Originally published by IG Markets
The music that keeps investors buying will continue to play, just at a slower pace. That’s the message global central banks and economic data have sent around the world over the past 24 hours.
The weak consumer inflation data out of Australia with a print of 1.8% y/y add further to the idea that the RBA will not be persuaded by other central bankers who charged ahead with hawkish language only to pull back as the sustainability of an economic recovery has proven difficult.
The European Central Bank came out of the gates on Thursday with a commitment to halve the amount of bond purchases while at the same time extending the tenor of the absolute program life. The market read this as a sign that central banks may be buying less, but are no less active than they have been in working to ensure volatility remains low and confidence remains high.
The market reaction tells you everything you need to know with the euro falling against the majority of G10 FX and Bunds going bid alongside the DAX. The ECB rates decision and Mario Draghi briefing that maturing debt investments will be reinvested in 2018 at a “substantial” amount “for an extended period of time.” The line from Draghi that the market appears to have liked the most is the assurance that there is no “sudden stop” envisioned by the ECB’s head. The euro traded toward the 100-Day Moving Average for the first time since April when it traded down to EUR/USD 1.1675.
S&P/ASX 200
S&P/ASX 200 remains a shade below the year-to-date high traded at on May 1 at 5,956 with the current close at 5916.30. The futures price implies a lower open by nearly 30 points near 5,888. The heavy hitting sectors of materials and financials continue to limit the breakaway moves higher in the index due to lower margins from financial firms thanks to hesitant RBA and highly concentrated iron ore trailing the fast moves of aluminum and copper.
Our call for the ASX 200 sits at 5940 (+0.5%), so 16 points away from the high print from May and obviously 60 from the illustrious 6000 level. BHP (AX:BHP) is set to open up 8c higher (if we use the ADR), although the S&P 500 materials sector has flown (+1.4%). Aussie banks should open on a stronger footing, but it’s all eyes on Macquarie Group Ltd (AX:MQG) this morning with the stock reporting 1H earnings. The market expects cash earnings of $1.14 billion, on revenue of $5.29 billion and whether they can justify the full-year expectation’s set by the street is another thing. However, keep in mind MQG is an absolute super star when it comes to earnings and in the last 18 half-yearly reports shares have only closed lower on the day of reporting once!
All eyes in Australia will be on the PPI print this morning in hopes that the recently weak inflation data was not a sign of things to come. Previous readings of PPI y/y were 1.7%, a q/q at 0.5%. PPI measures the prices received by producers at the completion of their supply chain and can echo the sentiments found from inflation data.
RBA Deputy Governor Guy Debelle added concerns to the slowing economy stating that the inflation data, as weak as it was, may be even weaker due to lagging re-weightings of the index and substitution bias. Substitution bias is the idea that consumers will move to cheaper goods faster than indices like CPI can adjust. You can read his speech here.
Wall Street continues to flash green, getting a lift on gravity-defying earnings. Since earnings season began in mid-October, investors have seen the Wall Street 30 rise by 2.5%. US economic data has been impressing since early September, and Friday’s US GDP print is expected to keep the positive sentiment going thanks in large part to economic bell weathers in the US raising forecasts.
Technology firms remain a keen focus during earnings seasons after a shaky earnings season last quarter led by volatility surrounding the often-cited quartet of Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOGL).
The Australian dollar continues to be sold on the view that US dollars should be bought, not sold in anticipation of a new Federal Reserve head and the recent selling in the US sovereign bonds that have sent yields higher. The US Treasury 10-year yields are at the highest levels in 6-months, which brings the US dollar higher in the hope that tightening is providing demand.
AUD/USD fell 1.25% after the weak consumer inflation print pushed out the already lagging expectations for the next RBA hike. The Australian dollar is now facing the 200-DMA against the US dollar, but the momentum would not expect buyers to step in front of the selling that has taken place across commodity FX like New Zealand dollar and Canadian dollar, that have their own themes driving their selling vs. the US dollar. Traders utilizing the charts would likely see 79 US cents per Australian dollar as a likely point to encourage selling against the US dollar in the current environment.
Commodities have received exciting news for oil bulls on the backing of Saudi’s Crown Prince Mohammed bin Salman regarding oil’s “new era” that explains supply control is the key way to support prices. Recently, markets were encouraged by Russian President Vladimir Putin’s comments that Russia was open to extending cuts in alignment with OPEC producers to the end of 2018. Despite impressive compliance between OPEC on production cuts, US production showed the strongest rise in output since 2012.
Given the rise in stocks, precious metals alongside the CBOE Volatility Index fails to hold relative spikes higher. The spot price of gold is currently trading near the low of the monthly range at US$1,306.11/oz. to US$ 1,260.67/oz. iron ore remains under pressure on China’s concern about dirty steel mills, which has pushed miners to focus on mining higher-quality ore as lower-quality such as the 62% iron ore content delivered to Qingdao continues to trade 20% lower from the August high.
Volatility is picking up in emerging markets led by the rising concerns of a debt downgrade to South Africa after their Finance Minister signaled an intention to issue a slew of new debt to plug a widening budget gap. The troubles do not belong to ZA alone. Looking across Emerging Market FX (EMFX), traders recognize the longest selling streak against the US dollar since April. There is traditionally an inverse relationship between trends in the US dollar and the US dollar-dependent borrowing emerging markets.