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Reluctantly, I find myself going for the Melbourne-double, jumping on the Yellow-and-Black and Storm bandwagon. Although the odds are somewhat against me, and we’ll have to see if Eddie Betts and Charlie Cameron brings their A-game to the G. Either way, the equity markets are open today and if we see value of over $5 billion, I’d be very surprised. We would tend to find the big money managers catching up with clients, who have either flown-up from Adelaide, or from Australia-wide.
So we close the page on September, with the ASX 200 down a touch and underperforming other developed markets for the month. Certainly, when we see the S&P 500 eyeing a sixth consecutive monthly close higher and trading at all-time highs, there is an element of envy that the ASX 200 trading at the lower levels of the multi-month range and barely treading water. Seasonal watchers will suggest that October tends to be a reasonable month, although we said that last year, given in the prior four months of October, the ASX 200 (on a non-total return basis) had generated 2.2% on average, but alas in 2016 the ASX 200 lost 2.2%. Looking at the event risk in October, it makes it even harder to believe seasonal factors will play out and we can point to the official start of Quantitative Tightening, US Q3 earnings season, the ECB formally announcing a slower pace of asset purchases (on 27th October), a potential vote in Catalonia of self-determination this weekend and a general election in Japan on 22nd October.
On 19th October we also see UK markets take centre stage, with the European Council making a call on whether to push forward with trade talks. There is much water that needs to flow under a rather murky bridge before then, including resolution and plans from UK politicians on the exit bill, EU migrant’s rights, and Northern Ireland borders. It promises to be a macro-driven backdrop for markets (when is it not) and that is even before we touch on the known unknown that is North Korea. Talk in the overnight press is that South Korea expects Pyongyang to act again around 10 and 18 October, but we are in the dark as to whether they believe this to be a military drill or another nuclear test.
This event risk is for us to worry about in the coming weeks, for now though, we eye flat closes in the various US equity indices. S&P 500 closing +0.1% and finding a bid in the market after opening at the lows. The daily chart suggests maintaining a bullish bias on this index for now. Modest buying has been seen in European equities too and while I am bullish on the S&P 500, the EU Stoxx 50 looks in even ruder health on the daily chart. In fixed income, we have seen some buying in front-end yields (the 2- and 5-year US treasury are lower by a couple of basis points), while the longer end has barely shifted. Despite a slight upward revision to US Q2 GDP to 3.1%, we also saw good numbers in the August advanced trade balance and wholesale inventories (+1% vs expectations of +0.4%). These two data points suggest Q3 GDP should be running closer to 2.5%.
The USD has lost some of its recent momentum, with the USD index lower by 0.2% and moving in appreciation with short-term bond yields. AUD/USD looks interesting here, especially on the daily chart, with the session candle showing a strong test and subsequent rejection of the 15 August significant low of $0.7807. Price did trade through the 78 handle around 5:00pm AEST, with the bears in full control at this time and while many feel the Aussie still has a lot of downside work to reflect the 24% fall in iron ore (from late August), many also noted a strong drop of late in the Shanghai Property index. The property index closing below the 200-day moving average and reacting to news of Chinese authorities have further restricted sales in the secondary market in eight-tier one cities. Through European trade though, we have seen better buying in AUD/USD and the pair holds the $0.7807 with ease. For now, anyhow.
With China in mind, there will be some focus on China’s liquidity conditions, as we head into next week’s holiday. Further selling in USD/CNY and USD/CNH is a key focal point, given the trend that has developed since 8 September. This is a major factor in explaining the turning point in the USD more broadly. Data-wise, we also get China’s manufacturing numbers out at 11:45am AEST, while locally, private sector credit is due some 15 minutes earlier. I don’t expect either to move the market to any great degree.
Japan may struggle a touch, given USD/JPY has sold off fairly aggressively from the session high of ¥113.21, with some focus today on its inflation and industrial production numbers due at 9:30am AEST and 9.50am AEST respectively. Perhaps the more dominating factor though, falls on the 22 October election and market interest has started to ramp up, given Aber now has a serious challenger in the shape of the current governor of Tokyo, Yuriko Koike, who is extremely popular in Japan and has formed the ‘Part of Hope’.
Clearly, it’s still far too early to think she will come anywhere close to winning the election, but she is a viable alternative longer-term and of course, this is a key reason why Aber called an early snap election. SPI futures are 12 points higher than 4:10pm AEST (and the official close of the ASX 200), so a positive start for the local market is expected here, although there is no clear read through from commodity markets, with the various oil, bulks, and base metals not giving us much to work with.