Trader thoughts - the long and short of it

Another calm US trading session is to be discounted for Asian markets this morning, with the S&P 500 hitting a high of 2564 and closing up a mere 0.1%.

Market data
Source: Bloomberg

The Dow Jones has gained a more impressive 0.7%, thanks largely to the result from IBM which has closed up a very impressive 9.4% and accounted for 89 points in the move. Recall, the Dow is a price-weighted index, therefore the S&P 500 is a far better guide for Asia. IBM’s results have also lifted tech, where all things considered on any other day we may have seen the sector struggle, given we have seen the US fixed income sell-off across the curve and for the first time in a while we can see both the 2’s v 10’s and 5’s vs 30’s curve steepen – the yield curve is not indicating an impending recession like some are incorrectly (in my opinion anyhow) deducing from the recent flattening of the yield curve.

US financials have caught a bid (the S&P 500 financial sector closed +0.6%), helped by the move higher in Treasury yields, with the US 10-year Treasury now sitting at 2.33% (+3bp on the day) and we can also see a modest move in ‘real’ yields too. The reflation trade still has some juice it seems!

Also, keep in mind that ANZ report 2H17 earnings next Thursday, with MQG the following day and NAB and WBC on 2 and 6 November respectively and this should be a key focal next week. The usual thematic of margin expansion/contraction, expenses, volumes, bad and doubtful debts and capital take hold, although given what we have seen from Morgan Stanley and Goldman’s it will also be interesting to see how their markets division has performed, especially MQG, where shares really need to find an extra boost here to push price through a very interesting consolidation phase.

Energy has struggled (the sector closed -0.8%), despite US crude closing up 0.3% and gaining for the fourth day, helped largely by a 5.73 million draw in the weekly DoE energy numbers, although this was offset by a slightly above consensus build in gasoline inventories. Either way, US crude continues to define a new trading range of $50.00 to $55.00, which I feel holds for at least until December.

Materials have closed -0.1%, although if we cast our eyes to the UK we can see the FTSE materials space lower by 1.2%, with RIO getting smacked 3%, on allegations of fraud charges and given RIO closed -0.76% in Oz yesterday, one suspects there are downside risks as the stock plays catch up to the treatment seen in its London listing. BHP’s ADR has closed -2.5%, which if accurate suggests good downside for the materials space on open, thus BHP should take a few points out of the broader index, joined as I say by RIO.

The materials space also has the aspect of contending with decent weakness in bulks with spot iron ore closing down a modest 0.4%, with more pronounced moves seen in Dalian futures, with iron ore, steel, and coking coal futures lower by 3.4%, 3.2% and 3.9% apiece. Copper has also struggled and is lower by 0.6%. In terms of event risk at 13:00 aest we get China’s Q3 GDP, with consensus sitting at 6.8% (economist range 6.9% to 6.6%), which would be a slightly slower pace than the 6.9% pace of growth we saw in Q2. We also get the higher frequency data dump, with September retail sales expected to grow +10.2%, industrial production +6.5% and fixed asset investment +7.7%.

Of course, the Chinese data puts the AUD in focus and it’s interesting if we look at the daily chart to see strong bids and support coming into play at $0.7819, which was also a test of Tuesday’s low of $0.7818. Trading AUD/USD, at least off a daily chart is tough at the moment though as price action is messy and fairly erratic, with a higher high seen on 13 October and the bulls failing to follow through with the move and the pair has drifted lower since. In fact, if we look at the last two daily candles there has been clear indecision to push prices higher or lower. It would be nice to see this indecision rectify itself today, but I am not sure the China data does that. It will more likely fall down to the Aussie jobs report due at 11:30 aest to push this pair out of the doldrums, with consensus currently sitting for 15,000 jobs to be created (the economist range sits at +30,000 to -10,000) and the unemployment rate to remain at 5.6%. Keep in mind we haven’t seen a month of net job losses since September 2016!

Aggregating this all together we have seen SPI futures close 4 points lower and our call for the ASX 200 sits at 5888. A simple sense check suggests that if BHP and RIO are facing headwinds and we have a flat index call then banks will find buyers and support the open. Let’s not forget that the ASX 200 has gained for six straight days and we have only seen one period in 2017, back in May, when the local index has closed up for seven straight days, so a pullback and some modest mean reversion continue to become a higher probability.

It could pay to watch the open and putting the chart onto a far shorter timeframe seems logical for shorter-term traders, because if the sellers hit the market on open then that could be an opportunity to see a 20-30 point move lower as the profit taking manifests on itself, before support kicks in. If financials don’t support then materials will drag us lower and while the trend has been super strong since early October, is there enough in the news flow to cause new money to hit the market when so many funds are now fully invested?

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