Trader thoughts - the long and short of it

After a 1.5% sell-off last week in the ASX 200, the bulls should see far more bullish conditions, at least on the Monday open.

French flag
Source: Bloomberg

One can look at the US crude price, which had a huge capitulation move on Friday. For those in ASX 200, energy names will be pleased to see US crude around 5% higher than Friday’s ASX cash market close. This needs move needs to be priced into local equities and with this in mind, price action in energy names will confirm if traders see $43.76 (Fridays low) as a low point in this move. One suspects much of Fridays 2.5% sell-off in the ASX 200 energy sector will be unwound on open here.

I would also add that positioning in crude has swung to a far more neutral setting, where we saw US crude future positions (held by money managers) fall a sizeable 52,317 contracts (last week) to stand at a net position of 203,104 contracts. This is the lowest level of bullish bets since November and would go some way in explaining the sizeable drop of late. Technically, a rally back through $46.25 (the November lows) would suggest adding to any bullish exposure here.

We can also look at the bulk commodity complex, where despite the iron ore spot price closing down 5.3%, we can see iron ore, steel and coking futures rallied 2.9%, 3% and 1.6% respectively in the Friday night session and I would looking more closely at these numbers today. Copper and Nickle closed up 0.7% and 1.5% respectively and we can see BHP’s American Depository Receipt (ADR) closing up 2.6%, with Vale’s US listing up 2.7% - both indicative of a solid day for the miners.

One can turn to the US, where the S&P 500 closed up 0.4% and just shy of the all-time high of 2400. This provided SPI futures a platform to rally strongly, in turn pushing our ASX 200 opening call to 5888 and a gain of 0.9%. US payrolls were the big event risk everyone was looking at. The headline print of 211,000 was nicely above consensus, with a lower-than-forecast unemployment rate at 4.4%, we can also see the hourly earnings up 2.5%.

The earnings print went along way to explaining why we actually saw modest buying in US Treasuries on Friday, with the ten-year Treasury closing at 2.34% (-1 basis point) and ‘real’ (or inflation adjusted) yields closing at 47bp (also -1bp). Interestingly, though the Fed funds future is priced at a 77% chance of a June hike, which considering the time until the June FOMC meeting seems fair. We also saw little move in longer-term interest rate expectations and this could go some way in explaining why US banks are not finding too many buyers, with the financial sector closing -0.1%.

Staying on the financials theme and all eyes locally will be on Westpac’s 1H17 numbers and while WBC have reacted to earnings from ANZ and NAB and therefore have less effect on the sector, traders will still be keen to explore the numbers and themes. Consensus is calling for cash earnings of $4.021 billion, paying a dividend of 94, while net interest margins expected to fall 7bp to 2.07%. WBC are also expected to see strong returns on equity of 14% and good capital levels too.

Of course, the big talking point this morning has been Emmanuel Macron’s clear victory in the French elections, taking it home (at the last count) by 63.9% to 36.1%. Macron has no traditional party behind him, so the political analysts will be keen to understand the make-up of his government (when it is formed) and one suspects that the view that this potentially fragmented structure is keeping a lid on EUR buying in too great degree. Of course, the fact that this was highly anticipated is the main reason why we are only seeing EUR/USD up 22 pips at $1.1018 in early Asia trade. I would expect some buying in our European equity markets, but given what we are seeing in EUR/USD and the EUR crosses one suspects it won’t be any great conviction to push up prices.

The open of the S&P 500 and oil futures markets will be very interesting too at 8.00am AEST, as this should provide some belief that the S&P 500 will print a new all-time high later today. The other key question is whether last weeks’ theme of liquidating all things commodities is still in play, or is this an entry to increase exposures to this underperforming space.

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