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Trader thoughts - the long and short of it

Despite further subdued moves in US equities, which ultimately sets Asia up for quite a soggy start, there have been a number of interesting macro factors worth exploring.

Market data
Source: Bloomberg

Moves in G10 FX markets are perhaps the most interesting dynamic, with the EUR finding its mojo again. A few traders questioning whether the liquidity forever stance from the ECB is appropriate, with German Q3 GDP smashing expectations at 0.8%qoq. This takes the annualised rate of growth in German out to 2.8% (the highest since 2011) and hardly thematic of central bank still buying six times the debt issuance from the broader Eurozone area governments. Giving the GDP data real backbone was the Eurozone ZEW economic sentiment survey, with the index pushing out to 30.9 (from 26.7), with Eurozone industrial production growing at a 3.3%yoy clip. All very positive indeed.

We also saw UK inflation running at 3.0%, which was a small miss to consensus, but still resulted in a reasonable position unwind from GBP longs. The world was also treated to a heavyweight panel discussion in Frankfurt, with Draghi, Yellen, Carney, and Kuroda all speaking, but the conversation failed to really shake the markets, although Janet Yellen made mention that US stocks have high earnings multiples, which again reinforces the message that the current Federal Reserve are focusing part of their efforts on managing financial risks. With that point in mind, it’s worth highlighting that we have seen speculation (source:  Politico) that current Kansas State Bank Commissioner Michelle Bowman is set to be nominated for a seat on the Fed, while interestingly Dow Jones reported: “White House considering nomination of Mohamed El-Erian for Federal reserve vice chair—source”.

Recall Mohamed El-Erian recently described the Fed’s move to lift the Fed funds rate and allowing its balance sheet to run-off as a “beautiful normalisation”. And also suggesting the market was too sanguine when understanding the concern central bankers hold about financial instability down the road.

There are always headlines around the US political arena and we look forward to Trump’s “major statement”, which is scheduled to be unveiled at the House Republican conference (and of course the trading world) Friday morning 3:30pm AEDT (4:30pm GMT). This comes at the same time as the House is expected to push through a vote on tax reform, while the Senate should push forward their own bill for a vote next week, which precedes the arduous task of trying to reconcile the two plans. One could argue that the allegations towards Republican nominee Roy Moore are also having an impact, and while this is a complex issue, the market is somewhat concerned any fallout here could weaken the GOP’s hand.

There is seemingly also some anxiety around tonight’s (12:30am AEDT) US core CPI print, which has really become the new non-farm payrolls for markets, which is in its importance. Economists expect core inflation to remain anchored at 1.7%, while headline inflation should drop 20bp to 2%. Ahead of this we have seen modest buying in the US Treasury curve, with the US 10-year Treasury yield dropping just two basis points to 2.37%, but the reaction in the USD has been far greater. The USD index, really driven by the 57% weight of the EUR, has smashed through the September uptrend at 94.14 and also the August/September double-top of 94.00 and there is a chance for USD bears to build on this, so I would be cutting back on USD exposures on this development. EUR/USD has pushed up to $1.1800 and through the November consolidation, although it has some work to push through the 12 October high of $1.1879. EUR/GBP has some good flow on the long side and is eyeing a move into the 90 handle.

EUR/AUD looks bullish too, with the pair now breaking convincingly through to trade at the strongest levels since June 2016 and as I write is at the highs of the day. AUD/USD was well supported yesterday after the blockbuster NAB business conditions release, but traders have faded the pair into $0.7650, although we still haven’t seen the daily close through the 27 October low of $0.7625. In theory, this support level could be taken out today, with the AUD likely to get a working over today, where at 11:30am AEDT we get the Aussie Q3 wage data, which has to be up there as key Australia economic data. The market expects a 30bp increase in wages to 2.2%, so anything below 2% will be welcomed by those currently short. A reading above 2.4% and those calling for hikes in 2018 will feel further conviction in their call.

Aside from the clear event risk in the upcoming 24-hours, moves in US equities have been modestly to the downside, with the S&P 500 currently lower by 0.1%, the Russell 2000 -0.3%, while in the credit markets we can see the now widely talked about HYG ETG lower by 0.3% and high yield spreads widening a touch. SPI futures currently sit 36 points from the 4:10pm AEDT official ASX 200 cash close, indicating the bears will build on yesterday’s move, which to be fair caught me by surprise. So we see an open in the ASX 200 at 5940 and the question is why would you put new money to work in the market and buy today? Clearly yesterday’s move looked like a move to cash and locking in profits and this should be in play today, so it seems likely that the bid comes out of the market to an extent and the index could fall under its own weight. A nice rally in iron ore, looks set to be offset by a 2% fall in US crude, with the large speculative position built in the oil futures market being partially unwound and the selling assisted by the IEA cutting its forecast global crude demand growth.

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