Trader thoughts - the long and short of it

Sentiment in financial markets is fluid, where earlier in the week a certain positivity was building seemingly in favour of the bull’s camp.

Market data
Source: Bloomberg

We can now see a reversal in fortunes and sentiment deteriorating, although the sell-off feel to holding risk assets seems to have stemmed purely from rumour.

Granted, we can see certain corporate issues in play, with Cisco Systems weighing on the Dow. However, the main issue seems to have arisen from an interview conducted on CNBC, where Jeffrey Sonnenfeld, from the Yale School of Management, was interviewed on the potential impact on markets, should National Economic Advisor and potential new Fed Chair Gary Cohn resign. By all accounts, he is under pressure from some of his ex-Wall Street buddies and is said to be ‘unhappy’, by Trump’s recent commentary. Let’s recall he is not the first in the Trump Administration to be ‘unhappy’, but we can still see Secretary of State Rex Tillerson in his role, as is Attorney General Jeff Sessions.

The market, even heard from a number of prominent political journalists, such as Axios Political Reporter Jonathan Swan, who tweeted, “rumour flying around Wall Street that Gary Cohn has resigned. Source with direct knowledge tells me the rumour is ‘100% false.’” Still, despite a number of other reports that suggest Cohn isn’t actually looking at resigning, the market seems to have bypassed this and is of the belief that Trump is on a war path with anyone and everyone. Furthermore, it would be far more advantageous to hold strong relationships, not just with the future Fed Chair, but also business leaders and with senior senators too.

We are now seeing headlines that “Trump said to drop plan to form infrastructure advisory council”, although to be fair, the market probably hadn’t known much about this council in the first place.

If we look at markets, we can see the S&P 500 taking a bath -1.5%, and in what looks like a fairly important technical development has closed (2430) below last Friday’s low of 2342. Small caps have underperformed, with the Russell 2000 closing -1.8% and below its 200-day average. As you’d imagine with the index down to this degree, we are seeing broad based sector losses, with financials, energy and tech all moving sharply lower.

Implied volatility has moved higher again, with the US volatility index (“VIX”) pushing to 15.5% (+32.5%), while the US 10-year treasury has dropped four basis points to 2.18%. We can see a further bid in the Fed Fund future, and thus, the market is now pricing in eight basis points of hikes by year-end (or 32% chance). Of course, we can see demand for the JPY, with strong selling in AUD/JPY, EUR/JPY and USD/JPY, which is currently ¥109.60 and could be eyeing a move into the 11 August low of ¥108.72.

Interesting, despite the lack of real love for the USD we’re seeing weakness in EUR/USD, although the pair has come well of the session lows of $1.1662 (currently $1.1734). A move through $1.1700 seems important, but we are now seeing the ECB step up its concern about the EUR, with the latest set of ECB minutes detailing ‘concerns were expressed about the risk of the exchange rate overshooting in the future.’ If you felt Mario Draghi had recently given a green light for trader’s to push EUR/USD into $1.2000, well we have just seen the ECB step into the picture to give us reasons to think twice about the conviction behind further upside in EUR/USD and EUR/GBP.

Staying in the FX theme, and AUD/USD has come well off the highs of $0.7962 and has retraced about a third of yesterday’s strong rally. We have had the big Aussie data points out of the way this week. While wages and jobs have garnered attention, market pricing of future changes in RBA policy haven’t shifted, with 11 basis points of hikes being priced in by May 2018. AUD/JPY has had the far bigger move, as you’d expect being a FX proxy of sentiment towards risk and after trading above Wednesday’s high looks set for a close below the low – a bearish key day reversal. Follow through selling in the session ahead will not be taken well.

We can look at the influence of commodity markets and oil has seen a small upside move of 0.5% to $0.5%, although has done little to help energy stocks. Gold has reacted positively to the move lower in US ‘real’ (or inflation-adjusted) bond yield, putting on 0.8% and eyeing another key test of the $1295/96 double top. A close through here in the session ahead and we start talking $1350. We got quite excited about base metals yesterday, with huge gains in zinc, lead and nickel. In the overnight session, we haven’t seen much follow through and prices are largely stagnant, so we won’t see the same love as we did for Aussie miners as yesterday, and it promises to be a tough day at the office for the ASX 200.

I maintain the focus on the trading range of 5800 to 5675 on the ASX 200 and it continues to respect this range like a dream. So many traders get frustrated by the lack of trend in this index, but if you are going to play the index, then you have to trade the conditions/set-up and for 13 straight weeks if we sold into 5800 and bought into 5675 you’d have done well. We always ask if this time is different, but our ASX 200 call sits at 5732, with SPI futures 46 points lower from 4:10pm AEST (the ASX 200 close), so carry on trading this set-up.

It’s not the best conditions to report earnings in either, although the reporting calendar is on the light side, with traders and investors eyeing numbers from CLW, LNK, PRY and SPK. We are around a third of the way through of receiving full-year numbers and we find 39% have beaten consensus, while 47% have beaten on the sales line. The average miss on earnings has been 0.8% under expectations, so by and large, the analysts have been on the mark.

While we have a number of important corporates yet to report, aggregate EPS growth has been +6.4%, with revenue +4.8%, and we expect this to climb from here. So a good earnings season so far (perhaps a 6.5/10), but clearly not enough to cause any real re-ratings to earnings estimates and subsequently not the inspiration thus far to spur the bulls into pushing the ASX 200 out of its range. Of course, global macro issues are also playing into this issue.

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