Originally published by IG Markets
The focus overnight has been on the Federal Reserve, with moves in oil, bulk commodities and Bitcoin also getting a good focus.
Bitcoin is trading like a small cap miner that the market feels is ready to make a game-changing announcement. The number of social posts I have seen in the past week about how much a $1000 investment made in 2016 would be worth now is everywhere. I genuinely can’t wait to see young tech heads driving down Collins Street in a new Aston, because they had the stones to be able to hold their exposure through what has been an exponential move without ever having taken profit. While I haven’t be involved in the rally in Bitcoin, it should be seen as a case study for budding new traders in the art of letting profits run, while trailing the stop loss without emotion forcing the issue of crystallising the profit prematurely.
Bitcoin is up another 11% on the session, and up for an impressive eighth straight day. While I haven’t seen the news flow overnight, it seems to me that this is the mother of all FOMO (Fear of Missing Out) trades and it has been great to see retail genuinely following the trend here and not consistently trying to counter trend this move. Perhaps the fact I am putting so much focus on Bitcoin suggests a top has been seen and I am the taxi driver contrarian indicator. We shall see, but our flows in Bitcoin have been huge.
Elsewhere, the eyes of the market were on the Fed minutes and they had a reasonable effect on a market that was literally devoid of a pulse, with the CBOE Volatility Index trading back below 10 for part of US trade. Even with a late session rally (post the FOMC minutes) the Dow Jones index and S&P 500 traded in a meagre 89- and eight-point range respectively. The Nasdaq 100 saw a bit more life, and tech was the star again in the S&P 500 sectors. Volumes again on the light side, and some 11% below the 30-day average on the S&P 500.
The minutes themselves seem quite ‘neutral’, although if we judge the moves in the US 5-year Treasury, which fell from 1.83% to 1.78%, we can deduce that the market was positioned for more of a hawkish tilt. Without going into the statement in depth, the stage has been set for a June hike, with the narrative that it would 'soon be appropriate to take another step in removing some policy accommodation'. 'Soon' equals June to economists, although if we look at the July Fed funds future, we can actually see some modest buying, taking the yield on the contract down slightly to 1.10%, consistent with a 76% probability of a hike.
Most of the focus has been on the narrative on reducing the $4.5 trillion balance sheet and reading through the statement it has the feel that we could hear an announcement that they will halt some reinvestments in the September meeting. This seems somewhat earlier than consensus, who would be have been looking for this to materialise in December. This remains my own personal view (for what it’s worth). The fixed income strategists out there would have been interested in the method of capping the monthly run-offs, with the Fed pre-announcing a US dollar level that would be permitted to mature. This is getting technical, but the fact we have seen US Treasuries rally and the US dollar fall under this announcement is very interesting. A normalisation of the balance sheet was supposed to be extremely bullish US dollar's and the US dollar has fallen against all G10 currencies on the session.
US crude and Brent has fallen very modestly on the session, but all eyes will be on tonight's OPEC meeting and that becomes the key note event. There has been some discussion, specifically from Russia’s Energy Minister Alexandr Novak about freezing output for 12 months, and that perhaps Iraq and Iran could be on board, although both nations have said they 'will go along with the Majority'. A 12-month extension would certain go a long way to mitigating a ‘sell the fact’ scenerio playing out in oil. It is also worth flagging that some support was seen in the barrel after a strong 4.43 million and 787,000 barrel draw in crude and gasoline inventories.
If we aggregate the overnight moves we can see SPI futures pushing up a modest eight points, so our call for the S&P/ASX 200 currently sits at 5779. It’s interesting to see the ASX 200 consolidating just shy of the 19 April low (and double top neckline) of 5791 and price action from here will be interesting. I would be taking a neutral stance on the market, but feel a break of 5791 looks probable.
In terms of drivers there will be a central focus on the materials space today given the huge move lower in iron ore futures through yesterday’s trade. Spot iron ore closed 2.4% lower, while Dalian futures fell a further 2.3%, with steel futures also down on the night session. BHP Billiton Ltd's (AX:BHP) American Depository Receipt (ADR) closed up 0.5%, but the attention will be placed on the pure plays such as FMG and AGO, where we saw a reasonable pick-up in shorting activity yesterday.
AUD/USD saw a reasonable sell-off yesterday after the Moody’s downgrade of China sovereign rating, but has clawed its way above the the 75c handle. The is clearly a reflection of US dollar weakness more than anything, with comments from US Treasury Secretary Steven Mnuchin also adding to the US dollar selling with a focus on the debt selling timetable again. Price action is actually looking quite constructive here but there is a general malaise on the US dollar at present.