Risk sentiment continues positive trend

After a strong week last week, sentiment needs the bulls to continue taking the lead, or there’s a risk the market sees a reversal in a number of overbought assets.

Global equities are taking their confidence from central banks ‘lower for longer’ mantra with regards to interest rates, although this seems confined to the Fed and ECB, as the market has done a good job of repricing rate expectations for the BoE after last week’s inflation report.

In terms of future Fed action, the market is currently pricing in 61 basis points of hikes by the end of 2015, however this is 14 basis points below the Fed’s own consensus. Throw in good earnings from all parts of the developed world, and stability in emerging markets, and you have a market that is seeing new all-time highs in the NASDAQ, while the S&P 500 is 0.6% from printing a new all-time high. We’ve also seen strong gains in bloc currencies, a reversal in CME copper, the VIX falling 36% in nine days and sterling on a trade-weighted basis at multi-year highs.

I will be keeping a firm eye on the credit markets as well, and as long as corporate credit default swaps (CDS) spreads contract then sentiment should stay fairly healthy. The credit market is generally one step ahead of everyone else and if spreads fall, equities and other risk asset should find further buyers.

The ASX 200 holding the multi-month trend break

In Australia the ASX 200 put on 3.7% last week and when you adjust global markets into AUD terms, the ASX 200 was the best performer. This is certainly something we haven’t seen in a long time, but we really did see the perfect storm for the ASX 200 to appreciate. When you see strong developed markets, stability in emerging markets, improved China data, good corporate earnings (albeit from recently lowered expectations from sell-side analysts) you know the ASX should do well. However for me, the fact that the bar had been lowered by the analyst community going into this earnings season is key.

If you take into account good US leads, strong China financing data (released over the weekend), an upside beat in Japans Q4 GDP, some fairly mixed earnings from names like Bendigo bank, UGL, Ansell, Australand and Aurizon; you have a market that is up 0.4%. CBA paid it’s A$1.83 dividend, which has naturally taken some of the wind out of the index’s sails, but the ASX 200 seems to be holding the former downtrend drawn from the October 2013 high and a few days above 5366, which could mean a move to 5400 is on the cards.

Tighten stops on gold longs

The AUD/USD has found buyers and is once again testing last week’s high of 0.9067 and the 38.2% retracement of October to January sell-off at 0.9079. The China financing numbers were very strong, however it’s important to realise the January data is traditionally very strong, as this is when the banks are given their fresh lending quota. The fact that gold continues to move higher is probably helping to a degree, as we need to remember that Australia is still a major player in the gold export market. However, as things stand the 30-day correlation between AUD/USD and gold is actually negative.

On the subject of gold, I would be taking a bit off the table at these levels as it is overbought on a number of metrics. The 61.8% retracement of the August to December sell-off at $1338 should limit the upside, and a move here would be in fitting with a measured move from the December low. Shorting into the strong short-term uptrend is ill-advised, but the chance of a retracement in the short-term is growing.

It promises to be a flat to negative open in Europe, with an early close seen in US futures, which have seen no real moves in Asia as one would expect. Corporate reports are also limited, so with the US closed for Presidents Day it promises to be a day of fairly low volatility. The DAX is also perilously close to making a higher high, however our client base hold a net short bias (69% of all open positions are short). That is a view that has been built up over time, however clients today have preferred to follow the improved sentiment and trend, and the majority are trading from the long side.

In the FX market it’s all about sterling right now and while cable is overbought, pullbacks are a buying opportunity in my opinion. EUR/USD looks like a sell on the weekly chart, with divergence seen between price and the oscillators. I feel taking a small position around current levels and putting a stop above the multi-year downtrend could work well, although this isn’t a pair which can find any sort of trend at all right now, so traders need to be fairly nimble here.

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