Trader thoughts - the long and short of it

The S&P/ASX 200 has become the global equity index darling: Telstra saw a significant boost of volume after they stated that they will shift from a wholesaler to reseller and in so doing hopefully improve recent margins. The impressive gains on the day were helped by 21 stocks that saw 52-week highs with only two stocks experiencing 52-week lows.

Implied pricing of BHP & Rio Tinto shows both set to open nearly 1% higher while ASX front-month futures anticipate a move to new 52-week highs.

Aussie Dollar rebound slowly continues with RBA statement ahead: The Australian Dollar managed to extend its recovery from Wednesday’s session. Yet, where there was greater depth in certain pairs such as AUD/USD and GBP/AUD, we certainly lost some of the breadths behind the drive. The March trade report showing an unexpected increase to the surplus to A$1.527 billion sat well with bulls. That said, a standard economic report wouldn’t wave off lingering issues with tepid monetary policy forecasts and the general disinterest in carrying trade across the FX market. Ahead, we have the RBA monetary policy report to offer greater nuance than what the central bank gave us with its most recent rate decision. The local currency is certainly deflated on a fundamental basis, but something meaningful needs to rouse traders to pursue that opportunity rather than just passively observe it sink further and further into ‘discount’.

Wall Street bounces into the afternoon, saving traders from hard questions: US market participants nearly had to face some very difficult questions Thursday. Through the morning, the benchmark equity indices opened to a gap down and extended the drop from there. By mid-day, theS&P 500 was leaning on a trendline support that dates back to the beginning of 2017. In other words, we were close to a technical cliff of a longer-term possible breakdown. Naturally, that puts a market that has flourished amid complacency in a very uncomfortable position. Yet, it became clear that the headlines suggesting disappointment in earnings – revisionist considering the beat in key tech firms among others – didn’t strike a serious chord with the speculative rank. With an improvement in trade data to offset concerns of ongoing negotiations between US and Chinese officials on the same topic, the afternoon drew out the bulls. An impressive rebound from session lows covered most of the losses, put off questions of a trend change and moved the S&P 500 and Dow back above their 200-day moving averages. For much of the day, the S&P 500 was below the trailing technical level which it briefly dipped below 22 trading days ago. Had the Dow closed below its 200-day average, it would have been the first slip below it in 465 trading sessions to end the longest ‘bull run’ (by that definition) in 30 years. Now, on to the NFPs.

Will NFPs leverage rate forecasts, economic activity, political agenda? Though there is always considerable media interest surrounding the monthly US labour report statistics, its market-moving potential is notoriously uneven. Sometimes, slight deviation forecasts on payrolls can leverage dramatic moves in risk assets while other times a substantial shift in wages yields a practical yawn from a US Dollar that has found much of its drive-in rate expectations. Technically speaking, the April NFPs are expected to have added 192,000 net jobs to the economy, the jobless rate is seen edging further down to a more-than decade-low 4.0 percent and average hourly earnings growth is seen holding a 2.7 percent pace. These are generally encouraging projections. Yet, if you want to establish how the market reacts, it is important to determine how this data will be interpreted. Will it alter expectations of growth following the recent 1Q GDP update? Will it alter rate forecasts where the FOMC couldn’t Wednesday? Or perhaps it will signal a political shift to support or detract from the Trump administration’s efforts? Currently, political risks – in its many forms – is the most consistent influence in the financial markets and consider the options for how investors would respond to disappointment.

US trade deficit drops sharply as exports hit a record: Without context, the sharp improvement in the US trade shortfall with the recently released March statistics would look like a roaring success. Politicians would no doubt like to claim this is evidence of policies that have been questioned for their long-term effect on global relations, capital flow and growth. Yet, one data point does not make a trend. The US trade deficit did indeed deflate by 15 percent to $49 billion through March on the back of a record $208.5 billion in exports and 1.8 percent decline in imports to $257.5 billion. That said, the improvement was made from the largest negative gap since October 2008 reported in February. More importantly, the threat of trade wars that arise from tariffs can make any benefit seen now completely washed out mere months ahead should a series of retaliation by the Eurozone and/or China develop around current uncertainties. The EU is still troubled by the open question of whether the US will place its metals tariffs on the region’s produce, while a delegation from the US – Commerce’s Ross, Treasury’s Mnuchin, Chief Eco Advisor Kudlow – to China have yet to give a sense of optimism about their discussions. 

Not so fast RBA, CBA pushes hike into Q12019: CBA, Australia’s biggest lender has recently pushed back their forecast of the next RBA hike off the 1.5% floor announced where it has been since 2016 to February 2019 from November 2018. It appears the flattening forward curve will continue to keep a lid on the Australian Dollar, which continues to lose ground to the US Dollar as evidenced by the widening yield discount that front-end AU yields relative to front-end US yields.

The AU 2yr yield discount relative to the US 2yr yield stands at -47bps whereas it held a 60.3bp premium as of last September. This massive flip in yield premium to discount is a key reason why futures have gone from pricing in an RBA hike later this year to now not fully pricing in a hike in 2019.

A key global commodity market is set to open today: Despite the volatility, commodity investors and global hedgers like miners, steel mills, and other exposed corporations are likely in high anticipation as Dalian Iron Ore will be open to global commodity investors. Currently, Singapore Exchange is the largest clearer, but the opening of iron ore futures on the Dalian Exchange will give an on-ramp for global investors to find exposure to the world’s second-largest economy and to a key commodity priced in Yuan. 

Earlier this year, Crude futures priced in Yuan known as PetroYuan kicked off and are expected to become the East’s benchmark and a complement to WTI and Brent crude. This week, Chinese processor Sinopec asked to cut the volume of purchased from Saudi by 40% after Saudi set the price benchmark for Asian oil at a three-year high.

Markets Update:

SPI futures moved 48.09 or 0.79% to 6098.28.

AUD/USD moved 0.0036 or 0.48% to 0.7529.

On Wall Street: Dow Jones 0.11%, S&P 500 -0.32%, NASDAQ -0.01%.

In New York: BHP 1.11%, Rio 0.6%.

In Europe: Stoxx 50 -0.69%, FTSE 100 -0.54%, CAC 40 -0.5%, DAX 30 -0.88%.

Spot Gold moved 0.62% to US$1313.07 an ounce.

Brent Crude moved 0.61% to US$73.81 a barrel.

US Crude Oil moved 0.53% to US$68.29 a barrel.

Iron Ore moved -1.89% to CNY468 a tonne.

LME Aluminum moved 2.72% to US$2321.5 a tonne.

LME Copper moved 1.11% to US$6820 a tonne.

10-Year Bond Yield: US 2.94%, Germany 0.53%, Australia 2.81%.

 

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