Trader thoughts - the long and short of it

Life is slow when implied volatility (highlighted by the ‘VIX’ index) is at 10, but that is the world we live in right now and global equities, led by the S&P 500 are moving higher, but at a very subdued pace.

Market data
Source: Bloomberg

As a lead for Asia, the S&P 500 closed up 0.1%, with new highs seen in the NASDAQ. Outperformance within the sectors came from tech, energy and materials, with financials up 40 basis points. At a stock level, all the talk is on Snap Inc., which has been taken to the cleaners in the after-market, with price down 23.5% and looking to test the IPO price of $17. There isn’t much to like, with Q1 revenue 5.6% below consensus and detailing soft daily active users.

We have seen little moves in Fed funds futures or fixed income across the curve, despite a fairly poor $23 billion ten-year bond auction. Boston Federal Reserve president Eric Rosengren (a non-voter) turning notably hawkish and talking up his view of reducing the Fed’s balance sheet concurrently with three rate hikes (in total) this year. The USD index is largely unchanged on the session as a result of limited moves in the bond market.

Outside of the US, there are some interesting opportunities though. The India Nifty 50 is a trend followers dream and is about as bullish a market as one will see. The Nikkei 225 is also in a strong trend higher and likely to test 20,000 on open and the highest level since November 2015. A break of this level and we should see a fairly quick move into 21,000 (the August 2015 highs). With USD/JPY moving into ¥114.37 and the JPY weakening more broadly against the crosses, this index is also one which should be traded from the long side.

For traders who like expressing a view using Exchange-Traded Funds (ETF), then the EEM ETF (Emerging Markets ETF) looks beautiful from a trend perspective and trading at the highest levels since June 2015. The rally really started in December and has moved some 21% in that time, but the trend is strong and again the path of least resistance here is higher.

Our own ASX 200 has shown that it just doesn’t want to break below 5833 (the top of the trading range in January to March) and we see an open today around the 5900 level. A move and close through 5906 (the 61.8% retracement of the May sell-off) would be positive and would increase probability that the index tests and breaks the recent high of 5965. SPI futures have pushed up 18 points and we should be looking out for a move through the recent highs of 5945. This will be the cue for the ASX 200 cash market to move into the high 5900 level. Naturally we will be watching the financials today, but if we look around the markets for other leads, it seems materials and energy are where we will see the outperformance today.

BHP’s American Depository Receipt closed +1.3%, with Vale’s US-listing moving higher by 1.2%. Clearly this is indicative of a nice move in mining stocks and although the spot iron ore market was closed yesterday (Singapore is on holiday), we can see iron ore futures have gained 1.4%. In the commodities space, crude has been the big mover on the day, with the Department of Energy inventory data showing a sizeable 5.2 million barrel draw, while gasoline inventories fell 150,000. Distillate and Cushing Inventories were also down by more than forecast, or predicted after yesterday’s API inventory report and oil has put on a lazy 3.3% - the biggest upside move of the year.

For the FX traders out there, we have seen the NZD being smashed 100 pips at 7.00am AEST. This shouldn’t surprise us, as the NZD had emerged recently as the markets preferred currency to own. There are expectations that the central bank would change its guidance today to a more neutral setting have not been met, with the RBNZ maintaining its fairly accommodative setting and this has caused a wave of selling in the ‘kiwi’.

The RBNZ maintained its projections for the cash rate, with the first rate hike not expected until 2019 and despite some signs of inflation picking up, the central bank have widely dismissed them. This could be a dangerous game, but for now, the bank feels these price pressures have been driven by one-off factors. One suspects that while a number of traders would have taken a hit on this move that many will be using this dip to sell AUD/NZD and buy NZD/JPY. NZD/USD is a different story though, as a daily close on the session ahead through $0.6850 would suggest a deeper extension of this bearish move.

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