Trader thoughts - the long and short of it

FOMC minutes of the September FOMC meeting where the Fed was shown as still uncertain on the persistence of low-inflation factors.

Market data
Source: Bloomberg

The probability of a Fed hike of the reference rate at the December meeting remained around 75% after the meeting, though USD and UST bond yields remained lower while equities in the US remained positive. Beyond US equities, other major indices pushed to record levels with the AS51 closing at 2-month highs, and the Nikkei 225 closing at the highest level since 1996 in a further showing that global sentiment is synchronized and investors remain in a buying mood.

The AS51 rose to the highest close since August 17 thanks to a 10 of 11 subgroups moving higher, which was led by technology as a key contributor alongside banks. The chorus of equity buying has been a global event as implied volatility from major markets continue to sit at historic lows, thanks in large part to faith that much of the global risk scene remains under control.

The Australian Dollar remains near the lowest levels since July against the US Dollar and is working toward the lowest level against the EUR since summer of 2016. The weakness in the AUD is likely a delight to the RBA who has consciously decided to step out of the normalisation conversation of other central banks. This move by the RBA has allowed the Aussie to weaken, despite the globally synchronized acceleration of economic data. This weakness seems to have caught hedge funds off, as the net-long positioning per the CFTC’s Commitment Of Traders report recently showed the largest bullish exposure anticipating AUD strength since 2013.

Japanese equities saw their highest close since 1996 as the Nikkei 225 Index, which has gained 9% so far on the year added another 0.3% on Wednesday to overcome the early 2015 high. The smooth run-up is expected to have a difficult time holding should a shocking outcome develop in the October 22 snap election cause Shinzo Abe to lose a majority holding of the lower-house. The move higher in equities has not been helped by the JPY much as USD/JPY, historically positively correlated to the Nikkei 225 remains more than 5% lower on the year.

The price of Copper traded to the highest level in 1-month. It’s close to the daily range of the extreme day during 2017 that was reached in early September, when the price hit an intraday level of 6970 on the LME. The rally in copper has been a bright spot in base metals, as other key base metals involved in steelmaking. For example, Iron Ore has fallen below $60 in Dalian on demand concerns on the back of an environmental crackdown in China, as Beijing has asked for an output curb through the seasonally weak winter heating season that runs through to March.

Wall Street was higher barely after FOMC Minutes showed Fed members do not see the weakness in inflation as only transitory. Looking ahead, this seems to communicate that hikes by the Fed beyond December are not set in stone. Recently, we’ve heard from two voting members of the Federal Reserve, Dallas’ Robert Kaplan and Chicago’s Evan’s who both said it is too early to decide on a December hike. Specifically, Kaplan noted that he is keeping an open mind on US rate hikes and continues to look for evidence that momentum is building in US cyclical forces to ensure as much as possible that the structural headwinds of tighter monetary policy are offset. Such comments from voting Fed members communicate that USD strength is not a given to continue, despite the rally in September.

Economic Storm clouds continue to gather above the UK as the U.K.'s Office for Budget Responsibility published a report on Tuesday titled the ‘Forecast Evaluation Report,’ explains the group’s downward revisions of predictions to upcoming UK economic data. The timing of this report is worth pointing out, as it comes within a handful of weeks ahead of the November 2 meeting where the Bank of England has been expected to engage in raising rates, which traders and investors have priced in with a 76% probability indicating they are convinced such a hike will happen. The larger catch is that such a hike would be done in the light of growing signs of economic weakness as opposed to strength.

Confidence in the European economy was not swayed by thanks to the acute concerns of Catalonian independence fading after the Catalan leader put independence on hold for now. Now the focus has shifted to the Oct. 26 ECB meeting where the Governing Council is set to agree upon the future of the bond-buying program for 2018. Derivative markets have shown a prevalent demand for European assets and options with tenors greater than one month saw the highest premium paid for upside protection (EUR strength) since 2009. Equity market optimism has centered around the EuroStoxx 50 (SX5E) that appears set to test the 2015 highs near 3,800.

Market Watch:
SPI futures moved 34.04 or 0.59% to 5772.15.

AUD/USD moved -0.0001 to 0.7777.

On Wallstreet: Dow Jones 0.07%, S&P 500 0.04%, Nasdaq 0.09%.

In New York: BHP -2.08%, Rio -1.39%.

In Europe: Stoxx 50 0.24%, FTSE 100 -0.06%, CAC 40 -0.02%, DAX 30 0.17%.

Spot Gold moved -0.1% to US$1286.75 an ounce.

Brent Crude moved 0.32% to US$56.79 a barrel.

US Crude Oil moved 0.61% to US$51.23 a barrel.

Iron Ore moved -1.25% to CNY434.5 a tonne.

Dalian Iron Ore moved -2.23% to US$59.65 a tonne.

LME Aluminium moved 0.95% to US$2163 a tonne.

LME Copper moved -0.01% to US$6760 a tonne.

10-Year Bond Yield: US 2.34%, Germany 0.46%, Australia 2.82%.

 

By Tyler Yell, Trading Instructor & Currency Analyst, IG Addison

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