S&P futures have pulled back, with traders concerned that the Ebola patient had travelled on the subway from Manhattan to Brooklyn. Our European opening calls have fallen in response, although our clients have been better buyers of the pullback, presumably expecting the short-term trend higher we have seen in a number of developed bourses to continue.
It does feel like the bulls are back in control, although the level of attention traders pay to Ebola could increase from here. It’s also interesting to see the startling correlation between the VIX and the level of Ebola quotes in mainstream publications.
The S&P 500 has retraced over 62% of the recent 9.8% pullback, and the fact that Federal Reserve speakers haven’t been in the market over the last few days seems to have helped lower the level of confusion. With industrial production, Philadelphia Fed manufacturing, housing starts, existing home sales, University of Michigan confidence and jobless claims all showing positive signs, and 79% of companies (38% of the S&P 500 have reported) haven beaten on the earnings line and 60% on sales, fundamentals have meant a lot more to investors. This could change next week though as we enter what could be a very interesting FOMC meeting.
US bonds have been offered as well, with the ten-year moving to the 50% retracement of the recent move from 2.65% to 1.86% through September and into October. What’s interesting here is that the Fed funds future (December contract) hasn’t moved at all, and at 47 basis points suggests that all the selling in the bond market has been driven by positioning and risk sentiment. Watch the ten-year next week as a central guide around Fed expectations.
The central question then that traders will be asking (assuming Ebola looks to be contained) will be whether the Fed removes the ‘considerable period’ for keeping the funds rate low. My personal belief, for what it’s worth, is that it will continue to see rates staying low for a considerable period of time and remain confident in its economic outlook, thus sending a message of confidence to the market. This should also be USD positive; especially given the ballooning divergence between market pricing (i.e. the Fed funds future) the Fed’s own central projections.
Still looking for the Fed to act mid-2015
US data still suggest an economy running above 3%. Job growth is trending in the right direction, the stock market is back eyeing the all-time highs and volatility is gently falling. We get the next payrolls report on November 8 and the consensus expects payrolls will most likely be nicely above 200,000. Still, as we know the Fed thinks globally and acts locally, but with an eye on financial stability, it will no doubt be keen to start raising the funds rate sooner and I feel with all things considered, it will raise rates in mid-2015. So with the market now priced that the Fed act in November, there are signs of dislocations and this should mean that bouts of volatility will still arise throughout the coming months.
Locally, the ASX 200 continues to move higher and like other markets has reclaimed over 50% of the losses seen in the recent global sell-off. The 200-day moving average is seen at 5427, but I would not be looking too closely at this average and would be paying more attention to whether we can see an upside break next week of the 61.8% retracement area of the 9.8% sell-off at 5466. Financials are once again in vogue, with traders holding into next week’s earnings and the potential for the solid dividend income shortly after. NAB is expected to pay $1.98, ANZ $1.76 and WBC $1.84, representing a pay-out ratio of 70% to 88%. Returning cash to shareholders is still going to win over a market, even when volatility is heightened.
AUD/USD to resume its trend lower?
AUD/USD has been moderately offered today, although AUD/JPY took more of a hit from the Ebola headlines. On the two-hour chart, AUD/USD is looking ominously poised to break a triangle consolidation pattern, however fundamentally if volatility (i.e. the VIX index) falls, then AUD/USD should find support. China’s new home prices have hardly been inspiring either, falling in all but one city.
The upcoming European and US sessions will focus on earnings from Procter and Gamble and Colgate-Palmolive, while Amazon will follow on from its horrible after-hours session. On the data side, consumer confidence numbers will be seen in Germany and new homes sales in the US. The highlight promises to be UK Q3 GDP, with the market expecting a 0.7% increase on the quarter (estimates range from 0.6% to 0.8%). European banks will be the most interesting however, as traders position themselves for the weekend’s Asset Quality Review (AQR) and the prospect for gapping risk on Monday.
We are likely to hear that just over 10% of the 130 banks reviewed will need additional capital totalling around EUR25 billion; if one is to use this as a guide we can make assumptions on how the EUR and bond markets could trade.