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Trader thoughts - the long and short of it

The S&P/ASX200 has started a new string of winning session: A sharp drop in Greencross Ltd. Was not enough to stop the index from rising for the third day with a close above 6,100 to 6,108 with a rise of 16.14 points or 0.3%.

Source: Bloomberg

The last session saw the highest volume on South32 thanks to a share buyback announcement with WiseTech as the strongest gainer at 5.6% thanks to an institutional upgrade from Citi.

Implied data is anticipating a strong day ahead for BHP & Rio Tinto with gains expected at 3% and 2% respectively.

Australian Dollar takes the first step to stabilise: The Aussie Dollar seemed to temporarily staunch the bleeding that it had suffered this week.  On an equally-weighted basis, an index of the most liquid Aussie Dollar crosses bounced Wednesday after two hard days of selling. For many pairs, the technical damage has been done. AUD/USD clear 0.7475 to undermine any semblance of general support to operate around while GBP/AUD’s bearish reversal below 1.8000 now stands as the wreckage of volatility. If you intend to trade this currency, focus on volatility level rather than the explicit technical levels.

Can Australia maintain its AAA credit rating? After the budget announcement from the Treasury, questions are beginning to build as to whether Australia can maintain its sought-after AAA credit rating. S&P Global Ratings has reaffirmed their negative outlook on AU’s AAA-rated debt, which is escalated as the Australian dollar has fallen due to a negative interest rate differential relative to the United States.

If the budget can utilise fiscal stimulus to boost growth and a weaker AUD are realised inflation, and an RBA rate hike may be on the table sooner than previously expected.

Wall Street continues its recovery as VIX slides to pre-panic lows: US equities continued their recovery despite the headlines over the previous 24 hours reporting President Trump’s decision to pull the US out of the Iran nuclear deal. It seems the immediate implications for higher energy prices and the longer-term concerns for global security are not particular concerns. It is the market’s overt discount of this news which can readily be converted into natural speculative concern which suggests a subtle shift in the underlying sentiment bias behind the scenes. With the Dow up five straight days – only the second time in six months – while the VIX sinks to its lowest level since its February explosion, complacency is settling back in. Should we take these developments as a sign of renewed conviction or treat it with the kind of scepticism that lingers after the degree of surprise volatility that we have experienced over the past few months? Given this pace, economic development or event risk is necessary to spur a serious move or trend. Yet, in our current fundamental environment, that is more likely to find us stumbling into the next crisis.

BoE Super Thursday can stir a Pound already under power: Of the two major central bank rate decisions scheduled for Thursday (the first is the RBNZ’s), the Bank of England’s meeting is by far the most anticipated. To be clear, there is little expectation that the UK authority has any intention to change policy at this gathering. In fact, looking to swaps, we saw a collapse in rate hike expectations for a move by the BoE by mid-year; while chances of any move by year’s end have lost considerable ground. That is owing to inflation updates and the near stall-speed 1Q GDP update. Yet, there is still a general hawkish lean in expectations for monetary policy. That leaves us in a predicament where there is still considerable premium afforded to the Pound which can be lost – GBP/USD has only retraced about a third of its climb starting at the beginning of 2017. Alternatively, the recent retreat can lend a sense that the currency is trading at a discount to which speculators can jump on with the proper motivation. That balance highlighted this is a meeting of potential in the nuance. This is one of the BoE summits that is referred to as a ‘Super Thursday’ where the Quarterly Inflation report will accompany the decision and Governor Carney’s views. There is certainly enough here to speculate on the warning or waxing chances of a hike in the coming months.

US CPI meets a stubborn Dollar and deeply engrained rate forecast: The Dollar’s climb these past four weeks is nothing short of impressive. Not because it has unfolded with reckless abandon, but instead because of its relatively restrained pace paired to the exceptional consistency. This would seem to be a move that reflects a bias that has a strong undercurrent and is not easily diverted from its path. We should consider that when we take in the US consumer inflation data due later in the New York session. The economist consensus for the updates are for modest upticks in both headline and core inflation (to 2.5 and 2.2 percent respectively), but that pace would not likely expedite the slow convergence of a discounted Dollar and the high-flying Fed rate forecasts. At the same time, any disappointment would likely be met with the same level of restraint. This past session the upstream PPI inflation report slipped with relatively limited Dollar response. 

Crude oil continues its advance to multi-year highs: While it is easy to attribute the recent jump to the highest levels since November 2014, the EIA Crude Oil Inventory Report showed shrinking supplies by the most since March as traders also weight what newly applied sanctions will do to an already tight market.

Brent and WTI crude oil have risen by ~3% to US$77 and US$71/bbl respectively. Likely helping to support the bullish argument is the continued drop in the CBOE Oil ETF VIX or fear index. A higher VIX translates to costly options on the United States Oil Fund that narrows as crude oil prices continued their ascent.

Market’s Data:

SPI futures moved 16.14 or 0.26% to 6108.02.

AUD/USD moved 0.0009 or 0.12% to 0.746.

On Wall Street: Dow Jones 0.7%, S&P 500 0.84%, Nasdaq 0.74%.

In New York: BHP 3.21%, Rio 2.21%.

In Europe: Stoxx 50 0.33%, FTSE 100 1.28%, CAC 40 0.23%, DAX 30 0.24%.

Spot Gold moved 0.31% to US$1312.91 an ounce.

Brent Crude moved 2.83% to US$76.97 a barrel.

US Crude Oil moved 2.95% to US$71.1 a barrel.

Iron Ore moved -0.11% to CNY471.5 a tonne.

LME Aluminum moved 3.57% to US$2350 a tonne.

LME Copper moved -0.01% to US$6826 a tonne.

10-Year Bond Yield: US 3%, Germany 0.56%, Australia 2.78%.


Written by: Tyler Yell, CMT and John Kicklighter, Chief Strategist with DailyFX.

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