Some attributed this weakness in US futures to the reported North Korea missile test, others to the weekend news that Donald Trump was acting ‘less presidential’ by accusing Barack Obama of tapping his phones’, without any real immediate evidence. It’s amazing that markets have given these sort of accusations such little genuine concern, given the magnitude of the allegations. It almost seems traders are comfortable with almost anything Trump says these days. Judging by the strong rally last Wednesday (of 1.3%), when he sticks to an autocue and a script, then the market will reward him with a renewed feel-good factor. This is when he sounds presidential and confidence flourishes through markets.
‘Trump on, Trump off’ (TOTO) is the new ‘risk on, risk off’.
In an overnight trading session devoid of any major market moving news, there has been very low ranges in prices across multiple financial markets. The focus has been on Trump’s second attempt at pushing through the controversial travel ban. By all accounts, it bans travellers from similar regions as the first and rejected attempt with the exception of Iraq. Again, this story is not really one for markets to be concerned with, but it highlights the lack of news focus in the session.
Aside from Trump, there has been some good buying of Japanese yen, which one could interpret as giving the trading session somewhat of a negative bias. There has also been a turn of focus from the trading community on whether the Reserve Bank of Australia (RBA) - at 2.30pm ADST today - move to a modestly more hawkish setting and acknowledge the improvement in global economics. It’s interesting to note that on one hand the swaps market are pricing in 13 basis points of tightening over the coming 12 months. In simplistic terms (i.e. not taking into consideration time value) there is a 52% chance of one rate hike over the coming 12 months, so the market is of the view that the argument should be when the RBA hike rates, not cut.
However, if we look at inflation expectations in the Aussie bond market, we can see five-year inflation expectations have dropped from around 1.93% in January to sit at 1.68%. This is interesting as the US and European inflation expectations have actually been increasing of late, while Aussie generic Aussie bonds yields have stayed firm.
It suggests to me that the RBA should err on the side of caution for now and clearly not signal a bias to tighten policy. However, they should maintain its recent adopted optimistic setting. They can be more upbeat on key commodity exports, especially as we head into a seasonally strong period for the likes of iron ore. However, a number of commodity analysts have suggested the wheels could fall off as we head into the second half of the year, especially HSBC who recently put out a note suggesting ‘iron ore is set for a massive fall this year’.
Watch the Aussie fixed income market today on the RBA’s narrative, and naturally the AUD will be especially sensitive to any changes in outlook. AUD/USD has traded in a tight range on the session of $0.7571 to $0.7610, with price struggling to break back above the 7 February low and we can see some indecision from market participants. On the USD side of the ledger, I think it’s important to also point out that the USD is missing a short-term catalyst (that could push AUD/USD lower), with a hike at next week’s Federal Reserve meeting almost fully priced in.
We can also see some weakness creeping into the commodity complex, with copper down 1.6%, while iron ore and steel futures are 1.7% and 0.8% lower respectively. We can certainly put iron ore futures on the radar, with price trending lower and since the peak on the 21 February we have seen price trade above the prior day's high, only for the sellers to smack the price back down. Is this the start of something more sinister or is the pullback of the bulls needed within a bullish longer-term trend? This argument needs to be resolved and will be interesting viewing.
It’s worth highlighting that even though the materials sector had a strong day yesterday, it suggests those who bought yesterday may be somewhat disappointed. If we use BHP’s ADR (which is currently down 2%) as a proxy, then the fact that the SPI futures are down a mere four points suggests that if there is any weakness in the miners, we should see signs of stability in the bank's staples and utilities.