Trader thoughts – the long and the short of it

The US Q4 earnings season kicks into gear tonight, with Bank of America (10.45pm AEDT) and JP Morgan (12am AEDT) starting the proceedings.

New York
Source: Bloomberg

The US financials space will get attention above all other sectors this earning season, not just because the analysts’ consensus is for earnings-per-share growth of 21.5%, but because for those more macro-focused traders, what CEOs say about the potential for a further boost to net interest income (from a steeper yield curve) from potential fiscal stimulus matters.

The fact that all of the big US banks have moved in unison since Trump became President-elect tells you that the banks are simply being used as a vehicle to trade the reflation thematic. So, rather than select one bank, my preference has been to focus on the sector, which we can do easily through the KBE ETF (SPDR S&P Bank ETF). It’s interesting that despite a pullback in US treasury yields of late, the US banks have held firm and we can see the KBE has simply traded in a range of $44.56 to $42.83 in the last 23 trading sessions. I am happy to trade a breakout either side of this range, and this will tell me everything I need to know about how traders read earnings. The probability (given the strong trend higher from September to December) is that the banks break to the upside, but patience is required.

The big talking point remains on whether US fixed income yields will continue to fall, which in turn will pull down the USD and hold implications for markets like precious metals, which are really just a second derivative of other markets. It’s interesting that the US ten-year treasury is holding key support at 2.28%, and in fact, we have seen selling start to creep into price which is supporting the USD from moving down too aggressively. In my opinion, 2.28% (on the US ten-year treasury) is the key line in the sand, so for those who think the Trump train has derailed, you should watch moves from here and a break of 2.28% suggests the market is warming to that view. I am not so sure that will happen and think the fact that gold has rallied from $1122 to $1207, the USD index has pulled back 3% (from the December highs) and the US ten-year treasury has dropped from 30 basis points, means that markets simply don’t go up or down in a straight line and this is a healthy position adjustment from overstretched levels.

It’s interesting to see the good buying in the USD index overnight, with the USD index hitting 100.68, which as we can see from the daily charts is strong horizontal support. Gold prices reversed and are back below $1200. That won’t surprise as the correlation between gold, the USD and US treasuries is almost tick-for-tick. I have taken profits on my platinum trade and moved to the sidelines here, with price moving just shy of my target of $1000.

The big move in FX land continues to be GBP/AUD, with the pair having lost 3.6% (or 600 pips) this week. The AUD is having good outperformance and again the moves in bulks (spot iron ore closed up 0.7% at $80.99, while iron ore, rebar and coking coal futures closed up 1%, 0.4% and 0.9% respectively) are supporting. We have seen good bids in GBP/AUD into A$1.62, but rallies are to be sold here especially with Teresa May due to speak on all things Brexit on Tuesday. If we look at GBP/USD one-week implied volatility (in the options market) we can see this has spiked by 16% on the session, so traders have been expressing a view that GBP could have even bigger moves in the coming days.

AUD/USD has traded in a range of $0.7430 to $0.7519 and importantly doesn’t look like it will close the session above the strong resistance point of $0.7500. Working purely from the daily or weekly chart, we can see the trend is up and shorts are ill-advised, but I will be watching for signs that price could roll over. China remains a focal point for AUD traders, and while we saw the monthly credit data released last night (8pm AEDT) showing another strong month of credit creation (new yuan loans totalled RMB1040 billion) which should support the economic growth around 6.7%, in today’s session (no set time) we get China’s December trade data. I suspect the AUD will not react too aggressively to this data point, despite this being a notoriously difficult data point to forecast. The consensus is we see an increase in the surplus to $47.5 billion, despite exports expected to fall 4%, and imports expected to increase 3%.

On the equity front, we are once again calling a modestly stronger open for the ASX 200 at 5777, but if we look purely at price action we can see that every day this week traders and investors have used early strength in the market to increase cash holdings. The index has really gone nowhere this week, but the fact that every rally has been met with supply is quite telling. On the daily chart, a close above 5800 is clearly needed for a continuation of the November to January rally. A break below 5750 could see momentum shift and a move back to 5650 could be on the cards, if not welcomed by those with higher cash holdings who are keen to pick up stocks at lower levels. On the ADR front BHP looks set to open +0.6%, CBA -0.3%, while WPL +0.2%).

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