Trader thoughts - the long and short of it

We saw a strong day’s trade yesterday around Asian markets, but whether the bulls have the impetus to promote a follow-through upside momentum is yet to be seen.

Market data
Source: Bloomberg

However, Aussie SPI futures are sitting up a touch and we see the ASX 200 opening at 6055. If we focus on the four-hour chart, it's looking far more constructive with price having built a base for a number of days around 6000, and has now firmly closed above the neckline of the double bottom pattern, which technically argues for a move just shy of 6100.

That said, Aussie SPI futures (currently trading at 6000) are finding it hard going clearing the figure and this needs close attention today, as a break here would be clearly bullish and naturally propel the ASX 200 higher. Many of the other key Asian equity bourses should be on the radar too, as they are absolutely flying and while moves in the Hang Seng have got attention from traders, one should also focus on the China H-Shares (Chinese mainland equities listed in Hong Kong), the China A50 (the top 50 mainland companies traded as a futures index in Singapore) or the CSI 300 cash (the top 300 companies traded in Shanghai). These markets literally can’t be stopped and have had seemingly one-way moves since late December and one simply can’t rule further upside here even if there is growing risks of buyers fatigue has to kick in. Are the Chinese markets acting as the new Bitcoin, in so much that there is such strong momentum and genuine FOMO here?

So, there has clearly been a wall of capital hitting these markets, as is the case with many Asian currencies and whether this capital has rotated out of other markets or asset classes into China’s mainland or offshore markets is one which we should focus on flow data. However, one suspect’s the savings rate around many Asian countries would have taken a hit of late too. Anyhow, one to watch given the huge moves of late and the increasingly elevated prospect of a short-term price reversal.

The leads for Asia are constructive and we can see an unchanged read in the Dow. However, the S&P 500 is up 0.2% and the NASDAQ 100 is higher by 0.7%, with tech having a cracking day, with Netflix gaining 10%, which seems to also be impacting more traditional media stocks. Don’t discount comments from Adobe too around its lower effective tax rate on the back of the Trump tax cuts, and like Netflix also has a market cap north of $100 billion and is putting in index points.

By way of a guide, we are seeing gains in REITs (+1%), utilities and retail names, with REITs likely given a boost by the buying coming back into the US Treasury market, where we can see the US 10-year Treasury yield lower by four basis points at 2.62%. US data has been on the light side, although there was a slight miss to the Richmond Fed manufacturing report, which doesn’t bode overly well for the upcoming US manufacturing PMI print. I do think the BoJ narrative in yesterday’s central bank meeting has influenced the US Treasury market and notably in the press conference BoJ governor Kuroda tried hard to calm speculation about near-term changes to its Yield Curve Control (YCC) program, pushing back on the notion of reducing its ETF purchases and while he acknowledged there is a debate among the board to reduce the pace of ETF buying, it is not consensus.

It still seems as though the Bank of Japan will alter its policy stance and target a steeper yield curve, but perhaps only in Q4’18 and not two times this year as some economists had forecast.

The moves in fixed income are not really having a huge influence on US financials and we can see the XLF ETF (US financial sector ETF) up by 0.2% and where price is still holding the 5-day EMA (exponential moving average), so I have no problems holding my long bias here, as I do in European financials, which I have been playing through the EUFN ETF (iShares MSCI Europe Financials). That said, European financials, while still trending strongly, look somewhat vulnerable to a slight downside move and a daily close through the 5-day EMA, which currently resides at $25.24.

We can also see materials lagging a touch, as has been the case in energy, where we see the sector lower by 0.2% despite a healthy bid in US and Brent crude which sit up 1.3% and 1.2% respectively. US crude certainly looks interesting from a technical standpoint, with the price having broken out of a bull flag pattern (best seen on the four-hour chart) and we could feasibly see trend resistance (drawn from the May high) around $65.20 come into play soon. Natural Gas (February contract) is also worth a focus too, with price sitting up 3.8% and breaking out to the highest levels since 2016. Iron ore futures have traded heavy, and spot is down a touch too, so it this may weigh a touch on the likes of RIO, where the London-listing fell 1.5% and it would not surprise to see modest weakness in BHP and FMG too.

In the FX space, we have seen the USD resume its weakening bias and is a touch lower on the day, with EUR/USD pushing back into recent highs. EUR/USD presumably spurred on by the miss in the Richmond Fed report (and moves lower in US Treasury yields), as well as a strong beat in the European consumer confidence report, which came in at 1.3, versus the 0.3 eyed and puts this confidence read at similar levels as we saw in 1999. Animal spirits are alive and well it seems in Europe and the fall in the savings rate in Europe is going to have a big impact, not just on the current account, but also bode well for EUR appreciation in 2018. Technically, EUR/USD is eyeing a break out of the eight-day consolidation zone and where a close through $1.2300 would clearly argue for an extension of the bullish trend seen from mid-December, although the risk of the ECB ‘talking down’ the currency is a real risk for holding EUR longs. That said, traders tend not to worry about a central bank talking down the exchange rate unless they actually feel it has a genuine backbone and the bank will actually act.

AUD/USD had threatened to break lower, with price trading into $0.7950, but the buyers have stepped back in and we see the 80 handle in play through Asia. We can also see that the JPY has appreciated, despite BoJ governors Kuroda’s press conference being seen by some as less hawkish than anticipated and we can see USD/JPY trading 0.5% lower on the day at ¥110.38.

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