Facebook brings it home, while the ASX 200 eyes 5600

Traders are staring at another day of gains for the ASX 200, meaning the local index continues to eye a move into 5600 and perhaps 5700 in the coming weeks.

Source: Bloomberg
  1. Chinese mainland markets down heavily, with the Shanghai Composite -1.9% and the Shenzhen Composite -4.5%. Speculation of increased regulation around Wealth Management Products causing renewed angst.
  2. The July Federal Open Market Committee (FOMC) statement indicated ‘near-term risks to the economic outlook have diminished’. This is positive, but largely expected.
  3. Traders were seemingly positioned for a clearer signal of imminent rate hikes, with the USD subsequently selling off and the two-year US treasury falling three basis points. Expectations of a December rate hike are unchanged at 45%.
  4. S&P 500 closes -0.1%, Dow Jones unchanged (or -1.5 points).
  5. Facebook reporting strong earnings. Stock up 6.9% in after-hours trade. Stay long.
  6. Apple reached the milestone of selling its one-billionth iPhone!
  7. Gold up $23 (or 1.7%) since the ASX 200 close. NCM likely up 4% on open.
  8. AUD/USD trades in a range of $0.7421 to $0.7505 through US trade. Expectations of an August rate cut from the Reserve Bank of Australia (RBA) unchanged at 55%.
  9. ASX 200 likely to open at 5565 (+0.4%), with banks up 0.5%.

It must be said that this is an unprecedented run and of course all good things come to an end, but for now the trend is higher and traders are switching between sectors (always a sign of a healthy bull market). For now, all macro and political concerns are swept aside with ease.

The big talking point overnight has been the reaction from the market to what was a more constructive Federal Reserve. We had expected recognition of some of the more positive developments in US economics and which we got with remarks that ‘near-term risks to the economic outlook have diminished’. However, while a number of investment banks have increased their internal probability models for a September hike, the interest rate markets have gone the other way and priced out the prospect. The reverberations of this re-pricing can be seen in weakness in the USD and a bold rally in gold. The Fed are not raising anytime soon in my opinion and the pessimistic market participants have been right all along.

The flat finish in the S&P 500 has provided local markets with limited catalysts, but we are staring at another day of gains and its worth keeping an eye on NASDAQ futures given the cracking results from Facebook - 1.71 billion Monthly Active Users are incredible numbers. Stay long in this name – although Amazon is also a core holding.

The USD weakness is a tailwind for emerging markets and we should see the Chinese ‘fix’ their yuan stronger today at 11:15 AEST. This would be a positive for Australia if one thinks of the purchasing power of the Chinese importer. It is not great for the Japanese though and while the real prize is tomorrow’s Bank of Japan (BoJ) meeting, the move lower overnight in USD/JPY is going to act as a slight headwind for the Nikkei today on open. Trying to trade around tomorrow’s BoJ meeting is complicated and requires a high-risk tolerance, as the playbook is very convoluted. Any fiscal package is likely to be detailed next week, with talk this could equate to a sizeable ¥28 trillion. However, picking the exact mix of monetary policy easing measures requires not just strong analytical ability, but also luck.

There seem to be little intra-day data points to drive, so it will be interesting to see how the market fares after 10:30 when all the news is fully discounted into the ASX 200. Keep an eye on the Chinese markets that have started to show signs of increased volatility again. Expect bank stocks to be at the heart of any rallies today given the strength seen in their ADRs (American Depositary Receipt).

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