Trader thoughts - the long and short of it

SPI futures have the ASX200 edging slightly higher this morning, following a day in which the Australian market challenged the significant 6300-handle once more.

Source: Bloomberg

The strong activity perhaps came as somewhat of a shock to traders, given the humdrum session on Wall Street the night before, combined with the floating of several geopolitical risks. Some solid earnings reports set the foundations for the yesterday’s run, namely from financials stocks Suncorp and Magellan; but the real catalyst for the stronger ASX was a general boost to sentiment from a rally in Chinese equities, which added 2 per cent according to the blue chip CSI300 index.

In what was a slightly disappointing climax to the day, the ASX 200 failed to close about 6300, indicating some reservations amongst investors about yesterday’s move. It isn’t the first time that the local market has failed to hold above that level, raising questions about the substance beneath these sorts of moves higher. So far, reporting season has delivered some respectable results, which — assuming if it continues — will give impetus for pushes higher. However, considering the vulnerability in bank stocks owing to tightening funding costs and slow credit growth, coupled with flatness in the materials space due to softer commodity prices and trade war fears, a sustainable move higher in the index must questioned and approached carefully.

The low implied volatility markets, which is at 7-month lows based by some measures, has boosted risk sentiment and supported riskier assets in the past several days. This dynamic was well demonstrated by the Australian Dollar, which saw a flow of speculative trading push the local unit to the very top of its range. The AUD/USD edged close to the top of its range during the Asian session, hovering around the 0.7440-mark for much of the day, and reaching highs above 0.7450. Although the move higher in the Aussie Dollar was slightly counterintuitive given global risks and the matter of unattractive yields, the price action was well within the currency’s recent range. Profit taking from speculative traders has presumably overnight irrespective of this, with the AUD/USD trading around 0.7375 at time of writing.

Wall Street dipped at the North American session’s close, receding for the second day and putting on hold its resolute climb towards record highs. US shares seems to be a little more sensitive to global risks at the minute, pushing traders into safe havens like US government debt, and driving benchmark 10 Year Treasury yields to 2.92%. Furthermore, it was industrial stocks and the US financials lead the market lower – a state of fairs manifesting most in the Dow Jones. In a silver lining to the night’s trade, the ever-strong Nasdaq held its line, coming within around 15 points of it all time highs, galvanized by renewed enthusiasm towards tech stocks. 

Some of the bearishness in US markets last night may be attributable to positioning for the release of the week’s major economic announcement tonight: the release of US CPI data. Following on from the overnight release of US PPI figures, which revealed a below forecast number, traders will be digging into tonight’s inflation numbers for signs that the red-hot US economy is showing signs of significant price growth. Although the official CPI print isn’t the US Fed’s preferred inflation gauge, signs of an overheating economy in the form of rapid price growth will weigh on policy maker’s minds, particularly amid only gradual rises in US wages growth.

The US Dollar this morning is displaying considerable strength. According to the US Dollar Index, the greenback has wrestled through resistance at 95.40, to trade at 95.60 at time of writing. Currency markets have been awaiting this sort of move for several months, and though it’s too early to say if it will consolidate itself, conventional wisdom suggests it’s a matter of time before higher yields will drive the greenback higher across the board. Tonight’s CPI figures could be the spark that lights the fire, with a break of this resistance at 95.60 opening-up ~96.70 as the next stop.

In other relevant economic data, both locally and abroad, global traders will be preparing for the monthly release of UK GDP data this evening, while locals will be keeping an eye on the RBA’s quarterly Monetary Policy Statement. The UK’s GDP data will be particularly interesting as it relates to the GBP, particularly the cable, which has come under heavy selling pressure following the BOE’s recent dovishness and heightened risks relating to a Brexit “no-deal”. The GBP/USD has burrowed below a rather firm trend channel overnight, and is flashing signs of being a little oversold: although the trend is irrefutably lower for the Pound, perhaps a bounce in the sterling is on the cards following tonight’s GDP release in a classic “buy the rumour sell the fact” scenario.

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