Trader thoughts - the long and short of it

Global markets find themselves in a holding pattern. On the one hand, we are heading into a familiar seasonal vortex of inactivity for the Developed World’s markets. And yet, conditions are reflecting more than the traditional mid-year lull with a market that has positioned itself for a progressive and extreme reach for return.

Market data
Source: Bloomberg

There is a tangible sense of doubt among many bulls about the exposure that they have built up over the months and years, but little will to jump off the train. Though, given the increasing number of economic, geopolitical, monetary and financial threats popping up around the globe; a passive obliviousness is not a wise approach to managing one’s investments.

Wall Street: By the time US liquidity took the yoke, there was already a mild risk aversion hanging over the world’s capital markets. The S&P 500 eased back for the second consecutive session on the open – though we are still an easy stone’s throw to record highs. It is worth noting that the US benchmark has gone 13 trading days (excluding weekends and holidays) without a 1% drop, 329 days without a 10 percent correction and 2,069 since the last 20 percent correction – the technical ‘bear’ market. The question traders need to ask themselves is whether such long breaks make a rebalancing more imminent.

Anticipation: While the docket ahead, has a range of impressive event risk,  anticipation will keep drawing traders’ attention forward. Thursday’s explosive mix between the ECB rate decision, the UK’s general election and former US FBI Director James Comey’s testimony before Congress can readily stir up hornets’ nests individually or collectively. We shouldn’t be too surprised if the market decides to hold off on major changes in exposure until the lightening has struck.

RBA: The RBA kept interest rates unchanged at 1.5% as fully expected. The outcome was seen as less-dovish-than-expected though Governor Lowe does think we could see a lower GDP print for the March quarter. The RBA warned that under-employment (a global phenomenon) was limiting wage gains and is leading to lower than desired household spending.

The December 2017 Cash Rate Futures level is below the 1.5% current rate at 1.44%  showing futures traders are anticipating a rate cut. And, they have likely become more confident of their view after recent bank downgrades, which the RBA-validated after confirming a slowing in housing prices.

Australia GDP: For local event risk, the top listing today is the Q1 GDP release. The consensus forecast from economists is already setting the bar low with a 0.3 percent bout of growth through the three-month period following the previous period’s 1.1 percent swell. According to the RBA, this would be in part a natural course correction as the ‘variation’ balances out. Against the weakened spending (prior to April’s pop) and construction figures recently as well as the 0.7 percentage point detraction from GDP due to the period’s $3.1 billion deficit, that would seem a fitting forecast. Yet, the central bank remains optimistic that this will be a passing waver.

Australia Dollar: The Aussie’s 24-hour historical volatility outpaced other G10 currencies, even the impressively strong JPY, which rose ~1% to the USD. On the release of the unchanged cash interest rate, AUD per USD fell to 0.7457 but then broke higher above the 50-day moving average (at 0.7501) for the first time since March. Much of the rise in AUD could be attributed to the fall in USD thanks to mounting concerns that the Fed will soon succumb to the breakdown in the reflation trade. Currency traders are likely now keeping an eye on the 200-day moving average and the May 2 high at 0.7529 and 0.7556 respectively.

ASX: Financials led the ASX lower resulting in a drop of 1.1%  for the index - though the largest percentage decline was seen in utilities. The index saw its largest fall since early March and has reached the lowest levels since February. The largest intra-day decline was base-metals exploration firm, Syrah Resources, falling 6%. In the financial sector, there are natural concerns over the flattening yield curve. Flattening sovereign yield curves like the AU 2-10yr spread, at its lowest in three-months at 80.4bps, show concerns of future inflation expectations. The concern can also be seen through AU 10Yr breakevens, which is known as the bond market’s inflation barometer. AU 10Yr breakevens are trading at their lowest levels since early November in the wake of the US Presidential Election. Both of these developments are not unique to Australia, but that won’t keep the RBA from worrying if the flattening persists.

Commodities: There remains a general sinking feeling throughout the commodities market. The largest ETFs and indexes (DBC, DJ-UBS, GSG) show the asset class staged at or near the floor of the past 12-15 months’ range. Oil has been a big contributor to this weakness, but the Qatar isolation news from Monday doesn’t seem to have redefined the market’s bearing. Looking for bright spots, gold is arguably the brightest. Having cleared $1,280, there is little arguing the descending trendline resistance that began with 2011’s record high has been cleared.

Market Watch:
SPI futures up 6 points or +0.1% to 5673
AUD +0.35% to 0.7513 US cents (Overnight range: 0.7457 – 0.7522)
On Wall St, Dow -0.1%, S&P 500 -0.1%, Nasdaq -0.04%
In New York, BHP +0.34%, Rio +0.93%
In Europe, Stoxx 50 -0.71%, FTSE -0.01%, CAC -0.73%, DAX -1.04%
Spot gold +1.08% at $US1293.66 an ounce
Brent crude +0.65% to $US49.79 a barrel
Iron ore 0% to $US55.35 a tonne
Dalian iron ore at 427.5 yuan -1.04%
LME aluminium -1.45% to $US1903 a tonne
LME copper -0.65% to $US5628 a tonne
10-year bond yield: US 2.135%, Germany 0.248%, Australia 2.369%


By John Kicklighter, IG Chicago

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