Trader thoughts - the long and short of it

It has been an eventful October for Aussie investors, especially those who have successfully positioned portfolios in healthcare (the sector is up 6.2% on the month), energy (+6%) and consumer discretionary (+5.8%) names. Although, to be fair, all sectors have found good buying through October.

Market data
Source: Bloomberg

The ASX 200 has seen a gain of 4.2% on the month, which when we price other global markets in AUD terms has actually seen the local market perform favorably relative to US and European equity markets. Chinese and Japanese equities are where one has really generated strong performance through October, although there are signs these markets could see consolidation and even modest headwinds in the short-term. We can also go into the micro side of things and see some outrageous gains in individual names, with Blackmores, Galaxy Resources and A2 Milk the three standouts, with a 33.9%, 33.1% and 32% return respectively.

Let’s see if we can see a similar return in November, although seasonally November is not a brilliant month for the ASX 200 and while we saw the index return +2.2% last November, if we go back we saw the Aussie index fall in this month for prior six consecutive years, by an average of -2.2%. Tactically, any pullbacks remain a buying opportunity, and that view is negated of course if the news flow radically changes, as we know December tends to be a strong time for global equity appreciation and we can see the ASX 200 closing up in December for the past five years.

Still, we find ourselves staring at a fairly damp and uninspiring lead for the session ahead. The S&P 500 has closed a touch lower, with breadth painting quite a negative state of affairs, with 69% of stocks closing lower on the day. Tech, energy and REITS have outperformed on the day and this makes sense give we have seen good buying in the back-end of the US Treasury curve, with the 10-year Treasury lower by four basis points at 2.36%, which has also weighed on the USD, with the US dollar index lower by 0.5%.

There have been a number of factors worthy of note, but it seems traders have focused on comments from US Treasury Secretary, Steven Mnuchin that the Treasury Department “doesn’t see a lot of demand on ultra-long bonds”. A Bloomberg article reported that “the House is said to be discussing a phase-in of corporate tax cuts”, was also discussed on the trading desks and enforced a growing message that when (if) passed, tax cuts will be incremental and gradual over a potential five-year timeframe. In the latter stages of the session though, Steven Mnuchin (again reported in Bloomberg) pushed back on this view detailing the “objective is not to have corporate tax phase in” and “we will see”.

Also weighing on sentiment to an extent, has been headlines around Paul Manafort’s indictment and even more so Trump’s former advisor, George Papadopoulos, who has actually pleaded guilty to lying to the FBI about his involvement with Russian officials. Also, further speculation in a New York Time article that Jerome Powell will get the Fed chair role when disclosed this week, seems to have aided the Treasury curve flattening. In economic data we have been handed fairly uninspiring inflation reports from Germany and the US, with the US reporting core PCE at 1.3%, which was in-line with expectations, but has seen a few question whether the 82% probability of a December hike (from the Federal Reserve) should perhaps be closer to 70% to 75%.

One interesting factor is we have seen both US and European inflation expectations moving a touch lower and this won’t help the ‘reflation’ trade going through markets of late. Perhaps ironically, it comes amid another move higher in Brent (+0.7%) and US crude (+0.5%), which are clearly benefiting from rhetoric from OPEC, Russia and the Saudi’s, extending the production quota agreement well into 2018. When do we start to think energy will start to play into higher inflationary reads given on a 12-month basis Brent is up 10.4%, US crude 4% and gasoline +27%?

More closer to home, amid some portfolio tweaks given it is month-end and where we see the broader ASX 200 opening at 5915 (-4 points), one should keep an eye on the ASX 200 energy sector this morning as the sector is trading at the highest levels since August 2015 and could get a further boost from moves in the barrel. It perhaps isn’t such a positive backdrop for the materials space with spot iron ore closing at $58.75 (-2.2%) and there would be some eyeing a further move for a test of the year’s low of $53.36. Dalian iron ore, steel and coking coal futures closed -0.8%, -1.3% and -1.1% respectively and as a guide we have seen Vale’s US-listing glower by close to 3%. BHP looks set to open on a slightly lower footing, with the ADR lower by 9c.

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