Originally published by IG Markets
We are still seeing a positive trend in speculative appetite across the various global market benchmarks, but the addition of volatility is causing a certain degree of nausea among traders. At this stage of the cycle, volatility is undesirable.
Despite the wishful thinking of most traders, a leveraged degree of market activity rarely manifests in a single direction and it is even rarer that such consistency would support a mature – and increasingly unmoored from ‘value’ – trend. Volatility equates to uncertainty and the complacency that has been utilized to stretch the last 12 months of gains in particular does not need the scrutiny that naturally brings. Nonetheless, the VIX this past session climbed above 12 briefly in defiance of the equity market’s climb. That is still low historically, but the gap on the open and follow through to fresh all-time highs from the S&P 500 comes with glaring and unfavorable comparisons to Bitcoin’s wild rise and fall around $10,000. Risk, volatility, and sudden surge at stretched values would naturally raise the market’s fears of blow off tops.
Wall Street: Where Asian and European equity indexes were bathed in red Thursday, the US markets were a notable island of green. The Dow and S&P 500 extended a familiar series of bullish opening gaps – the latter raising the tally of consecutive upside jumps to eight. Adding to the enthusiastic sentiment this implies, each of the past seven trading days has at hit fresh record intraday highs for the same index. Clearly this past session’s performance for US shares was motivated by local news that the tax policy making its way through Congress had gained further traction, but is this talking point alone the motivation for such extraordinary pacing? And if so, how long can the windfall last?
US Tax Bill: After the multiple failures by the US Congress to push through the healthcare reform these past months, caution has held when it comes to evaluating the economic and financial support to be found in proposal for major policy changes. One of the major hurdles to the passage of that unfulfilled policy vow by the US President and many GOP congressmen and women was John McCain. And so, when news in the afternoon hours of the New York session that McCain would support the bill circulated, there was a natural ebulence. This policy still has a ways to go before it is approved and long-term economic implications are heavily debated. Yet, in the short-term; speculators are happy to find any reason they can to justify their already expensive positions in the market.
OPEC Meeting: The moment all energy traders have been waiting for came to pass overnight as OPEC and strategic Non-OPEC alliances like Russia confirmed rumors that a nine-month extension from March 2018 to end of 2018 had been agreed on to curb production.
As with all deals, the devil is in the details so markets are waiting to see if any members could receive an ‘opt-out’ in mid-2018 if stockpiles fall toward the 5-year average sooner than expected. Such a development could leave Crude oil in a weak spot similar to the one-month decline seen in December 2016 after the initial agreement. Another data point that showed OPEC doesn’t sway the global power they historically have come from US data showing imported crude and refined products hit a record low as the US shale oil industry is doing just fine and pumping away, which could delay the efficacy of OPEC’s agreement.
British Pound: In G10 FX, Britain’s currency has recently been pounding higher thanks to headway made on a preliminary UK/EU deal on the so-called ‘divorce bill.’ The development on an agreed upon bill with a price tag between €45bn (£39bn) and €55 bn shows significant headway being made in negotiations compared to the market perception of a deadlock. Despite the optimism, traders and investors exposed to the UK should keep an eye on the Irish Border that remains a stumbling block with historical significance ahead of the December 14 negotiations.
Multiple ways of looking at the British Pound show that gains may continue, but the future remains clouded. While bets in the rate market show the Bank of England (BoE) has a higher probability of raising the reference rate in March, the terminal or final rate hike expectation has not budged. In other words, traders betting on imminent GBP weakness are likely to be disappointed, but so are those who are expecting a long-time rebound in Sterling toward the pre-Brexit levels. The options market, which looks to ratios at out-of-the-money calls to puts also show that beyond 1-month, traders have a distinctly bearish long-term bias on the GBP.
Bitcoin Financial Stability: Though there has been a lot to happen in the global markets this past week to warrant headlines, Bitcoin’s epic volatility still deserves top spot. The cryptocurrency managed to settle this past session following its incredible about face Wednesday when it surged through $10,000 to hit $11,400 only hours later before collapsing back to around $9,250. For those that have watched – and participated – in emergent markets before, this is like spotting a rare bird. It is the speculative critical mass where media coverage and participant mania triggers a blow off top around a key level. This doesn’t mean we have come to the end of Bitcoin’s march higher necessarily. However, this oscillation will certainly leave a more cautious crowd about the power of volatility. Expect volatility to linger (Thursday’s session range was 16 percent of its total value) and traders to remain on-edge.
ASX 200: The AS51 cash index was unable to close November above 6,000 but managed to end the month stronger by over 1%. The open of 5,909 provided a strong platform to the beginning of the month to jump to 6052 on November 8, with an intra-month range of ~2.4% before trading roughly sideways for the remainder of the month. The final day’s performance was a 0.7% drop to 5,969, which was the largest drop since November 14 and were dragged lower by financials. On news that the government will open a public inquiry on Australia’s bank at PM Turnbull’s request.
The implied open for December is back above 6,000 at ~6,015 for a ~0.5% gain from the November close.
Commodities: Commodities were generally lower across the board. That usually occurs when risk trends are generally lower to drain speculative interest from this market as with most other financial instruments or when the pricing instrument (the dollar) has significantly increased. Neither of those drivers was in play this past session. US speculation was uneven – despite equities – but not meaningfully negative. And, the dollar was notably in retreat against its major FX counterpart. In the key energy complex, crude oil’s hold after the OPEC meeting was one of the best performances that would be mustered. Heating oil and natural gas were down significantly. Further, in metals, gold dropped back to a multi-month trendline support while silver has cleared its own floor and is firmly under bears’ controls.
Aussie Dollar: The Australian dollar remains in a difficult spot when looking at long-term capital flow prospects. The yield premium of AU government debt, which historically attracted international capital has narrowed persistently against the US 10-year treasury yield to 10bps. The last inversion where US 10-year yields were higher than AU was in 2000 when Australian dollar traded at an average US$0.58.
The good news is that recent economic data was encouraging, and the Aussie could persistently find selective strength against the New Zealand dollar and haven currencies like the yen and Swiss franc. A recent report showed local firms expect capital expenditures to rise next year to A$108.9b from prior estimates of A$105.4b while October building approvals rose 0.9% m/m vs. an expected 1% decline. Another echo of positive sentiment came from Chinese PMI that was stronger-than-expected. AUD/NZD climbed as high as 0.7% after NZ business confidence sank to the lowest levels since 2009.