Trader thoughts - the long and short of it

For Australia's earnings season, on the docket today we get Newcrest Mining (NCM), Ansell (ANN), Bendigo and Adelaide Bank (BEN), Cochlear (COH) and JB Hi-Fi (JBH). These companies have the tailwind of reporting numbers on a day when the broader market is to open higher and positive sentiment seems to be lifting.

Certainly, if we look at JBH on Friday, we can see someone was pretty happy to hit the bid and there seems little concern in the price action to suggest that they will miss the 23% increase expected in 1H sales (at $2.507b), or $110M in 1H NPAT. NCM has been a favourite of late, with the price having rallied from $16.35 to $23.95 through December into February, so the earnings numbers will need to justify the move.

The broader ASX 200 is looking upbeat, both from the technical set-up and the recent revisions higher in consensus earnings per share (EPS) growth. Our call for the open sits at 5730, which would be the highest level since 17 January and would see price breach the January and February double bottom neckline at 5720. Therefore, probability states higher levels should be on the cards in the short-term and 5800 is the clear target.

The market internals backs up this case for higher levels in the index; we can see 64% of stocks above their 20-day moving average, 15% at four-week highs and 10% above the top Bollinger band. These percentages have been moving up of late, as you would expect when the index is going up, but they are definitely not at levels which suggest euphoric conditions and contrarian positions.

By way of leads, the S&P 500 made a new high on Friday, pushing up a touch to close at 2316, so the view that a market at all-time-highs is bullish holds true again. We have seen stability in US fixed income, with the ten-year treasury up one basis point at 2.40%, although it did close the week down six basis points (bp). US crude is supportive, although we have seen the Baker Hughes rig count increase by a further 12 rigs to 741, so watch the crude futures open at 10am (AEDT). A move above $54.34 this week (the 2 February high) would be positive and open up a further extension into $56. Obviously this is great for leveraged names such as Santos (STO), who report earnings on Friday.

Bulk commodity futures have pushed higher as well on the Friday night session, with iron ore futures gaining 4.2%, steel +2% and coking coal +1.9%. Copper has broken out to the upside, thanks to the ongoing strike at BHP’s Chile mine Escondida. Stay long on copper here, but watch news flow as this is where first mover advantage plays a pivotal role, as news of a restart will likely cause a wave of profit taking.

Event risk for the week

It’s hard to pinpoint the exact event risk this week as there is a lot going on at a macro level. We can see relations between Japan and the US moving along nicely, with the deputies Mike Pence and Taro Aso getting along well during their meeting. Trump’s recognition of the One China policy on Friday has been well received and lifted some tensions that had been hanging over the markets for a couple of weeks. There is renewed focus on Europe, with prosecutors stepping up their investigation into Francois Fillon’s alleged incorrect use of public funds. This won’t do his approval rating any good and it is becoming increasingly likely we see Marine Le Pen take on Emmanuel Macro in the run-offs on 7 May.

It also has to be acknowledged that Greece is back on the radar. It's not a source of angst in the markets yet but will play into further downside and my short EUR/AUD trade is working nicely. The Greek creditors want Greece to commit to EUR1.8 billion of new reforms (1% of GDP) by 2018, but the Greeks, inspired by Brexit, have told the Troika to 'stop playing with fire'. How can they put new measures through without sizeable political ramifications?

However, with key elections in France and Germany this year, the last thing anyone wants is a destabilising event, so who balks first here is key. Will it be the International Monetary Fund (IMF), the Germans or the Greeks? Either way, one suspects this issue will be pushed out to 2018 or the can will be kicked down the road.

It does support the view that Greece simply cannot go on under the current regime. Importantly, even when they appear to be hitting their fiscal targets, one of their key creditors (ie the IMF) believes this is purely down to one-off factors. What we are seeing here is a big story for 2018, and one I suspect will find a temporary resolution, so that the elections can go on without Greece being at the epicentre. 

Janet Yellen takes the stage on Thursday (2am AEDT), although she will be speaking on behalf of the Federal Reserve (Fed) collective and it’s hard to see anything that shakes markets too greatly here. There has been some focus on Fed Vice Chair Stanley Fischer's weekend comments about 'significant uncertainty about fiscal policy under the Trump administration' while suggesting Dodd-Frank would not be repealed as a whole. This comes at a time when Daniel Tarullo has announced his retirement from his Fed role that was effectively created after Dodd-Frank. So Trump now has three spots on the Fed he has to fill.