See important Research Disclaimer.
With sentiment where it is, new all-time highs in the US benchmark look relatively assured.
There will be a time to be tactically short US markets, but with the trend clearly higher, companies beating the relatively low earnings expectations, M&A activity lifting sentiment and the prospect that we get a decent weather-related payback in the economic data flow in the near term all suggests that the time is not now. Technically there is a prominent ascending triangle pattern (on the weekly chart) which suggests the potential for a further move to 1915 on the S&P 500, while a weekly close below 1814 (the uptrend drawn from the 2012) could see better days for the bears.
We were always expecting reasonable gains in Asian equities today, given the platform we had been provided. However, the main event was always going to be a fixed income and currency affair, with Australian Q1 CPI and the HSBC ‘flash’ manufacturing PMI report in focus. The HSBC PMI report did little to inspire (at 48.3), however there is still much talk around yesterday’s announcement that the PBOC was easing reserve ratio requirements (RRR) for rural commercial banks by 2% and rural co-operative banks by 0.5%; by all accounts this will inject around RMB 100 billion into the rural sectors of the Chinese economies. But the fact that the CSI 300 is down 0.3% highlights that traders see this easing for rural institutions in isolation, and it isn’t a pre-cursor for easing for the larger financial institutions.
AUD taken to the woodshed and chopped up
The bigger mover on the day is clearly the AUD and this won’t surprise too many given the thirty basis point miss to both annualised headline and core inflation. One suspects the Australian treasurer Joe Hockey will be fairly pleased, given his rhetoric of late; while the RBA will be content that a major catalyst for earlier rate hikes has been put on the backburner for now. The swaps market said it all, and after pricing in 23 basis points over the coming twelve months prior to the release, has now settled with a more modest fifteen basis points being priced in.
The AUD/USD was slammed across the G10 region, with the biggest falls seen against the Norwegian krone. AUD/USD has convincingly broken the 93 handle and it will be interesting to see how the London and US sessions shape up for the pair, especially on further talk of more buying of Australian government bonds in the coming months, especially with the news of late around changes in June to the Japanese government pension fund (GPIF) asset allocation.
A big flush out of speculative players
There has been a fairly strong flush out of speculative players today, many who had been hoping we would get an inflation read above 3%. This in turn would have cemented the AUD’s place as a star currency to be long, not just for carry, but also from more a tactical central bank policy divergence standpoint. Interestingly, this is the second consecutive month of negative real interest rates (i.e. adjusting the cash rate for inflation); although you obviously can’t invest in the cash rate. However, adjust the Australian five-year government bond for headline inflation and you get a positive ‘real’ yield of 47 basis points – this is down from 145bp in late December. The ten-year bond still looks compelling with a 106bp positive ‘real’ yield, but this more than halved from late December and it’s worth pointing out that the two- and three-year bonds actually have negative ‘real’ yields, although by less than its US peers.
It’s also interesting to see the ASX 200 actually fall after the inflation data, despite the lower AUD and re-pricing of rate hike expectations. This has to keep the housing market supported, while consumers should like this and should keep the yield trade steady for now. Banks are strong today, as are consumer discretionary names; however all of the gains came prior to the CPI data.
European markets will find little inspiration from Asia and should see a flat open. This seems fair enough as traders have other issues to think about, and while one eye will be firmly any escalations in Ukraine, another will be on European manufacturing data and US earnings. US data will centre on new homes sales and the Markit manufacturing PMI report. However, the more talked about event should be earnings from Procter and Gamble, Dow Chemicals and then after the closing bell numbers from Facebook and Apple.