ASX 200 powers through 5400

We’ve seen a flat finish to the S&P 500, but with some interesting market moves to put on the radar.

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Source: Bloomberg

Firstly, we should consider that the S&P 500 futures were down 0.2% at 16:00 (the close of the ASX 200 cash session), so having moved modestly higher, it’s no surprise to see our call for the Australian equity market now above 5400.

The key level to watch will be the 27 May high of 5427, it will be interesting to see if the bulls can push the index into this prior high. The ASX 200 has rallied for the last five consecutive days, putting on close to 5% in the process. We have seen only one occasion in 2016 where the index has rallied for six days in a row, in early March. The balance of probability therefore suggests that buying on the sixth day of gains is probably not the best strategy (from a risk-reward perspective) and one should perhaps wait for a slight pullback – although the market did rally for nine consecutive days in December.

If one is to focus on the market internals we can see good participation in the recent rally, with the percentage of companies above their ten-day moving average increasing from 55% to 84%. The materials sector looks like a thing of beauty right now (see below chart) and the 7.7% rally in the last five sessions has taken the sub-index trading above its 50-, 100- and 200-day average. Sellers will be more prominent in this sector today though given the collapse in oil prices overnight, on higher gasoline inventories and small losses in iron ore. BHP’s ADR, if we use as a proxy for the space, is 1.3% lower.

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The focal point will likely be the FX and rates markets today though, with traders adjusting last minute positioning ahead of the Bank of England meeting at 21:00 AEST, which the swaps market is pricing a 81% probability of a cut. On the political front, all the focus has been on the construction of Theresa May’s Conservative cabinet. It seems clear that the markets feel comfortable with May at the helm, in what is going to be a very ‘interesting’ 12 months for the UK economy. One feels that she is the best person to guide through this tough period. However, the appointment of Boris Johnson as Foreign Secretary has been met with a strong degree of scepticism and one of the reasons we have seen renewed GBP selling in my opinion. Philip Hammond has been promoted from Secretary of State to replace George Osborne as chancellor and he will have a huge task given the UK’s 7% fiscal deficit. David Davis has taken position as the aptly named Brexit Secretary.

In Australia, we’ll be getting the June employment print, with the market expecting 10,000 jobs to be created, and the economists calling for a range of +20,000 to -30,000 jobs. The 12-month average for total job creation is +19,600, with an average of 4200 full-time jobs created monthly over the same time. Expect the AUD to be sensitive to this release given the interest rate market is so finely balanced for an August cut. To give some perspective, it is one of three key influences that could dictate an August cut, with the others being the Q2 CPI print (27 July) and financial market volatility. Good numbers today should see AUD/USD find a firm footing above 76c, with GBP/AUD eyeing a re-test of the 11 July low of A$1.7045.

Japan looks set for slightly higher open, despite USD/JPY sitting nicely in the middle of the sessions ¥104.88 to ¥103.91 range. USD/JPY is a tough one, but my trading bias is to sell rallies in the pair and the obvious area to fade the move into is ¥105.90, just below strong horizontal resistance.

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On the stock side, we have seen some good flow on Yum! Brands in the US after-hours session, up 4.5% at the time of writing. The focus, though, is on JP Morgan, as they will have a clear read through into other banking stocks. The market expects Q2 EPS of $1.43 or $24.5 billion revenue, but it will be interesting from a more global perceptive to hear Jamie Dimon’s comments on the plans for ‘Brexit’.

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