The state of play:
- The US equity markets lost over 1%. Yet the bond market and the Fed funds rate (FFR) futures moved in a ‘positive’ direction (FFR fell a basis point – so a lower rate when the FFR is raised). This is a clear example of ignoring the ‘risks’ and trading independently of one another.
- The USD smoked every major G10 currency last night - something you would expect on the data releases and upgrade from the previous data release last night. So why did the FFR fall, and why did US equities lose 1%? I would expect some correlation here.
- On the Fed speak front, Richard Fisher told the market nothing new last night. His entire mantra over the past year has been ‘sooner and gradually’ rather than ‘later and steeply’. His speech overnight was just another version – yet the FFR lost ground. Bonds gained something, suggesting that theory is wrong.
- On Saturday Janet Yellen all but confirmed rate ‘will’ rise this year – ‘data dependent’ being the condition. Durable goods overnight were revised up in March, suggesting the revision to Q1 GDP is going to be to the upside. The revision, however, was not that strong and the original 0.2% annualised growth read is weak on any metric.
- If the Fed is going to reach its CY15 GDP estimate of 2.4% on current information, analysts estimate that nominal GDP would need to be 5% in the second half of the year – that is very unlikely. ‘Data dependency’ is its own curse.
- The market that did move overnight was the VIX. Under Deutsche Banks ‘emotion index’, markets are still complacent but the VIX had a big boost, jumping 12%. Volatility in the USD and the bond markets also jumped up in last night’s trade – the need to watch call/put spreads for confirmation insurance is increasing as risk builds.
- The stimulus bright spot remains China. There is a growing belief the reserve requirement ratio is under further review; consensus expectations are for one more cut to the rate. The consensus call is 100 basis points – the top end of the range is 200 basis points. No doubt Chinese markets are hot but are likely to continue to heat up on further cuts to the RRR.
- The ASX is currently trading at on its new resistance level, which was the former support level of the range formed in February to April. The fundamentals in the ASX still look ‘neutral’ at best – in fact, some would argue they’re historically high.
- The contrarian call would be to load up on the banks or the defensive darlings of the past four years that have corrected as they still provide fantastic yield returns as the further easing kicks in and the global central bank easing continues to support these kinds of equity.
- However, the lack of volume and real conviction in global trade tells me that being contrarian when complacency is at its highest is a ‘risk’ too far. High conviction in the analytical world has fallen to 53% - the historical average in sell-side analysts is 80%. Total returns are still looking venerable.
Ahead of the Australian open
We are currently calling the ASX down 32 points to 5741. the SPI futures market has fallen 34 points to 5748 at the June close.