Caught in the middle

Last week was the first real positive trading week of 2016 for all developed markets.

GBP
Source: Bloomberg

However, Friday’s ‘moderation’ and oil’s ‘reversal’ leaves everything caught in the middle of nowhere.

US markets added 2.6%, and the S&P is touching the 50-day moving average which it has tested three times this year and failed to break above each time.

Fed voting member Loretta Mester’s comments on the US economy and that gradual hikes in 2016 should be expected is a possible dampener to start the week. It had a mild effect on Friday night’s trade, however it may hit home this week.

The political side of the US is ramping up. Marco Rubio must feel like a million dollars today with his main ‘establishment’ candidate Jeb Bush suspending his campaign after the South Carolina primaries. He will be odds on in political circles, however, Trump will still believe he has the ability and momentum. He will have to keep winning and the longer the primaries drag on, the more likely US politics will start to seep into US trading.

Brexit will be one of the biggest events in 2016. Over the weekend the EU granted all ‘special’ requests for Britain to remain part of the 28 member zone. However, it’s the political storm after Donald Tusk’s announcement that is making markets sit. Boris Johnson’s decision over the weekend to support the ‘Brexit’ campaign has caused the GBP to move wildly in weekend and out-of-hours trade. He is widely believed to be the next leader of the conservative party and is highly popular – his position has a lot of influence.

The Brexit referendum on June 23 will add a new dimension to European trade as the politics seep into the GBP and the FTSE. This is at a time when the FTSE is testing 6000 points with little direction to go higher – buckle up here.

ASX is looking to test 5000 points as we enter the final major week of earnings season, which has actually been positive and ahead of expectations. However, SPI futures were weaker on Saturday and we are facing the CAPEX read on Thursday. The retrospective nature of the earnings season results may see the ASX dissipate as guidance and spending expectations decline.

Oil is still fluctuating – Friday’s trade is hard to explain other than the fact oil got ahead of itself after a 22% rally in eight days. Stockpiling hit a record level and the ‘accord’ between OPEC and Russia has fallen off the front pages. We see an average price of US$35 a barrel in Q2.

Weakness into the mid-US$20 handle is likely to be a buying opportunity, while above the US$37 handle is probably a sell call.   

The Brexit call will be the biggest event over the next four months, and the opening of the FX markets this morning illustrates that the market is nervous about what impacts it will have on the region and the nation.

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