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There is still a short time to go until the close of the US equity markets, but if the S&P 500 can hold and close above the 4 December high of 2665.19 then it would give us clarity that the index can make a tilt at 2700, perhaps into early January. However, it’s clear the bulls really do have the upper hand and the bears just don’t have much influence here. By way of a sector guide, we can see financials have dominated with the S&P 500 financial sector up 1.3% and for those who follow the Dow Jones index, Goldman’s and JP Morgan have accounted for 62 or the index’s 156 point gain. Boeing being the biggest contributor with 54 points. Telco’s and health care have also outperformed. Overall though, breadth hasn’t been wholly inspiring with 55% of S&P 500 companies gaining on the day, but the bulls will always take a new all-time high, as it’s really as bullish as it gets!
European equity markets have played a bit of catch-up, but that said, correlations between equity markets between countries in the G20 (including Spain) sit at a 20 year low. So a rising tide doesn’t lift all ships and it highlights that just because the S&P 500 trades higher, it doesn’t necessarily translate into a higher FTSE 100 or ASX 200 and this is a sizeable consideration for any money manager or private investor who invests in international markets. The DAX is still very much on the focus-list and I think this index is poised to make a break higher through 13,200 and what has effectively been a ceiling on this market since 10 November. Any break-outs on a closing basis should be respected and one suspects the index goes onto test the 7 November highs of 13,533 on this development. As I say, one to watch.
Aussie SPI futures traded down to 6008 just prior to the open of US equity markets, but have once again moved in alignment with the S&P 500 and we see the futures markets currently sitting up seven points. SPI futures may have a decent correlation through the night session with S&P 500, however, a simple regression analysis shows only 11% of the variability in the ASX 200 (year-to-date) is explained by the S&P 500. So the conclusion here is that while the ASX 200 may open in-line with overnight moves in the S&P 500, we really do our own thing during the day and there is limited consideration to the fact US equites are at all-time highs and this of course creates opportunity.
Our ASX 200 call sits at 6025, so it will be interesting to see if for a third day traders fade the open (as I say it creates opportunity) and we see markets gravitate lower into midday trade. It’s unlikely ASX financials feed off the positive moves seen in US equity markets, and CBA’s ADR (American Depositary Receipt) indicates an unchanged read on open, as does BHP’s ADR and we see mixed leads for miners and energy names. Oil prices have been hit fairly hard and we have seen a failed break-out through $65 in Brent, with the global benchmark lower by 2.1%, while US crude is down 1.4%. Some change of heart from traders who now feel the repair work to the Forties Pipeline System in Scotland will not dramatically alter supply, while the EIA have also increased their estimates for US output up to 10.02 million barrels a day. Aussie REITS worked well yesterday, with the sector gaining 2% and there will be further moves had here today given Unibail-Rodamco $20.8 billion bid for Westfield.
We can also see spot iron ore pushing up 3.5%, although some fragility has been seen in the Dalian futures exchange, with iron ore, steel and coking coal trading -0.8%, -2.1% and +0.6% respectively. Gold looks interesting here, especially for those who feel the Fed will not raise its ‘dot plots’ to signal four hikes in 2018, which actually seems the likely scenario. While they may be somewhat more optimistic on inflation, but there will still be an element of concern. We have seen some buying off the session lows of $1236 for gold, but todays candle shows indecision and this needs to rectify itself, however, tactically I am warming to gold but still feel there is not enough in the price action to compel me to trade.
FX markets become very interesting here and the event risk actually for all markets is now real. Traders should always assess position and portfolio risk and the coming 24 hours are critical in this process. Overnight we have seen a mixed picture in G10 FX relative to the greenback, and there hasn’t been a huge reaction to all the chatter around US tax reform, notably Rand Paul detailing that he will oppose any “budget-busting” spending bill. Tax chatter has largely been offset by a higher US PPI print.
We can see the AUD performing well and trading into $0.7580 before traders have faded this rally. EUR/USD has been one of the weaker pairs, pushing down 0.3% on the day, but this more about positioning ahead of tonight’s (12:30am AEDT) November CPI, with economists expecting headline inflation to push up 20 basis points to 2.2% and core inflation to remain at 1.8%. Expect the USD and 2 and 5-year Treasuries to be most sensitive to this print here, as they will with Donald Trump due to speak on tax reform too (I can’t see a set time).
At 6:00am AEDT tomorrow the Fed looks set to hike the fed funds rate, so it is really down to how quickly we can react to any changes in the ‘dots plot’, as well as to the general tone of the statement. At 6:30am AEDT Janet Yellen takes to the stage one last time, and given it is her final press conference one questions how much the market will react to her views, although she does speak on behalf of the collective. Either way, it promises to be a big night for markets even if implied volatility is still quite subdued and options markets are not pricing in fireworks.