Markets rally as the bulls fight back

Federal Reserve member Lael Brainard stole the headlines with a fairly dovish speech, hardly indicative of a central bank looking to hike this year.

Source: Bloomberg

The implied probability of a hike this year has only fallen very modestly and we have seen little in the way of moves in fixed income markets. We have seen a slight calming of nerves though, and traders were more than happy to buy risk assets and emerging market assets, such as equities, into Brainard’s speech. Those brave enough to fight a progressive bearish equity sentiment were rewarded with a US stock market that closed higher, with excellent participation. Expect Asia to follow suit.

The trade of 2016 has been, and remains to be, doing the opposite of what feels right and this is what we may see more of today. Moves lower in equity markets have been aggressive, but yesterday the internals (looking at the percentage of companies above their 10-, 20- or 50-day moving averages) were at levels, historically seen as key low points of participation. The question is how traders act after the unwinding of the various markets and the pricing in of the overnight moves. Specifically, I am keen to ascertain whether traders use this strength to sell into or whether we see a genuine belief that markets can push higher here. Price action from 10:30 AEST will therefore dictate a lot of market sentiment.

Traders will largely be keeping an eye on the China data dump at midday (AEST), but I am not so sure this will rock sentiment too greatly – unless it’s a disaster. However, what we have seen of late is that boring is good, and as long as China keeps off the front pages, we can look at other macro factors. Today’s price action holds many clues for both investors and traders on whether participants feel the recent spike in implied volatile is over or likely to raise its head again.

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