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China is well worth putting back on the radar, with the CSI 300 and A50 cash indices eyeing a break of the 15 August highs and the market trending progressively higher. The Hang Seng has been in a range of 24,000 to 23,000 since September and could test the top of that range soon with earnings season firmly underway there.
We can focus on Europe where the German DAX has broken the August downtrend and is threatening a close above the August pivot high itself, while the Spanish IBEX is now at the highest levels since April. Both of these markets are getting a tailwind from the weakening EUR, although Spain has seen some of its political unease clearing. Had you told fixed income traders in the halcyon days of the European debt crisis that the market would demand the same risk premium to hold Spanish debt as UK gilts, most people would think you were nuts! Still, to push these markets higher from here we may need to see a further fall in currencies:EURUSD|EUR/USD], although I wouldn’t be surprised to see a bit of a retracement in the currency pair. However, with the trend firmly lower, rallies should be sold.
The S&P 500 is creeping higher (the index closed up +0.5%), but still needs a break of 2180 before I turn bullish on this market. Good buying has been seen in the technology and staples sectors, and tech will play a big role in price action for the remainder of the week, with Amazon, Apple and Alphabet out with numbers. Caterpillar reports in US trade tonight, with the market looking for Q3 adjusted earnings of 76c, on revenue of $9.88b. They should provide a 2017 outlook, with the street looking for $39.62b, but specifically the macro community will be eyeing views around the demand seen from emerging markets and China.
In Australia, we should see some modest buying on open, specifically in the financial space with CBA’s ADR (American Depository Receipt) looking quite firm. BHP looks set for a slightly weaker open this morning, with US crude falling a touch on the session. Interestingly, oil continues to find support at the $50 level, marking the seventh time since 5 October that oil has bounced from the $50 level. As we saw yesterday, with Aussie financials rallying 0.8% off the opening low and subsequently dragging the broader index with it, there seems little concern about buying banks ahead of 2H 2016 earnings. The earnings release starts on Thursday with NAB, with the financials having gained 2.3% thus far in October, just lagging behind the staples sector.
It’s worth highlighting that iron ore futures exploded to the upside with a 4.8% gain (the biggest percentage gain since 8 March 2016). Steel (rebar) futures are driving the show with a 2.5% gain. With this in mind, it’s interesting to see the correlation between iron ore futures and the trade-weighted AUD moving in such a tight correlation. The correlation specifically with AUD/USD is not huge, but the pair is likely finding some support from the firmer terms of trade and lower implied market volatility (the US volatility index is now below 13). However, price action shows a divided market with the intra-day ranges contradicting and traders wanting to see the details of tomorrow’s Q3 CPI and Friday’s Q3 US GDP before committing themselves. AUD/USD traded in a range of $0.7591 to $0.7641.