Trader thoughts - the long and short of it

The global melt-up in equities continues, and we could see another boost as recently strong currencies have weakened. In recent years, export-dependent companies have seen their share price boost as the home currency weakens, which makes their products more competitive on a global scale.

Market data
Source: Bloomberg

In the FX market, sterling volatility was the theme of the day. The cause for the volatility were conflicting views from the same person, the EU’s chief Brexit negotiator Michel Barnier went from saying talks were at a “deadlock,” to potentially offering the UK a 2-year ‘grace period’ where the EU may offer Britain a two-year transitional Brexit deal.

The price of AS51 shares has pushed aggressively toward the top of the range that has contained its price since June of 5629, traded at on June 8 to the high of 5836, which was traded shortly afterward on June 14.

Investors have likely been impatient with the AS51 when looking at other indices trading at either all-time highs in the case of the US or the multi-decade highs in the case of the Japanese Nikkei. In Thursday’s trading, utility companies led the index higher with a +0.4% rise, while 10 of 11 subgroups traded higher.

Aussie Dollar rebounded thanks in large part to the US Dollar falling to a one-week low in response to the Federal Reserve release of the September 20/21 meeting minutes. It showed persistent concern.

The strongest correlations that hold in the FX market about the AUD is the strong positive correlation between the price of Bullion for immediate delivery and an inverse correlation to the USD Index.

The US share markets are keeping an eye on bank earnings, which has seen a large drop in trading, but holding to increasing margin. The largest US Bank, JPMorgan Chase & Co. kicks off the bank’s earning season that was followed by Citigroup who also saw an 8% increase in profits over the same quarter last year. Like JPMorgan, Citigroup saw a drop in trading, which is a stronghold of bank revenue.

Another component of earnings that has grabbed the attention of investors is the development of banks increasing their internal provisions for credit losses, which Citigroup increased by 15%, while JPMorgan increased their reserves by 20%. Neither bank appears concerned about consumer credit. Bank of America will cap off this week’s third-quarter earnings on Friday in the US, and the tier-1 investment banks will release earnings next week.

A lot is happening in the metals market with the price of Iron Ore showing confusion as to what future demand holds, with concerns driven by a cut-off of Chinese demand. Precious metals have recently moved into the spotlight, as Gold is working on its best run since May, thanks in part to a FOMC minutes release of the September meeting that helped to put further credence to the inflation concerns persisting.

The price of Bullion for immediate delivery is approaching $1,300. The price of copper has held five-week highs on the hope that sustained Chinese demand will outstrip supply, which is supporting copper’s outlook.

Crude Oil inventories per the EIA Weekly Inventory Report that were delayed due to a US holiday saw a fall of 2.75m barrels.

The price of the largest crypto-currency by market cap, Bitcoin, reached a new record on Thursday. Bitcoin surged to greater than US$ 5,000, and the staggering weekly moves continue. Since a shake-out in mid-September on news of China halting ICOs, which triggered a sell-off that led to the price eventually trading down to US$ 2,975, the price has now moved higher by over 70% from the September 15 low.

Year to date, the price of Bitcoin has seen a range of US$752-$5,333 and a nearly 600% rise. Much like the impressive rise in stocks, which continues to make fools of doubters, it appears too early to call this move over.

CPI Looms in the US and its output points to the one word that still makes central bankers cringe, inflation. Despite equities at all-time highs and The Economist’s cover-story last week about the ‘Bull Market in Everything,’ inflation remains a conundrum to central bankers the world over, and it remains a key sticking point when Fed members and other central bankers debate the timing and steepness of normalising.

Whoever becomes the next Fed chair in February, the biggest bear she or he will have to wrestle, is whether inflation has come to a new normal of lower for longer or if a breakout makes the normalization process a more pressing issue than expected.

Years ago in the aftermath of the GFC, the payroll number on the first Friday of every month was seen as the biggest market-moving event because of the implications in the print. However, there now seems to be a sole focus on the monthly inflation prints now that the Fed sees ‘full employment,’ and inflation has spent most of 2017 falling in the US. A further drop on Friday away from the expected print of 0.6% m/m and 2.3% y/y, could further drop bond yields and the highly correlated US Dollar.

OPEC looks to be patting themselves on the back as the monthly report showed that the Organisation of Petroleum Exporting Countries has said they see the oil inventory glut ending by the end of the third quarter in 2018. While this may cheer oil producers who have been encouraged to cut back production further, and thereby revenue, investors are likely less enthused.

By estimating that the end of the glut is close to being realized, OPEC+, which includes Russia, will likely be less inclined to further reduce production. Such a move would likely cap prices after an impressive run of over 100% compliance with pledge outputs. While OPEC+ output would be expected to rise, the strong growth of US production would only be expected to continue, which could further limit price appreciation without demand surprises.

Market Data
SPI futures moved 22.32 or 0.39% to 5794.47.

AUD/USD moved 0.0022 to 0.781. Overnight range: 77.87-78.36 US cents.

On Wall street: Dow Jones -0.1%, S&P 500 -0.18%, Nasdaq -0.11%.

In New York: BHP -0.1%, Rio +0.13%.

In Europe: Stoxx 50 -0.09%, FTSE 100 +0.27%, CAC 40 -0.1%, DAX 30 +0.13%.

Spot Gold moved -0.06% to US$1290.93 an ounce.

Brent Crude moved -1.51% to US$56.08 a barrel.

US Crude Oil moved -1.95% to US$50.30 a barrel.

Iron Ore moved +1.5% to CNY440 a tonne.

Dalian Iron Ore moved +0.74% to US$60.09 a tonne.

LME Aluminum 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 0.45%, Australia 2.80%.

 

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

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