Trader thoughts - the long and short of it

Markets lost a bit of their mojo overnight, stunned by the shocking revelations that US President Trump’s former legal advisor, Michael Cohen, plead guilty to financial fraud.

Source: Bloomberg

Without directly fingering the US President, Cohen admitted to paying hush money to two women, who claim to have had affairs with then Presidential candidate Trump, for the purpose of “influencing the election.” The news truly took the wind out of traders, who sold out of equities and jumped into safe havens, driving indices lower across the globe. As the details of the story were digested throughout the day, it became apparent that perhaps initial reactions to the news were too extreme. Despite this, however, the ultimate effect was a neutralising one, with trading proven slackened for the rest of the day.

The question is whether the potential of having a criminal US President will have any lasting impact on markets at all. The broad consensus is that it likely won’t, with the broad fundamentals of the current bull market immune to these sorts of legal-political debacles. The most basic question is whether Trump will see out his whole term if it’s proven he has indeed broken the law. The big risk — and narrative worth following — is the US mid-terms coming up in November, out of which the Democrats are expected to win back both houses of Congress. If President Trump becomes deeply mired in legal woes, the risk he may face impeachment is possible, adding to a level of uncertainty that markets will surely hate. In this worst-case scenario, it’s unlikely markets will change course, but their advance would certainly slow, as future US policy direction loses conviction.

For those with an interest in the fundamental matters making or breaking markets, the US Federal Reserve’s FOMC released their highly anticipated minutes from their last meeting. The tone of the document was deemed much less hawkish than expected, with members seen debating what interest rate settings would qualify as neutral, along with semantic issues relating to whether the statement “monetary policy remains accommodative” remains true. The Fed reaffirmed its intention of gradually hiking rates, likely two more times this year, but it was the lack of conviction in the minutes that had traders talking. US yields fell and so did the US Dollar, as commentary began to pop-up in some corners that perhaps the rise in long-term US bond yields and the subsequent rally in the US Dollar has almost run its course.

Commodity traders managed to enjoy an element of heightened activity last night, upon the release of US crude oil inventory data, which this week managed to surprise to the downside. The figures showed oil inventories decreased by 5.8m against a forecast decline of 1.6m, following last week’s surprise increase 6.8m barrels. Oil inventory data have been somewhat of a roller coaster ride in the last several weeks, greatly overshooting or undershooting expectations, seemingly without reason. Although it’s a story that has been pushed down the list of priorities, the politics of oil is still unstable, with OPEC, Russia and the US still unable to agree on price targets and supply levels. We are some way off the oil price becoming a concern again — look for $US80 a barrel to stoke those fears — but considering last nights weak numbers, keeping an eye on oil supply may prove fruitful for those wishing to profit from further oil-price volatility.

With all of this as the very broad backdrop for Australian trade today, SPI futures are forecasting a jump higher for the ASX 200 at market’s open of about 16 points. The activity of the ASX200 this week can only be described as disappointing, taking the sheen off the index’s concerted rally to decade long highs above 6350. The index settled at a familiar support level slightly above 6260 yesterday, a mark which needs to hold in coming days to signal ongoing strength in Aussie equities. The local market has shrugged off all manner of risks in recent months, so the unfolding chaos in Canberra, the global trade war, and the circus in the White House won’t necessarily mean an end to this yet. Halfway through reporting season, however, perhaps we’ll need to see some stronger news from corporates to energise the Australian sharemarket bulls and push the ASX back to its lofty highs.

The reporting season delivered some good news stories yesterday, against a generally unfriendly macro backdrop. A2 Milk Co. underpinned activity in consumer staples stocks, with that company’s stock rallying 5 per cent, after it reported a 116 per cent increase in full-year profit. The telecommunications sector also outperformed, following news that a proposed merger TPG Telecom and Vodafone is being tabled. Telstra shares continued its run higher consequent to that story, supporting a 7.5 per cent rally in the telco space. The positive reports set up one of the bigger days on the reporting season calendar today, as share traders prepare for earnings from Qantas, South 32 and Nine Entertainment.

A distraction for markets could be the looming leadership battle within the governing Liberal party, which looks primed to kick off today. Debate continues about what effect the uncertainty in Canberra means for the local sharemarket, particularly considering the coincidental fall of the ASX200 on the day the leadership challenge first came to a head. The political discourse has established a loose consensus that the implosion of the Liberal party all but hands the next election to the Labor opposition, with investors seem willing to factor this information into their decision making. It’s believed that a Labor government, given its position towards negative gearing, franking credits and the banks, would not be favourable for investors in the real estate or financial sectors. Both sectors of the ASX have struggled in recent days, responsible for some of the overall weakness in the Australian sharemarket this week. If another leadership contest within the Liberal party kicks off before the end of the week, watch with interest for activity in these sectors, particularly as it relates to the fortunes of the overall index.

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