Originally published by IG Markets
It’s was all quiet on the Western Front in European and US trade and a pause after what has been such a strong run for global equity and credit markets.
Whether the gains can continue this week is obviously yet to be seen. I remain bullish, but of the view that these markets are tired, fatigued and need new information to feed the beast. So much cash has come off the sidelines, with one US investment bank recently disclosing that their institutional clients have never held a lower cash balance in the banks account, which suggests both active discretionary and systematic funds are all-in on this rally. The idea of reflation and this well-documented goldilocks backdrop for equity appreciation and risk-taking is now mature, with investors having reacted to good economic growth (75% of countries enjoy above trend GDP), robust earnings growth, fairly low inflation and predictably central bank policy, which is helping keep implied and realised volatility low.
Can this change this week with 40% of the S&P 500 set to report Q3 numbers, with the market having already seen 82% of the 97 companies, who have reported, beating earnings expectations? At the same time President Trump looks set to announcing his appointment as chair and vice-chair of the Federal Reserve anytime, which as we heard overnight is “very, very close”, while we are also due to get a vote this Thursday in the US House on the Senate’s 2018 budget resolution, which lays the ground work for tax cuts and fiscal stimulus and this is widely expected to pass. Locally, we also have to deal with Aussie Q3 CPI on Wednesday, Thursday’s ECB meeting and the start of the Aussie banks FY earnings. So despite a lack of any real move in markets overnight, we know there are landmines and event risk to work through and this creates opportunity for short-term traders.
Looking at market moves by way of a guide for Asia, we can see the S&P 500 closing -0.4%, with traders fading the opening high of 2578, on volumes 8% above the 30-day average. Despite this small loss at an index level, all sectors bar healthcare fell on the session, with 63% of stocks lower. In terms of earnings, the focus in the session ahead (due 22:30 aest) falls on Caterpillar (NYSE:CAT) and McDonalds (SA:MCDC34), where Caterpillar has been one of my favourite stocks for some time and remains a posterchild of trend and momentum. Whether they can live up to the lofty expectations for Q3 sales and earnings is yet to be seen, while they will also need to justify full-year consensus expectations of $43.1 billion in sales and $5.215 EPS.
We can also see very modest buying in US fixed income across the curve, however, despite this we have seen the US Dollar Index gain 0.3%, with the gains most pronounced against the euro and Scandinavian currencies. There will be much focus this week on the US dollar index and whether we can see a break of the 94 area, which as we can see on the daily chart seems so important, as break would certainly raise the prospect of good upside, where a stronger US dollar, if backed by a break of 2.40% in the US 10-year treasury could impact sentiment in broader financial markets. Given the euro commands a 57.6% weight in this basket of currencies (traded against the US dollar), one suspects a dovish ECB (well, relative to expectations) could also drive EUR/USD lower and the US dollar index through 94.00. It certainly feels as though the market will go into the ECB meeting eyeing a revised run-rate for ECB bond buying to E30 billion a month, while extending the program by nine months.
AUD/USD continues to see no clear cut trend and price action is fairly messy at present. We have seen a move into $0.7796 at one point, but the buyers are stepping in to defend the figure. There is little to drive the pair in the session ahead, with the focus on tomorrows Q3 inflation print. USD/JPY is perhaps a bigger issue for Asia today, as the pair has found good selling activity, with the pair around 80 pips lower than yesterday’s high of ¥114.10, and this should weigh on the Nikkei 225 on open and potentially end the incredible run of 15 straight gains!
It’s also been a subdued ride in commodity land too, with Brent and WTI crude closing -0.7% and +0.1% respectively. Copper has gained 60 basis points, while in the bulks we have seen spot iron ore close -0.7% at $62.00, with Dalian iron ore, steal and coking coal futures trading -0.1%, +1.2%, and -1.3% respectively. Gold has been well traded, with many noting a spike in activity just before 03:00 aest, with price jumping from $1275 to $1283 and nearly 19,000 contracts traded in a five minute period. So it’s quite a messy affair in commodity land and hard to see too much love for Aussie miners today, but I would expect BHP (AX:BHP) (by way of a proxy) to open down modestly.
Aggregating all the news we can see Aussie SPI futures closing lower by five points, so we should see the S&P/ASX 200 open around 5890. There seems little inspiration from the overnight leads to buy the market here, but we live in strange times and the downside (if it does eventuate) will be driven by profit taking above all and I would not be overly surprised to see the index fall from 5890 on open, although I don’t expect a collapse. It will be interesting to see how other Asian markets fare, as moves in the Nikkei 225 and Hang Seng could affect S&P 500 futures to an extent, which could manifest on sentiment in Australia. It promises to be an interest session, at least for the ultra-short-term focused traders out there anyhow.