Trader thoughts - the long and short of it

Oil is at the centre of the market moves, and our flows in Brent and US crude have certainly picked up. The question of when and to what degree OPEC step up their oil stabilising rhetoric from here has been discussed. 

Market data
Source: Bloomberg

One would imagine central banks would be looking at the moves quite closely, given the impact of falling oil on headline inflation.

That being said, despite US crude (currently -2.4% on the session) trading into $42.75, and eyeing a move into the November lows of $42.20, we haven’t seen too much of a move in the market's pricing of inflation expectations. Therefore with modest buying across the fixed income curve (US 10-year Treasury yields are down three basis points at 2.15%) and a renewed focus on headlines US tax reform, we have seen ‘real’ (or inflation-adjusted) yields pull back a touch. It’s interesting to see better buying in gold as a result, especially given how unloved the yellow metal is at the moment and I would have expected more short covering.

We have seen a reaction in equity, with the S&P 500 energy sub-sector closing 1.3% lower and taking the year-to-date losses to 13.5%. Consumer discretionary has also been sold 1.3%, with tech taking out a few points as well and we can see the S&P 500 closing -0.7%, providing a poor lead for Asia. Naturally, we would expect the ASX 200 energy space to find good selling activity today, however, it’s worth remembering the Aussie energy space, while having fallen 10.5% from 25 May, is still only down 3.5% year-to-date. Is it time to be greedy when others are fearful?

Staying in the commodity space and spot iron ore rallied for a fifth day, although the gain of 0.27% is hardly convincing and I would focus the Dalian futures complex. Here we can see iron ore, steel and coking coal futures falling 2%, 2.5% and 0.5% respectively. By way of a guide, we can see BHP’s American Depository Receipt (ADR) closing -3.1%, with Vale’s US-listing, also falling more than 3%, so it’s in not shaping up for a good day to be long materials or energy.

SPI futures are lower by 27 points and -0.6% from 4:10pm AEST, with our call for the ASX 200 sitting at 5725. The index continues to oscillate in the 5850 to 5650 range, but if the selling gains momentum during the cash session today then traders will start to question whether the index can close the week below 5675, which if you look at the index on a weekly chart we can see such strong support from the bulls since February. A weekly close through 5675 seems important.

The question then is when aggregating all the overnight moves, why would you buy equity on the open? Of course, there many reasons, but I would expect the bid to be fairly thin and stocks have a higher probability of falling from 10:15am AEST onwards.

It will be worth watching the Chinese equity markets, given 222 China A-shares will be included in the MSCI Emerging Market index. We have already seen a slight pop of 0.6% in the China A50 futures (traded in Singapore) and small buying in CNH (offshore yuan). This seems like a fair reaction given it represents a 0.7% weighting (proforma basis) in the MSCI EM index.

In effect, the level of passive funds which will buy into these names is fairly low and won’t actually materialise until May 2018. The question then of semantics is perhaps the bigger driver of Chinese stocks here, so will Chinese retail traders buy into this move? I wouldn’t rule it out, but if the CSI 300, A50 futures or Shanghai Composite rally today, it will clearly be confined to China and seems a very long stretch to expect it to lift the ASX 200 or S&P 500 futures.

In FX land, AUD/USD has found sellers on the session and tracked S&P futures lower through US trade. Buyers have stepped in at last Thursday lows of $0.7563, but tactically we may have seen a short-term top here. It’s my view that there is a strong possibility US data improves here, although many would disagree with me and I stand by the view that we are in for a period of USD outperformance. Of course, the big USD flows have been against the GBP, where miraculously BoE chief Mark Carney, who didn’t vote for rate hikes in the recent MPC meeting stuck to a dovish script and it seems some were expecting more hawkish rhetoric.  

It’s all politics over the coming 24 hours, with the delayed Queens speech on focus and a focus on poor negotiations between Theresa May and the DUP party. However, sources still expect a deal on Thursday, thus avoiding an another election. Cable looks highly vulnerable to further downside, but being short with conviction with this event risk ahead of us is tough. 

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