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Naturally this worked favourably for banks, which will be in focus even more over the next couple of weeks when Citigroup, Wells Fargo, JP Morgan and Goldman Sachs report. One has to think though that 17,000 on the Dow Jones index and 1700 on the S&P 500 are a near certainty given the underlying trend and the fact that it’s such a small distance.
The US market has now gone 521 trading sessions without a 10% correction, which is one of the longest stints on record. Complacency seems rife, but rightly so. You are seeing a number of developed market equities trading as if we are seeing a full blown cyclical recovery, with the biggest pullback seen in the S&P 500 since September at 6.1% (5.8% and 7.9% for the FTSE 100 and ASX 200 respectively). On the other hand, many developed bond markets are trading as if we are seeing very low, even disinflationary forces. Clearly the culmination of a ‘lower for longer’ stance from the Fed, the BoJ’s asset-purchase program, as well as the June 5 actions from the ECB are causing this phenomenon.
The interesting part though is that earnings in a number of developed markets are strong, while corporates are generally cash rich and growing through expansion, with record levels of M&A seen. We are also seeing record levels of buy-backs in certain countries, while in the US and Japan we are witnessing signs of increased capital expenditure. We just need to see wage pressures coming through and we would be staring at a world where the dynamics are very different in both developed and emerging markets. It still feels as though this is some months off, but when we do see better trends in key wage tracking indices, then the market will focus fully on just how far the Fed is prepared to allow inflation to pass its targets before acting.
Wall Street providing support for Asia
In Asia the solid lead from Wall Street has been its backbone Asia today, although it has really been the ASX 200 which has flown. Banks were smashed yesterday, but the reverse is true today, which is just as well for the bulls as the technicals were starting to breakdown, with key support levels coming in to play. Resource stocks have pushed up again, despite a fairly tepid lead from commodities, although momentum is behind the sector and it has been the best performer over the month.
Traders came in today staring at an AUD looking super strong against currencies like the JPY, USD, EUR and NOK. Naturally it was AUD/USD which had most talking and how much higher it can push. It was interesting that the pair found strong supply at the 76.4% retracement of the October to January sell-off at 0.9499, while co-incidentally it was the first time AUD/USD has closed above the top Bollinger band (or two standard deviations from the 20-day moving average) since February. The stars were certainly aligned for a bit of a pullback; while the pair is oscillating around the April high of 0.9461, the key level for me is still the 20-day (now at 0.9397) and a break here could see the January uptrend at 0.9365 in play. A close below the January trend and we should see better days for short sellers.
Today’s Australia May trade balance was an absolute shocker and the deficit of A$1.9 billion was the biggest since early 2013. Seasonally-adjusted exports fell for a third month, actually posting the largest monthly decline since January 2012. Australia’s Q1 GDP was strong at 3.5%, but given net exports were the key contributor to growth, one has to be concerned at the level of growth likely to be seen in Q2 (released September 3). Consensus for this print is 3.2%, but one has to think there are downside risks here now.
With RBA members Guy Debelle (speaking today at 21:05) and Glenn Stevens (10:00 and 11:00 AEST tomorrow), the prospects of currency fighting rhetoric is high and a weak read in tomorrow’s May retail sales print could see better days for AUD shorts and a test of the January uptrend. Still it has to be said that until the RBA adopts a full-blown easing bias the record low volatility will continue to push traders into the relative ‘real’ yields on offer in Australia.
European markets had a good session yesterday, despite mixed manufacturing reads. Peripheral yields found good buyers and it’s certainly hard to see significant upside in coming months in bond yields ahead of the September Targeted Long-term Refinancing Operation (TLTRO). EUR/USD traders will always look at the yield premium US treasuries have over peripheral debt – as this seems to be a key influence right now for the EUR. On that point EUR/USD found good selling at the 38.2% retracement of the recent sell-off overnight at 1.3690, and this could be telling. I quite like shorts from here.
On the data side today we also get a press conference from German Finance minister Wolfgang Schaeuble, while Janet Yellen speaks in US trade. We also get US ADP private payrolls (consensus expecting 205,000 jobs to be created), factory orders and ISM manufacturing from New York.