Global equities may take a pause

A number of developed markets are overbought, but the positive flows towards equities have been strong and predominantly driven by the relative attractiveness against developed market bonds.

Source: Bloomberg

Still, as I write we are seeing sizeable moves higher in Japanese and Australian bond yields and the Australian equity market is rolling over to a degree, although the Nikkei is a pillar of strength.

The technical set-up in the German bund market suggests sellers could be prevalent for the next few days and this may actually put further upside in EUR/USD, which broke convincingly above the December downtrend yesterday. I think it has the potential to squeeze as high as the 38.2% retracement of the December to January sell-off at $1.1659. One suspects this move will also be driven by crude and the short-term momentum here is also very compelling.

The ASX 200 has completed a tenth consecutive day of gains and has put on 500 points, or 9.5%, since 16 January. In that time, the material sector has moved 13.5% higher and energy 11.9%, while financials and discretionary names have underpinned the move.

Whether we see an eleventh day will naturally be down to overseas leads, but the fact there is such an aggressive sell-off in the domestic bond market seems to be giving short-term traders an excuse to take some well-earned profits off the table.

Market expecting more from the RBA

With the interbank market pricing a 67% chance of a back-to-back cut from the Reserve Bank of Australia, the trades that have worked (ie. buying high-yielding stocks and companies that benefit from a lower AUD) should continue to work.

However, stocks just don’t go up 10 days in a row very often and therefore profit taking has to be seen. Unless the investment case changes (which it hasn’t), traders need to look at retracement levels and work buy orders into the market. I think stocks like MQG, CSL, RMD, AMP, CBA, ANZ, TLS and NAB should be on everyone’s watch list, but they are also among the most overbought, so while there is little doubt the investment backdrop is favourable, we need to select our entry point as well.

It’s interesting to see price action in the AUD as well today and traders just aren’t sure whether to reapply shorts or stand aside and wait for a further squeeze higher. If we look, though, at the last five days, good bids have been seen into the low 77c level and the short-term move looks destined to be sideways.

The Chinese market is flat today, but reports that 14 Chinese provinces plan to invest $2.4 trillion in infrastructure projects this year haven’t really translated into positive flows in the Chinese market. Traders are perhaps not seeing this as incremental stimulus and more a summary of previously announced measures.

Crude in a technical bull market

The other big talking point has been the moves in crude and where to go from here, given there is still a massive oversupply issue. Both Brent and West Texas Intermediate are in bull markets, having rallied with real strength in the last few days. Commodity currencies are finding good support in the process.

However, we’ve now had a chance to look at the 24% decline in the US oil rig count since October, while many global energy plays have significantly cut back on capital expenditure. Some have talked about the refinery strike being positive. I don’t think that’s the case as it should lead to a further build up in inventory, especially after today’s statistics showing crude stock piles had increased by another 6.1 million barrels.

Keep an eye on the May Brent which is looking to test the 30 September downtrend at $59.81. It should act as solid resistance.

Europe is staring down the barrel of another positive open, with traders keen to see if the German DAX can break the 11,000 level this week. The FTSE is eyeing 6900 and could potentially break that level today.

In terms of stumbling blocks, we get US ADP private payrolls ahead of Friday’s non farms payrolls (the consensus is 228,000 jobs). The US services ISM is expected to expand at a moderately faster pace, so a strong number could reinforce the idea that the Federal Reserve will be the only G1O central bank to tighten policy this year. Cleveland Fed President Mester is also due to speak – remember she has already stated she could imagine a rate hike this year.

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