The mood and general sentiment had certainly lifted in the last few days. What’s more is that the underlying quality of the rally was strong, with good breadth and economic bellwethers like copper taking a central role. However, with the S&P falling 1.4% on what seems like little news, one questions how much of the recent rally was actually short covering from funds. The talk from one US investment bank was that asset managers and insurance companies held sizeable short positions on S&P futures in the lead up to this week and one can deduce the massive volume we have seen early this week was largely covering.
We also know this to be true in Japan, where the short sales to total trading value hit a massive 41.6% on 4 September. After yesterday’s 7.7%, one would imagine this would be well below the 40% level now. The fact that the USD/JPY collapse was in line with the S&P 500 futures overnight suggests those who actually bought Japanese equity yesterday are going to be facing a tough open. We are looking for an open closer to 18,200, a 3% decline.
Yesterday’s goodwill was largely based on news that we’re likely to see a 3.3% or greater cut to corporate tax, although this has been speculated and expected for some time. However, the way this measure was portrayed to the trading public yesterday was quite purposeful and this caught a lot of people off guard.
The ASX 200 should open around 5130, a 1.7% drop. BHP should open 1.5% weaker, so given the broader ASX call, one suspects the selling will be far reaching. Let’s see how China trades, as the 30-day rolling correlations between the CSI 300, Shanghai Composite and S&P futures (and therefore Asian markets) has increased of sharply late. Chinese markets are playing a strong role in sentiment, but the CSI 300 Exchange Traded Funds (ASHR, traded on the New York Stock Exchange) fell 3.2%, suggesting traders see Chinese stocks under pressure today.
Also worthy of note:
- Copper has been on traders’ radars of late, but the metal has pulled back 1.6% from the 4.00pm AEST ASX 200 close. The trend is still higher, but I wouldn’t be surprised to see a further pullback in the short-term to $2.39 per pound.
- Further weight has been added to the ‘Fed to keep rates unchanged’ camp. Deutsche have pushed back their September call, with Larry Summers also reiterating his view. Markets are pricing in a 28% chance of a September move, with the IMF, World Bank and Paul Krugman also urging a cautious Fed. With markets simply not prepared for a hike next week, it seems unlikely we will see a move. However, it raises the possibility of the Fed speaking out during this so-called blackout period, should they want to hike.
- AUD/USD has found strong sellers on the move lower in risk appetite and is trading back below the 70 handle. All eyes will fall on today’s employment report at 11.30am AEST, with expectations of 5000 net jobs (ranging from +15000 to -20000) added. The unemployment rate is expected to tick down to 6.2%. Remember that employment has been a bright spot for the Reserve Bank, so a deterioration would be a headache for them and one would expect a pick up in the implied probability of an October cut from the current level of 13%.
- We’ll also get the Chinese inflation data at 11.30am. A deterioration is expected once again at a producer price level (-5.6%), but consumer inflation is expected to tick up to 1.8%. A weak print could lead traders to believe we could see further easing of monetary policy, with all the talk around fiscal stimulus lately. Of course, with such sizeable capital outflows and drawdowns of FX reserves, a weak inflation print will add to the cries for further easing, based on the idea that ‘real’ rates need to fall.
- Short AUD/NZD was big mover overnight, trading to a low of NZD1.0938. Clearly there was a belief that the Reserve Bank of New Zealand (RBNZ) was not going to be as dovish as what was priced by markets. This was not the case, and the RBNZ has gone above and beyond, giving a clear impression that they will ease rates again in the near-term. They have even used terms such as having the potential to ‘substantially’ cut the cash rate if needed. NZD/USD has collapsed from $0.6394 to $0.6296 (at the time of writing). Rallies in the NZD look like very compelling for selling opportunities.