Trader thoughts - the long and short of it

It has been a strange old night in markets and the moves in US equities won’t support the Australian market at a time when investors are scratching around for an upside catalyst and finding them hard to come by.

Market data
Source: Bloomberg

The S&P 500 and Dow both pushed higher on open, naturally tailing on from the moves in the futures markets, which had been moving progressively higher through Asian and European trade. Just before 2:00am AEDT the market snapped and a pulse was actually seen in the market and suddenly the bid dried up and traders were reminded that the index can fall, with big moves lower coming through in all US equities, although small caps saw the bigger reaction, with a sharp 1.2% fall playing through in the Russell 2000. Dow Transports have also fared poorly, with the index lower by 1.1%

Many have questioned the falls, with some attributing an element of the anxiety to a New York Times article, who have reported on the Russia investigation and detailed that Robert Mueller “has subpoenaed Steve Bannon to testify before a grand jury as part of the ongoing Russia investigation. First person in Trump's inner circle known to have received a grand jury subpoena." Whether this was genuinely the trigger or not or whether we have seen just some good old fashioned profit taking, it’s also worth highlighting that many were questioning why S&P 500 futures were so strong going into the cash session in the first place.

We have seen is a slight pick-up in inter-market correlations, with US equities headed lower, implied volatility moving higher (the VIX is up 13.4% at 11.5%) and the USD has lost ground, with USD/JPY falling from ¥110.85 and now resides at ¥110.28. EUR/USD, which had moved lower and into $1.2195 on the back of German political concerns and talk reports the ECB will be less hawkish (than many have positioned for) at next week’s central bank meeting, is now sitting up at $1.2272 and eyeing a convincing break of $1.2300. Although, the moves have also been influenced by Bundesbank president Weidmann, who unsurprisingly detailed “ending asset purchases this year would be appropriate”.

There has been little change in US Treasuries on the day, in fact, the 2- and 5-year part of the Treasury yield curve are a touch higher and subsequently we can see a slightly flatter yield curve as a result, with a slight outperformance from the long-end. There has been little anxiety to hold one-month paper ahead of Friday’s government shutdown. We can also see that US 10-year ‘real’ (or inflation-adjusted) yields are lower by 2 basis points and again this is hardly going to compel a market in search of yield to reverse their ever bearish view on the USD. Still, the moves in fixed income are quite sanguine relative to the intra-day sell-off in equities and we can see little change in high yield credit markets either.

We can also see that volumes have been sizeable too, in fact value traded in the S&P 500 was 33% above the 30-day average, with poor breadth and we find 72% of stocks lower on the day. Within the sectors, we can see that despite good numbers from Citigroup, the financial sector is -0.2% on the session and all eyes now fall upcoming earnings from Bank of America (who report at 10:45pm AEDT) and Goldman Sachs (11:30pm AEDT), to see if they can stabilise this ship. Energy has been hit, with the sector lower by 1.2%, clearly reflecting a space that has performed well. Brent and US crude were lower on the day, naturally we are going to see elevated risks of profit taking.

It’s the S&P 500 materials sector that probably interests the most here, with the space falling 1.2% and is the worst performing sector in the S&P 500 despite no real sizeable moves in spot iron ore (-1.1%), iron ore futures (-0.8%), copper (unchanged) and gold (-0.2%). So, there has been some trimming back on exposure to growth stocks, and perhaps some rotation into more defensive earnings streams, with gains seen in staples, healthcare and REITS.

It all makes for an interesting, yet fairly bleak open for the ASX 200, where our opening call currently sits at 6019 (-29 points). I highlighted the support in Aussie SPI futures into 6000, where a break was a trigger for a deeper move lower and this is playing out here, although I’d expect some support to kick in, should SPI futures (currently 5967) fall into the 5940/30 region through the session, which seems a fairly low probability anyhow given we have seen buying coming back into the market from 6:45am AEDT. Energy found few friends yesterday, with the ASX 200 energy sector lower by 1.6% and it promises to be another tough day for those overly long the space, as it will for materials, where BHPs ADR indicates an open some 2.3% lower. Banks will outperform, although one can still expect a negative open and we should see CBA open around 0.5% lower. Given what we have seen in US equities it seems logical to believe we will see staples, REITS and utilities find some strength, as investors trim back some of their exposures to commodity names and into stocks with more defensive earning streams and predictable cash flow.

The event risk on the docket today seems likely to be overlooked by traders and investors questioning if the reversal in US equities, at least when put into context of low implied volatility, is a one day affair or whether this manifests on itself into something more sinister. If we take a step back and assess, nothing has really changed, so we have to believe that pullbacks will be sought. So, in theory Aussie data in the form of Westpac consumer confidence, home loans and investment lending shouldn’t influence too greatly and the AUD/USD, which has moved 30 points higher from an earlier low of $0.7937 is more likely to take its direction from the CNY and commodity moves.

Bitcoin and the wider crypto space is also firmly on the traders radars after another punchy move into the low 11,000, with increased regulation from China and Korea hitting sentiment. Rallies, it seems are to be sold given the trend.

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