Originally published by IG Markets
The US Labor Day holiday has naturally distorted the leads for the Asian market open, so there are fewer variables to discount, which will probably be welcomed by some.
SPI futures closed up 11 points, although this platform for the S&P/ASX 200 to progress still seems quite shaky. S&P 500 futures were open throughout European trade and closed lower by 0.3%, with European equities faring a similar amount, with the Euro Stoxx 50 index closing -0.4%, where volumes were awful and some 45% below the 30-day average. By way of leads, the materials and energy sector closed unchanged and +0.1% respectively and with the ADR market (American Depository Receipt) closed we can’t get a firm grip on BHP's (AX:BHP) open.
As a side note, I remain somewhat bullish on US equities here as a trade, although happy to reverse this bias should the S&P 500 trade and close through 2420. A close through 2480 and I would be adding to longs here, but it feels here that the market has fully discounted further missile test from North Korea and the reactions from here on in will be even less pronounced. The larger reaction either has to come from a missile making landfall, which seems very unlikely, or something more aggressive from the US side, other than sanctions. Then we have the backdrop of low inflation, growth across all OECD countries, predictable central bank policy, low implied volatility and low bond yields, all amid decent earnings growth.
Traders are consistently looking for reasons for a sharp sell-off in global equities, but the catalyst from this to occur may not come from an overnight trigger, and the real reason is more likely to take time to eventuate. That said, the US debt ceiling debate is still a potential catalyst for risk aversion and anxiety in markets and while some have maintained a focus on comments from the US ambassador to the United Nations, Nikki Haley, that North Korea is “begging for war”, the debt ceiling debate has also been well flagged. The debate should garner more attention with the House of Representatives vote tonight on a hurricane relief bill and reports are that this bill will not be tied to raising the debt limit, with the conservatives wanting to see a debt ceiling hike coupled with spending cuts and further reform programs. So with this view in mind, all eyes fall on US short-term debt, with a focus on the US T-Bill maturing 12 October, which is the key proxy now of potential default risk.
While the risk of the US defaulting is still extremely low we can get a strong understanding of anxiety around this event from this debt instrument.
Precious metals have traded through the US session, but again, we can turn the page on the session as once European trade got underway we saw fairly tight ranges. Gold has been well traded, but after hitting a session high of $1338.81 we have seen the metal trade in really a $4 range through US trade. It may be a tough start for the steel and iron ore plays, with spot iron ore closing -1.3%, while on the Dalian futures exchange iron ore, steel, and coking coal fell 2.2%, 0.4% and 2.7% respectively. US crude closed +0.2%, with a 3.3% fall in gasoline also getting attention, although the trading session for energy futures closed at 03:00 aest and just like S&P 500 futures will re-open at 08:00 aest.
- In the absence of any real moving markets, it’s been the crypto space that has captured client attention and the flows have been significant. China moving to ban Initial Coin Offerings (ICO) has seen a wave of selling, although the more pronounced moves have naturally been seen in ethereum, which is the vessel (rather than bitcoin) companies would use when raising cash through ICO. It seems the Chinese authorities will allow trading of crypto currencies, but they clearly stopping stop of company’s raising capital using a process that is so unregulated, which is one of the attractions for these corporates. Whether we see this tougher stance being adopted by other global jurisdictions is yet to be seen, and we have only just seen Aussie start-up, Power Ledger, raising $17 million in an ICO. One suspects this could be down to how China regulate their IPO market and the control they have from limiting companies looking to tap the market for funds.
Either way, we are seeing good buying on both ethereum and bitcoin at current levels.
With the S&P/ASX 200 likely to open on a flat note, the focus today really falls on both the Aussie rates market and the Australian dollar. Implied volatility in AUD/USD remains subdued and the options market suggests we shouldn’t see much more than a 46 point move in AUD/USD (in either direction) from the current spot level of $0.7944. If a move in either short-term rates or AUD is going to eventuate I would be more inclined to think it will come from the current account data due at 11:30 aest and the net exports as a percentage of GDP, which should give us the clarity to more accurately forecast tomorrows Q2 GDP print. Net exports are forecast to provide zero contribution to the Q2 GDP print, but a negative print will only add further downside risks after yesterday’s poor Q2 inventory and company profit data. The RBA statement at 14:30 aest, in theory, shouldn’t promote too much volatility and should justify the 20% chance of a hike by February priced into markets.