Trader thoughts - The long and short of it

It’s a stretch to believe anyone has really bought into the idea that the Trump administration can really deliver on far-reaching tax reform. However, what we can see, is that to a large extent it isn’t going to worry them too much either.

Market Data
Source: Bloomberg

This is a Teflon market where literally nothing sticks. This seems unfortunate, as volatility provides opportunity.

The USD and the fixed income markets have seen quite a bit of attention, with good buying across the US fixed income curve. Furthermore, all eyes maintain a focus on whether the US ten-year Treasury will ultimately test and break key support at 2.30% to 2.32%. With the yield currently sitting down four basis points (on the session) at 2.37%, a break here will have huge implications on markets in my opinion.

The USD was looking like the weakest currency in G10 during Asian trade yesterday, but that accolade can now be taken by the AUD. However, there is still much technical damage unfolding in the USD and should be firmly on the radar.

USD/JPY, USD/CHF and the broader USD index have all broken key support levels and technically look destined for lower levels. USD/JPY, specifically got quite a bit of attention yesterday, trading 11 pips shy of the ¥110 level and with talk of ¥27 billion of notional USD exposure set to defend the figure. It will be hard graft pushing the pair through that barrier.

EUR/USD traded to a high of $1.0962, but has eased back and from a trading perspective, this is great as we want to see price trade into the 2 February spike high of $1.0807 to confirm if the market is happy to defend what is now a key support level. A rally from here would be very positive for EUR/USD.

European data continues to impress, with a solid IFO business confidence print. This is probably best reflected in the yield premium demanded to hold US ten-year treasuries over German ten-year bunds falling to 1.97%. This yield spread stood at 2.2% a couple of weeks ago and the narrowing of the premium has caused stronger inflows into the EUR.

The implied probability of Marine Le Pen winning the French election sits at 24% (the lowest seen during her campaign). This is being priced out of financial assets too, with the betting markets given Emmanuel Macron a 70% chance. We can see that the yield premium demanded to hold French debt over German debt falling back to the lowest levels since January. I guess we can also throw in good manufacturing and services PMI data, as well as Angela Merkel winning the Saarland state elections too, pushing her to pole position again in the betting odds.

Buy Europe the strategists cry and this is fast becoming a consensus trade.

US equity markets have fallen a touch, but certainly not to the extent futures markets were suggesting when Asia was trading yesterday. In fact, S&P 500 futures are 0.5% higher from the ASX 200 cash close and it’s no surprise then to see SPI futures up 0.3% in the night session. Our ASX 200 call sits at 5767, despite the Aussie index performing strongly on a relative basis yesterday. It seems the market is happy to buy pullbacks, despite this growing feeling (and as mentioned yesterday) that realistically we should be thinking about a cut in the US corporate tax rate to 28% to 30% and not 15%.

One clear sector of interest is materials, with a specific focus on iron ore, steel and coking coal. It really shouldn’t surprise us that we saw spot iron ore close down 4.1% to $81.57, but the bulk commodity futures complex (traded on the Dalian exchange in China) is hardly inspiring today either.

We can see iron ore, steel and coking coal futures trading 1.7%, 0.2% and 2.1% lower. There has been a focus on the level of stockpiles sitting in China’s ports and for a period of time this was being taken as a positive. Strategists saw a rebuild story, which has now turned into a glut story. Keep in mind there are 63 days of inventory in Chinese ports – the highest levels since 2008.

Will FMG hold the 13 March low of $5.99?

There is a bout of weakness in Australia’s key terms of trade, and a feeling that the Chinese trend and momentum trader may start to speculate more on the short side in the bulk commodities is now a must watch story domestically. AUD is therefore in focus. Saying that, more positive flows are now being seen in the latter stage of US trade and a number of the AUD crosses are seeing indecision in the price action. AUD/USD traded in a range of $0.7648 to $0.7608 and looks a bit lost here with traders asking whether to follow the lead lower in the bulks or focus more intently on the USD side of the equation.

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