’s breakdown, energy offered a significant acceleration of performance with a 1.6% climb while financials were green to the tune of 0.2%.

Commodities: Softs saw robust performance through this past session with particularly strong showing in sugar and corn. Closer to home wheat and live cattle prices, however, were more restrained in performance. It’s the energy complex that holds he most promise for Thursday’s session. Crude oil prices climbed another 1%, which has shown some spill over to natural gas and coal. For metals, ore, gold and  aluminium had descending performance from 0.6% gain down to a 1.1% loss.

Market Watch:

S&P/ASX 200 down 16.503 points or -0.29% to 5689.730

AUD +0.05% to 0.8000 US cents

On Wall St, Dow +0.41%, S&P 500 +0.42%, Nasdaq +0.39%

In New York, BHP +1.11%, Rio +0.68%

In Europe, Stoxx 50 +0.38%, FTSE -0.25%, CAC +0.29%, DAX +0.75%

Spot gold -0.51% at US$1332.81 an ounce

Brent crude +1.31 % to US$54.07 a barrel

Iron ore +0.59% to US$86.847 a tonne

Dalian iron ore at 554.0 yuan

LME aluminium (cash) -1.19% to $US2072.25 a tonne

LME copper (cash) -0.25% to US$6869.50 a tonne

10-year bond yield: US 2.11%, Germany 0.35%, Australia 2.60%

 

By John Kicklighter, Chief Strategist, IG Chicago

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