Snapback from silly positioning

Judging by the very solid recovery in commodities, the perma-bears have gone too far.

Oil
Source: Bloomberg

Although the initial reaction in commodities were due to the downing of Russian aircraft sparking tensions between Turkey (ie NATO) and Russia, once that initial reaction calmed, commodities continued to rally as shorts were quickly unwound.

I won’t comment further on the Middle East tension other than to say Turkey is Russia’s second biggest energy customer and imports around US$25 billion in energy sales per year. Turkey, on the other hand, exports around US$5-6 billion a year to Russia. The conclusion would be Russia would not want to take this too much further at a time when its economy is seeing some green shoots after the past two years of sanctions etc.

This probably explains why risk stayed upbeat and commodities powered on. Brent added 2.9% from the ASX cash close, WTI added 2.4%, copper jumped 3.3% in London, and nickel had the best run of the night – adding 6.9% from the ASX close.

Solid snapback after the momentum trade pushed industrial metals to ‘silly’ oversold levels. The question we are asking is: Has it popped the bears’ resolve or is this just a short-covering rally? I still see it as the latter.

What’s caught my attention

ASX is once again looking to push higher, CBA’s ADR is at $80.14 as more investors pile back into banking stocks. After losing over 13% from August through to October, CBA is up over 6% since the start of November, which is leading analysts to move it from buy or hold calls to hold or sell calls.

Iron ore printed a decade-low print for delivery into Qingdao at US$43.89 a tonne. BCI announced at its annual general meeting yesterday that it will ‘look to diversify its offering away from its pure play fundamentals’. I would look at BHP and where it finds itself in this market with its ‘diversified’ assets. Junior and mid-cap miners look to be falling deeper and deeper into the hole.

Glenn Stevens’ speech overnight had long-term and short-term implications for Australian monetary policy. Admittedly, I am only interested in the short-term. The expectations of a further cut to rates in February were promptly dealt with when questions about it were met with, ‘February, that's three months away, we've got Christmas, we should just chill out and see what the data says’. Considering the amount of ‘change’ expected in December from Europe and the US, this is a fair call.

The interbank market is pricing in a 30% chance of a cut and that positioning is more likely to be hedging in the swaps market rather than a genuine belief that a cut is coming.

The bottom line from the speech is that central bank policy is unlikely to be able to ‘fine-tune’ the short-term economics. Stevens flagged that the board would like a period of ‘above-trend growth’ and was open to further cuts if needed. This is not new news and the AUD was traded to make it one of the nine G10 currencies to gain against the USD overnight, as the one-way Fed trade eased.

US front end treasuries, however, are still being sold, adding one basis point. The selling in the USD looks like traders are simply cashing in and taking some money off the table before re-entering the long trade. Expectations for December lift-off remains at 74% on the Fed funds futures.

A big week for all markets next week is also likely to create position trading this week:

  • OPEC meets to discuss production quotas in Vienna as it looks to ‘normalise oil prices’
  • ECB meets to ‘lower’ its benchmark rates and increase the timeline of its bond buying program
  • The Reserve Bank of Australia and Bank of China both meet for their respective December cash rate decisions
  • Final non-farm payroll read before the Fed meeting
  • The biggest event of all is Janet Yellen testifying to Congress next Friday. It will be the last ‘Fed speak’ event before the black-out period ahead of the December 16-17 meeting – flows will be well above average all week and are likely to peak on her testimony

Ahead of the Australian Open  

Ahead of the open, we are calling the ASX up 17 points to 5243.

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