Trader thoughts - the long and short of it

The event of the night, of course, belonged to the ECB, but the central bank meeting kept to a consensus script and we haven’t seen much of a net change in markets.

Market data
Source: Bloomberg

EUR/USD was unsurprisingly heavily traded, with market participants mostly keen to ascertain whether Mario Draghi would push back on the recent gains in the trade-weighted EUR, subsequently pushing EUR/USD towards $1.1800. Well, The ECB has expressed signs of concerns on the exchange rate, with rhetoric such as it required 'monitoring with regard to its possible implications for the medium-term outlook for price stability', as well as a focus on the ‘recent volatility of the exchange rate’.

However, after a spike lower into $1.1930, which in turn looked to be driven by stop losses, we have seen EUR/USD push back and hold the $1.200 level. EUR/GBP has traded a very similar path, but the EUR bulls are in control here and I expect higher levels from here. There has been little change in German or Italian bonds, across the curve.

We have seen tweaks to the ECB’s inflation forecasts, with a 10 basis points reduction for 2018 and 2019, while at the same time increasing its growth projections for the current year to 2.2% (+30bp). However, the focus has been on a stance of lower-for-longer, with some strengthening forward guidance that interest rate hikes will occur “well past” the completion of its bond-buying program. We have also seen clarity that the ECB will announce changes to its asset purchase program (or QE) in the 26 October meeting and this is now the firm consensus date from strategists.

European equities have provided Asia with some positive feel, although the daily chart of the German DAX (closed up 0.7%) and clearly the bulls would have liked a close above what seems such strong resistance at 12,320. US equities have closed on a flat note, with financials taking a beating again, while better buying has been seen in gold stocks, utilities, and healthcare. There has been little change in both investment grade and high yield credit as well, although we have seen life in US treasury market and a strong bid across the curve.

The US 10-year treasury (currently -6bp at 2.04%) has pulled back yesterday’s losses and is once again making an assaulting on the 2% level and this despite focus on a Washington Post article that suggests (according to three people familiar with the decision) Trump and Senate Minority Leader Charles Schumer had come to a ‘gentleman’s agreement’ to permanently remove the need for Congress to ever have to be involved in raising the debt ceiling again.

Perhaps the more pressing issue for markets in the poor US jobless claims, but most importantly is the strained relationship between Trump and Gary Cohn. Markets like Cohn and they are genuinely concerned about a further talent drain from the White House, if Cohn goes risk appetite with sour.

The moves in the US fixed income market have weighed heavily on the USD, with USD/JPY now ¥108.45 and eyeing the weakest close since April and likely to be a headwind for the Nikkei 225 on open. AUD/USD is an absolute pillar of strength, as will be your equity bond proxies such as Sydney Airports) on open today. While I had been looking to fade moves above 80c, I would hold back on that view here as price action looks clearly bullish here and the pair is destined for the highest close since May 2015.

One can only imagine if we get a poor US core CPI print next Thursday night (22:30 aest), amid good job creation in Australia (Thursday at 11:30 aest) and a slight tick higher (as expected) in China’s industrial production and we could be staring at the AUD/USD at 82c. Of course, low volatility is key too and we are seeing the USD as the funding currency for carry trades.

Keep an eye on headlines in upcoming trade (09:00 aest) though from New York Fed President Bill Dudley, given he only recently gave a view that he is still calling for a December rate hike. One suspects he will give a fairly balanced view on this call now, but his comments could still impact fixed income and the USD and it is an event risk.

Tracking Aussie SPI futures we can see the index some 18 points higher than where it resided at 4:10pm AEST (the official close of the ASX 200), so the Aussie equity market looks destined to close the week on a stronger footing. Our call currently sits at 5697. I would be a seller intra-day into 5725 to 5730 (should it materialise), although the downside should be capped into 5659. Of course, the usual consideration index trader’s face is what news flow will be seen over the weekend and the risks, which have been largely discussed in the past couple of days, of further missile tests from North Korea.

In theory, it would not shock or surprise to see news of North Korea conducting more missile tests, but it could be enough to keep the buyers away on the open, so we may see the ASX 200 gravitate a touch lower from 10:15am AEST. That said, happy to be long gold stocks as a hedge against this geopolitical angst, although we also get the additional kicker on falling nominal (and ‘real’) yields and most importantly momentum and trend are working nicely here too.

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