Trader thoughts - the long and short of it

Fading the fear that has grabbed investors from different global developments appears to be the global play at hand.

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Source: Bloomberg

US stocks rose on earnings Tuesday while key haven currency, the Swiss Franc traded to the lowest level against the EUR in three years. Strong Q1 GDP and retail sales data from China show that below the fear that economic growth remains though without the upside shocks that we had a few months ago.

S&P/ASX 200 climbs in concert, but volume is flagging: Though it didn’t post the same enthusiasm as the US indices later in the day, the ASX advanced through Tuesday to put bullish pressure on a rising wedge technical pattern. The question is whether the acceleration in sentiment through the past few active sessions will stretch far enough to give the Aussie index a more serious leg higher. Pre-dawn trading doesn’t support genuine breakout pressure just yet. Looking into the sector breakdown, the info tech outperformance fits the global headlines, but the breadth of the green is where we should look to support a genuine trend. The lacklustre volume of this index certainly won’t do it alone.

Wall Street receives a boost from Netflix earnings: Trade wars and Syria concerns may still be humming in the background for global investors, but that doesn’t seem to be enough to keep speculative appetites in check. Following the general build up in risk appetite through Tuesday’s trading session, the US markets picked up with the optimism to produce a broad bullish gap on the New York open. For the Dow and S&P 500, the jump through the open registers as bullish breakouts for three weeks of congestion.

The IMF’s World Economic Outlook (WEO) provides some degree of enthusiasm with a 3.9 percent pace of global growth in 2018 and 2019, but the projection further out starts to take on a cautious tone. In the here-and-now, traders were happy to have their speculative interests sated by Netflix’s after hour’s earnings late Monday. Earnings per share rose $0.64 compared to $0.63 expected on $3.7 billion in revenue. The real charge from this FANG member was the 7.41 million new users. As encouraging as the news is and from such a prominent market leader, this will not having the sway necessary to carry a new bull trend. We will need a steady drip feed of ‘good news’ if this climb is to prove significant.

Aussie Dollar receives little support from Chinese data run: The Australian Dollar was a mixed and unmotivated bag this past session. The Aussies best performance was registered against the Swiss franc and the worst versus the Canadian Dollar among the liquid crosses. Yet, that scale of performance is owed to the strength and weakness of those counterparts rather than the AUD’s own leverage. On an equally-weighted basis, the Aussie Dollar was virtually unchanged. The Chinese data run offered little outside support for the currency. The restrained pace of GDP, cooling in industrial production and decelerated pace of fixed asset investment did little to paint a picture of a growing demand for Australia’s raw material exports. There is a little data due ahead, but it is unlikely to win enough conviction to encourage say a break of 0.78 for the AUD/USD. The local jobs figures due Thursday on the other hand…

A few hawkish developments in the RBA minutes were enough to support the Australian Dollar, which is showing overbought in short-term momentum technical studies against the uber-weak US Dollar. The RBA stated that “members agreed that it was more likely that the next move in the cash rate would be up, rather than down” that mirrored recent comments from Governor Lowe. While the hawkish statement has made it to the surface before in RBA-speak, this is the first time such a statement was claimed in the minutes.

The commodities spotlight continues to shine on Crude Oil and Aluminium. Aluminium continues to hold near a six-year high as the Aluminum supply chain has been thrown into a chaotic state after Russian sanctions effectively took Rusal out of the market where it was the largest non-Chinese supplier. On Tuesday, the London Metal Exchange saw the highest price since 2011 as the supply shock on the universally demanded metal continues to reverberate through the market.

While crude oil price is off the year-to-date highs, WTI volatility has hit a 2-month high while backwardation, a calendar spread of futures contracts that imply a demand premium contracted for the first time after five sessions saw an expansion. Another helpful boon to the Bulls came as Kuwait is sharing that OPEC may consider production curb extensions into 2019.

Junk bonds and similar high-beta instruments are rallying like its 2007. The Bloomberg Barclay’s US High Yield Very Liquid index has aggressively tightened by 40bps since April 2. The spread is measuring the apparent risk of the market’s riskiest perceived debt to government debt and takes place in a grab for yield when risks are often ignored or discounted beyond reason. While times are good now, the eventual snap back to wider spreads when junk debt sells off is often aggressive and spills over into equities.

A similar bid is happening in FX where high-beta FX like Emerging Markets and high yielding currencies like the New Zealand Dollar are rising against the US Dollar and havens like the Japanese Yen, and Swiss Franc are showing similar sentiment.

Chinese tier-1 economic data points hit GDP expectations but left the markets wanting elsewhere as the onshore Yuan weakened after 1Q GDP gains 6.8% YoY. Industrial output dropped below expectations at 6% in March YoY, vs. 6.3% estimates while Fixed investment, a key driver of large-scale growth also missed estimates of 7.75% when it came in at 7.5%. On the positive, the shift from a state-run to consumer-driven economy seems in play as Retail sales beat expectations coming in at 10.1% in March YoY, vs. 9.7% estimates. Such domestic demand is a helpful balm to fears from trade threats. Going forward, investors and politicians will likely look to the domination of the service sector as the health of sentiment and the economy as a whole.

Markets Update:

SPI futures moved 0.21 or 0% to 5841.55.

AUD/USD moved 0.0001 or 0.01% to 0.7773.

On Wall Street: Dow Jones 0.86%, S&P 500 0.94%, Nasdaq 1.75%.

In New York: BHP 0.7%, Rio 1.07%.

In Europe: Stoxx 50 1.07%, FTSE 100 0.39%, CAC 40 0.76%, DAX 30 1.57%.

Spot Gold moved 0.3% to US$1346.86 an ounce.

Brent Crude moved 0.18% to US$71.55 a barrel.

US Crude Oil moved 0.44% to US$66.51 a barrel.

Iron Ore moved 1.36% to CNY446 a tonne.

LME Aluminum moved 4.99% to US$2399 a tonne.

LME Copper moved 1.18% to US$6910.5 a tonne.

10-Year Bond Yield: US 2.81%, Germany 0.51%, Australia 2.76%.

 

Written by: John Kicklighter, Chief Strategist and Tyler Yell, CMT, DailyFX

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