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Trader thoughts - the long and short of it

Speculative appetite was easing this past session with uneven performance across so-called ‘risk assets’ and at a far more temperate pace for those benchmarks that managed new highs.

Market data
Source: Bloomberg

However, that wouldn’t keep the US equity indexes from setting new record highs – with the most marginal of day-over-day gains. Complacency remains mired in deeper and ambiguous themes like risk appetite, but we are due for more distinct fundamental focus starting with the upcoming session and carrying through readily into the week ahead. In particular, monetary policy will generate more attention for the FX and global capital markets.

Wall Street: It is not unusual to see low levels of volume when markets are making progress towards new highs – it can be the hallmark of confidence and a lack of drama that puts investors on edge. That said, these are not your typical market conditions. Prices on shares have soared collectively, even as revenue and dividend forecasts have progressively deteriorated. Against this lingering sense of skepticism, we have fresh record highs across the most closely monitored US equity indices.

And yet, the 0.18% advance for the Dow Jones Industrial Average, 0.09% for the Nasdaq Composite and S&P 500’s 0.07% gain hardly registers as genuine confidence. September is historically the only month in the calendar year that the S&P 500 has lost ground on average over the past three decades and represents one of the most volatile for the VIX. Is this time different or merely waiting to get up to steam?

Expectations Grow Around Bank of England Decision: The United Kindom’s inflation update on Tuesday charged rate expectations for the Bank of England, when the headline CPI reading jumped to the upper bound of the group’s tolerence band and the core figure rose to 2.7%. Inflation is the MPC’s primary target; but as with most major central banks, there are qualitative considerations that need to be taken into account when deliberating monetary policy.

With the UK central bank due to announce policy bearings in the upcoming London session, the interest is not in whether they are due to hike at this meeting or not – no economists polled by Bloomberg expect a change and swaps reflect a market certain that it will come out with a steady bearing.

Rather, the interest in this meeting following the rise of inflation is the evidence that the eventual hike will come in the more immediate future via statement or vote count. If the market interprets a hike before the end of the year, the Sterling can generate a significant recovery, similar to the Canadian Dollar’s rise these past months following the BoC hikes. And, while Brexit uncertainties will inevitably reign speculation back in; it will be a speculative reprieve for this burdened currency.

Dollar Rebound Looks to CPI Data: We are less than a week away from the Federal Reserve’s own monetary policy decision (due Wednesday), and the market’s views for policy still diverge substantially from the bank’s own view.

At the last ‘quarterly’ FOMC event in June, the rate forecasts in the SEP accounted for an average forecast among members that a third rate hike would be secured before the end of the year. The market puts the likelihood of another 25 basis point hike by the final meeting of this year (December 13) at a dubious 39%. That skepticism can change though, if data and/or financial coditions change. Arguably the most important variable setting the time of the United States’ next rate hike is the level of inflation in the market. While the Fed’s favored price gauge is the PCE deflator derived from the same data that the GDP is calculated, the market’s preferred measure is the CPI.

That data happens to be on tap in the upcoming NY session – though the anticpated 1.8% headline pace would hardly stand as justification for speculating on an immediate hike. The Dollar could use some fundamental reinforcement though. The DXY Dollar Index has struggled for a mild recovery this week, but few technical traders would find confidence in the progress it has made.

Australian Employment Can Leverage Volatility but RBA Hopes?: With monetary policy speculation on the top of traders’ minds, the local docket has a few indicators of particular interest for the carry currency. The August employment figures and September consumer inflation expectations data will cover the Fed’s qualifications of a dual mandate. The RBA, however, focuses on price pressure specifically.

That said, the inflation expectations figures will offer a timely update to the official quarterly report. The previous reading of 4.2% is higher than the central bank’s tolerance, but expectations naturally overestimate reality; so a further rise is necessary to see anticipation pass through to reality. More tangible a market moving – though lacking the direct connection to yields and carry interest – is the labor data. This series has a history of generating sharp volatility for the Aussie Dollar in particular, and expectations are already set high. The concensus forecast is for 20,000 jobs added to the economy this past month, but the details matter. We saw a strong net figure for Canada last week, but the split between full and part-time dictated a very different interpretation.

Australia Dollar: The Australian Dollar has been somewhat listless the past session. Its performance has ranged between moderately impressive, as with EUR/AUD sliding 0.3% and somewhat weak with the 0.5% AUD/CAD drop. For AUD/USD, the threat of short-term reversal pressure has risen with a three-day slide that has brought the pair back within reach of its 20-day moving average. It has been 41 trading days since this benchmark pair made the remarkable move to clear 78.50 to overtake a multi-year high; and currently we only stand 1.5% above that otherwise remarkable technical level.

ASX: The strong charge this week for the ASX cooled materially with this past session, and the futures market points backed by the limited US performance points to a rather tepid open for shares Thursday morning. Technically speaking, this index still has some room before it starts to seriously put pressure on the upper bound of its well worn range these past four months, but it does not look like the bulls are going to readily push any extremes. Materials and energy offered impressive performance in the US markets this past session, so the same sector performance may extend from yesterday’s session to today.

Commodities: Given the lackluster financial market performance, commodities’ volatility certainly stands out. Gold revived its slide this past session with the Dollar firming and hope/fear of reversal is building. Meanwhile, the troubled crude market extended its rally to a third day and posted the highest close in over a month just around 49.30. From iron ore however, another 1.9% slide to $82.69 is putting this important export at risk of fully capitulating its momentum.

Market Watch:

S&P/ASX 200 down 2.185 points or -0.04% to 5744.256

AUD -0.42% to 0.7984 US cents

On Wall St, Dow +0.18%, S&P 500 +0.08%, Nasdaq +0.09%

In New York, BHP -1.57%, Rio -1.65%

In Europe, Stoxx 50 +0.30%, FTSE -0.28%, CAC +0.16%, DAX +0.23%

Spot gold -0.71% at US$1322.40 an ounce

Brent crude +1.57 % to US$55.12 a barrel

Iron ore -1.93% to US$82.693 a tonne

Dalian iron ore at 531.0 yuan

LME aluminium (cash) +0.61% to $US2104.00 a tonne

LME copper (cash) -1.52% to US$6627.25 a tonne

10-year bond yield: US 2.18%, Germany 0.40%, Australia 2.67%

 

By John Kicklighter, Chief Strategist, IG Chicago

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