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    Risk factors - APAC brief 20 Nov

    Written by Kyle Rodda - IG Australia Risk? No, thanks: Markets have given a resounding “nope” to all varieties of risk overnight. Equities have been slogged on Wall Street, following to a sluggish day in European markets, that saw the FTSE drop 0.2 per cent and the DAX shed 0.85 per cent. Here it looks like this is the convergence punters have been calling: US shares are playing a rapid catch-up with their global counterparts. The losses are piling up. The NASDAQ has been hit the worst in the North American session led by falls in FANG stocks. At time of writing, with about half an hour left in the session, the losses for that index are hovering around 3.00 per cent. That’s not to say the picture is any prettier for the other major US indices: The S&P500 is down just-shy of 2 per cent, and the Dow Jones is much the same. The havens: Typically, US Treasuries have maintained their bid. The yield on US 10 Year Treasuries has dipped to 3.05 per cent, while the yield on US 2 Year note has fallen further, down 3 points to 2.77 per cent. The markets are scrambling for safety once more as volatility spikes again: the VIX is up to about 21, and that is ample reason for investors to bail-out of equities. The US Dollar is suffering from the drop-in yields, and the Japanese Yen is accepting the safe-haven bid, along with the EUR, which is eyeing off 115 again, supported by (slightly) diminished anxiety around the Italian fiscal crisis. Of course, the Australian Dollar and New Zealand have pulled back, trading at 0.7290 and 0.6840, respectively, although it must be mentioned that commodity prices are holding well enough. Risk factors: The US Dollar Index is threatening to break short-term trend line support, and this is clearly helping gold prices: in another example of a flight to safety, the price of the yellow metal has climbed to $US1224 per ounce. Calling a top for the greenback is way too rash, and in time if this level of volatility continues, a return to the almighty Dollar would surely manifest. What is happening here, for now, though, is traders are pricing in a more dovish Fed, against what is being presumed as the start of “slower global growth” narrative leading into 2019. The hostilities between the US and China flowing from the weekend’s APEC summit fanned these fears, as has the deteriorating situation around Brexit. But ultimately, they tie back to the belief that the Fed may have overcooked their tightening regime. It’s the Fed, stupid! Markets have reduced their bets the Fed will hike rates next month to 65 per cent, with only a further two priced in for 2019. This is well-off the number flagged by the Fed in their dot plots, which outlines a further 5 hikes by 2020. The divergence between policy makers forecasts and that of market participants opens-up a cavernous divide, and subsequently boosts the chances of high future volatility. Growth aside, inflation risk still exists. Although there are few major signs (for now) that inflation could spiral out of control, building wage pressures, higher prices from tariffs, and the knock-on effects of Trump’s fiscal assertiveness mean that the risk remains non-negligible. If inflation were to emerge, the Fed would have no choice but to react and hike rates, sending markets scrambling to re-price expectations. Corporate debt bomb? It's on the chance that this situation will occur that has traders most worried, especially given the hot issue in global markets, presently: the massive US corporate debt burden and the impact tighter financial conditions will have on it. Credit spreads have continued to widen since October’s major share market correction: in fact, on both investment grade debt and junk bonds, the widening has accelerated. The dynamic makes it truly difficult to sustain equity markets gains, as attention becomes fixated on credit risk, and the broader implications of a more expensive debt burden for corporates, as a climb in short term rates translates into higher future refinancing costs. Indeed, it remains early days on this matter, but if it were spiral out of control – in a worst-case scenario – the selling across global equity markets witnessed already would only be the beginning. Pain for the Asian equities: It must be said this is one of the more catastrophic scenarios, and it is a long way from assured that it will play-out. Nevertheless, as it stands one day into the trading week, equities are having trouble finding friends. The volatility in US markets has futures pricing-in a generally negative day for Asian equity markets, on the back of day that – granting thinner volume everywhere bar Chinese markets – wasn’t too bad. The ASX200 certainly suffered, but the Nikkei was able to add 0.65%, the Hang Seng 0.72 per cent, and the CSI300 1.13 per cent. There was very little news flow for the region yesterday, aside from the overhang of the disappointment from the APEC summit, and perhaps the absence of information supported those gains. Australia today: It will be another day with a dearth of scheduled economic data, with RBA Minutes this morning the highlight. SPI futures are pointing to a 9-point drop at the open for the ASX200. It was another matter of yesterday’s sell-off simply being an “equity problem”: few sectors were spared from the selling, as investors, trading within thinner volumes, unwound their exposure to equities. The story for the day – and this was represented in trading volumes – was the latest chapter in the Financial Services Royal Commission. The financials sector sucked 15 points from the index on volumes 15% per cent above average. The close for the ASX200 below the psychological-level of 5700 opens-up downside for the ASX200 in the days ahead to key support around 5625, with momentum indicators and the RSI suggesting such declines are more than feasible.
  2. Weaker sentiment: Risk aversion continues to plague global markets. Despite some positive developments on Friday regarding the US-China Trade War and US Federal Reserve policy, confidence appears to be lowly, resulting in a general flight to safety. It was telling that the NASDAQ couldn't close higher along with the Dow Jones and S&P500 on Friday: the desire to jump into growth stocks keeps diminishing in this market. It raises the risk that market participants have internalised the idea that now is not the time to be chasing capital gains in high-multiple shares. The momentum chasers are being unquestionably washed out of the market, with punters changing strategy from one of "buy the dips" to "sell the rally". Missing conviction: It can be at these points in which moves to the downside are exaggerated because of an overall bearish bias. Assessing volumes are a terrific indicator of this, and currently and on balance, the days when Wall Street closes higher has generally coincided with days when volumes are relatively thin. The dynamic implies a lack of conviction from the buyers and sets up opportunities for aggressive sellers to profit from rallies in the market. The ASX200 demonstrated this well on Friday, where after a rather volatile week that ended with the index closing 0.10 per cent lower, intraday rallies in Aussie shares were flimsy and quite fleeting, revealing a tangible unwillingness by traders to take long positions in this market. Less information, more volatility? It will be curious to see how this theme holds in the week ahead. There is such a dearth of fundamental data: the economic calendar is light and US earnings season is effectively done-and-dusted. Traders will have no choice but to focus on the handful of significant geopolitical stories playing out, all in the backdrop of continued speculation about the very core concerns regarding US interest rates. It's a recipe with all the ingredients for a volatile week, if market participants struggle to price in the many vacillating variables moving markets. Watching how the VIX behaves will be the starting point for many-a trader, to get a gauge on to what degree fear and uncertainty exists. Geopolitics: It's conceivable that a new development in Brexit and/or the Trade War could shift sentiment very rapidly. There is a sense a breakthrough -- whether positive or negative for markets -- is upon us in both of those issues. Theresa May's Prime Ministership and her Brexit deal will face an existential threat this week, the possible outcome being a successful no-confidence motion in the Prime Minister, and subsequently the death of her Brexit deal. Trade War negotiations have ostensibly improved, however there are many mixed messages coming from both the US and Chinese governments regarding what this month's planned meeting between Chinese President Xi Jinping and US President Donald Trump at the sidelines of the G20 will yield. Slight to safety: An absence of certainty and clarity on both subjects has traders seeking safety. US Treasuries have rallied, with the yield on the 10 Year note falling to support at 3.07 per cent, a break of which could open downside to 2.95 per cent. The Japanese Yen has also been bid-up, closing last week's trade at 112.83, while the EUR bounced back above 1.14 -- and the GBP recovered some of its losses -- causing the US Dollar Index to pull back. Gold prices have spiked consequently, trading at $1222 per ounce. Other commodities have been supported by a lift in optimism regarding the trade war, with Copper and aluminium closing last week high, however oil prices still appear vulnerable to the downside, as concerns of a global over supply persist. The Aussie pops: Bringing it back closer to home: the Australian Dollar has been a major beneficiary from the weaker greenback on Friday. The Aussie Dollar has broken resistance at 0.7310, to open upside now toward the 0.7450 mark. The trend of US Dollar strength ought not be considered over yet: the yield advantage of holding US Dollars remain and looks likely to persist as the Fed maintains its rate hiking cycle. The tremendous amount of short positioning in the Australian Dollar (still), however, means that a continued pop higher in the A-Dollar is possible, before the more structural factors relating to interest rates differentials reassert themselves. In the week ahead, any sign of a step forward in trade negotiations could fuel an Aussie Dollar rally, with the inverse naturally true if trade negotiations sour. ASX today: Finally, the price on SPI futures is indicating a 17-point jump at the open for the ASX200. As alluded to earlier, a read on volume could be valuable today, especially if the market experiences upside. Of course, being a Monday, it will likely read lower irrespective, so perhaps the question should be to what extent volume deviates from the norm. The short-term trend is lower for the Australian share market and should probably considered so until a significant run back and beyond 5930 is achieved. A reason to buy into the market will be required to achieve this - something today is unlikely to deliver. Looking at the key sectors that drive the ASX200 and the narratives shaping their activity, briefly: the financials could find themselves supported today by a small army of bargain hunters, but another poor showing from Aussie property on the weekend plus more from the Royal Commission this week could drag on the banks; a sluggish day for the NASDAQ on Friday could indicate weakness in the high-multiple healthcare stocks; while the modest lift in commodity prices to end last week, along with the very slightly brighter outlook in the trade war, may benefit the miners.
  3. Expected index adjustments Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 19 Nov 2018. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video. NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange. Special dividends this week Index BBG Code Date Summary Amount MEXBOL WALMEX* MM 26/11/2018 Special Div 45 RTY WING US 23/11/2018 Special Div 305 RTY SBSI US 20/11/2018 Special Div 2 How do dividend adjustments work? As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
  4. Written by Kyle Rodda - IG Australia Brexit break-down: The headlines in financial markets are mostly Brexit related. What was suspected has become so: Prime Minister Theresa May’s deal with the European Union has fallen by the wayside, potentially (if not, likely) rendering it mute. 24 hours is of course a long time in markets, and this time yesterday optimism was blossoming about a potential Brexit deal to end the years of debate and gridlock. The harsh reality has now bitten though, and the brutal realpolitik has subverted that narrative: Dominic Raab – the UK’s key Brexit negotiator – has resigned from Prime Minister May’s cabinet, amounting to a no-confidence motion in the Prime Minister and her deal. It’s curious still as to what Raab’s motives are: he was in the room with Prime Minister May negotiating the deal with the Europeans. Nevertheless, he has pulled his support, and it’s now believed the castle is about to fall. Pound plunges: There was volatility in markets in response to the shock news, however it was mostly contained to Pound. The Cable plunged from the 1.30 handle to trade below 1.2750, in what amounts to its largest intra-day move in over a year, as yields on UK Gilts plunged on back of unwinding bets of more BOE rate hikes. Continental stock indices lost ground, with the DAX shedding 0.5 per cent for the day; however, the plunge in the Pound, coupled with more stable oil and commodity prices overnight, helped the FTSE100 close flat for the day. It’s a very premature call, but futures markets are pointing to a more stable day for European equity markets when they come on line in 10 hours-time, revealing that though Brexit is a massive social, cultural and political issue, for market participants, at least for the time being, it’s more a nuisance than a major concern. Wall Street bounce: Activity on Wall Street last night can attest to this: after hitting the skids in early trade as traders digested the Brexit news, US indices gradually turned to trade-off its own themes. It’s resulted in what appears to be a reasonable outcome for the day’s trade. At time of writing, the NASDAQ is up in the realm of 1-and-a-half per cent, the S&P500 has climbed 0.9 per cent, and the Dow Jones is trading 0.7 per cent higher. The real impetus for the shift in market sentiment came upon news that US and Chinese negotiators are in the process of knuckling down terms of a trade agreement to be discussed at this month’s G20 meeting. Industrial stocks have benefitted most from the dynamic, as fears regarding growth risks wane, while Treasury yields have popped higher, with the yield on the US 10 Year note-rallying to 3.12 per cent. US fundamentals: Markets were provided with ample material to judge US economic conditions during last night’s trade. US Retail Sales data was released and surprised to the upside, somewhat confirming the US economy’s sustained strength. Of greater import, US Federal Reserve Chairperson delivered two separate addresses in the last 24 hours, hammering-home in both his conviction that the US economy requires further interest rate hikes, even if that means some heightened volatility in asset prices. Traders largely took the news in their stride, taking it as a continuation of messaging markets have received from the Fed for the most part of the year. The US Dollar was rather steady on the news, as interest rate markets held to their current perception regarding future interest rate hikes: that is, a 75 per cent chance for a hike in December, followed by another 2-and-a-bit hikes for the entirety of 2019. The big paradox: Moving forward and looking at the bigger picture, herein lies the problem, however: markets are still under-pricing the likelihood that the Fed will hike the 3 times next year that it has flagged. Far be it to argue with the multitude of brilliant minds collectively deciding this. But as recent history has proven, the biggest spikes in volatility have come when traders have mis-forecast the fundamentals and underestimated the conviction of the Fed. It goes back to the big paradox dictating market behaviour currently (although it must be cited this up for debate and is rooted in contestable philosophical assumptions): stronger economic activity will force the Fed to aggressively hike rates, which will suck liquidity from the markets, stretch valuations further, and drive funds into safer, relatively higher yielding assets. The ultimate effect will be tighter financial conditions, higher volatility, and weaker activity in equity markets. ASX200: The big picture aside, and the day ahead is shaping up as a positive one for the ASX200. SPI futures are indicating presently a 16-point gain for the local market at the open, inspired primarily by Wall Street’s solid lead. Yesterday’s trade was rather grim for the bulls for the most part of the day, with the ASX200 down by as much as 0.7 per cent intra-day, to test the waters below 5700. Options expiries bailed out the ASX in the end, elevating the market after the formal end of trade to a neutral position for the day. The recovery was supported by positive price action on Chinese indices, which experienced (if using the CSI300 has a guide) a 1.17 per cent gain, along with a rebound in oil prices that lead the energy sector 1 per cent higher. Aussie fundamentals: In another example of stock market performance not necessarily marrying up to economic fundamentals, yesterday's local employment figures provided a very healthy upside surprise. The unemployment rate maintained itself at 5.0 per cent, even despite an increase in the participation rate, courtesy of a higher than expected jobs-added figure of 32k last month. The Australian Dollar shot through 0.7240 resistance to rally toward the next key level at 0.7310, opening the possibility of further short-term gains as short sellers continue to be squeezed. Even more remarkably, the labour market numbers resonated enough with (hard to please) interest rate traders: for the first time in quite some time, better than 50/50 odds of a rate hike from the RBA before the end of 2019 is being priced in, as some traders begin to buy the notion of a markedly improving Australian economy.
  5. Written by Kyle Rodda - IG Australia The global market landscape: November’s gains, as modest as they were, have been snatched it would seem, across Wall Street indices and Australia’s ASX200. The bloodletting has been profuse once more this week, and it seems that diminishing number of momentum chasers have had handed to them another dose of market reality. To be fair, this latest round of selling has been precipitated by a new risk: tumbling oil prices. The price of the black stuff bounced overnight, but this was of course only after a considerable plunge that sent prices into a technical bear market. Energy stocks have been pummelled, and its sparked concerns that debt instruments secured to oil held by many corporates are at a materially higher risk of default. That’s turned a commodity problem into a real-financial problem. US markets: That’s what has manifested in markets overnight. Credit spreads on US investment grade credit have blown out again, compounding the existing concerns relating to the effects Fed tightening will have on (deteriorating) liquidity conditions. The 3-month Libor rate for one, despite relatively lower volatility since the end of October, has continued to march higher, further stifling financial conditions. The assumed affect this dynamic will have on global credit availability has hit financial stocks, and those areas of the market considered highly leveraged – like US tech – driving a remarkably synchronized sell-off across Wall Street Indices last night. At time of writing, the Dow Jones, S&P500 and NASDAQ have pared losses for the session, leading into the final moments of trade, but this turnaround only occurred after an announcement by UK Prime Minister Theresa May she has cabinet support for her Brexit deal. US Treasuries and US CPI: US Treasuries have caught a bid on last night’s trade, with the yield on the US 10 Year Treasury note falling to 3.10 per cent, and the yield on the US 2 Year Note falling to 2.85 per cent, narrowing the spread between those two assets to 25 basis points. A haven play into Treasuries was fortuitously supported by (on balance) softer CPI figures out of the US overnight: annualized core CPI dipped from a month earlier to 2.1 per cent. The figures momentarily dulled fears of inflation risk, permitting traders to discount such anxieties, as risk-off assets, such as US Treasuries, were sought. It’s a trade with shrinking efficacy, however, and it won’t be long before the new-normal of elevated volatility, caused by a hiking US Fed, snuffs it out. Fed policy and Powell’s speech: This is because despite all the volatility already seen in financial markets in recent months, it won’t be enough to stop this Fed from hiking interest rates. Indeed, circumstances could change, and a risk too difficult for the Fed to ignore could derail these plans. As it stands now though, Jerome Powell’s Fed has little sympathy for the crocodile tears of market participants. He and his team are concerned with Main Street and its wellbeing, and for now, the average American punter (at least, according to the data) is doing rather well. Wall Street will just have to adjust to this world of less accommodative monetary policy – just as markets ought to do when they are functioning properly, and without artificial support. For this reason, the day ahead will find itself hinging-on a speech to be delivered by Chairperson Powell, with traders waiting for any word that may indicate a more dovish view. Geo-political risks: There are genuine macro-risks currently, and although not as significant as the structural factors relating to US Fed policy, they have and will continue to drag on US and, as such, global growth. Ironically enough, even considering this week’s equity market plunge, the outlook for matters relating to Brexit and the US-China trade-war has probably improved. The so-called “all-level” talks between the US and China has been welcomed by investors, and as of early this morning, UK Prime Minister Theresa May has announced that she has secured cabinet support for her recently negotiated Brexit deal with the European Union. The warmer sentiment generated by both stories has led to a sell-off in the US Dollar in favour of the Pound and Euro, which are presently trading above 1.30 and 1.13 respectively; while the Australian Dollar has appreciated in line with offshore-yuan to trade at resistance around 0.7240. ASX200 yesterday: SPI futures have picked up very slightly as Wall Street pares losses to end the North American session. The good-news (for markets, that is) story about Brexit and its progress has delivered the sugar hit necessary to boost trader confidence, during what has otherwise been a challenging week for the bulls. Yesterday’s trade for the ASX200 saw technical levels kicked aside, with much of market activity surely attributable to some irrational panic. Energy stocks suffered throughout the day, as did high-multiple-stocks in the health care sector, along with the heavy-weight banking stocks. The 1.74 per cent tumble really kicked-off around mid-day when Chinese money-supply and credit figures spooked market participants. Weak Chinese Retail Sales data seemed to weigh on Chinese equities, with the CSI 300 shedding another 1 per cent. The day ahead: An already very broad-based sell-off – breadth ended at a narrow 15 per cent – accelerated by way of virtue of the weak Chinese data, leading to breaks of support at 5825, 5800 and 5785. Another day of plus-1 per cent losses is rather improbable today, especially given the positive Brexit news, and that employment data is the only major local release. The market isn’t demonstrably oversold yet, and momentum hasn’t crossed to a point where hastened selling should take place. Furthermore, though bright spots are hard to find, a small minority of bargain hunters are surely to be sniffing around for value after three successive days of declines. More generally, pressure remains to the downside in the medium term: 5690 should be watched for as the next key price-level, a breach of which could open-up downside to 5600, and see the local index return to the very sticky range it occupied for 6 months in 2017.
  6. Written by Kyle Rodda - IG Australia Fleeting relief: The Chinese and Americans are talking again; and the UK and European Union are nearing a deal. Those are the two stories that have turned the dour sentiment that characterized the first trading day of the week into something resembling optimism. Perhaps it’s another relief rally – every time the world doesn’t end we get one of those. Like when US mid-terms passed with few surprises, things going as they ought to engender nice feelings in the guts of traders. And not unjustifiably, either: the trade war and Brexit have become the two biggest bugbears in developed markets. In fact, 2018 may well be remembered in financial market history as the year the three biggest economic blocs’ almost tore one another apart – well that, and the very significant turn in US Fed monetary policy, of course. Is this the turning point? If this sounds all a little grand, that’s because it is; and it is why although the headlines read well this morning, the text of the story is one that we’ve read before. Could this time be different? Quite possibly. The steps taken by Chinese Vice Premier Liu He and US Treasury Secretary Stephen Mnuchin to re-engage in talks is a considerable step forward, ahead of what is a planned meeting between the two nation’s Presidents, US President Donald Trump and Chinese President Xi Jinping, at the sidelines of this month’s G20. And the news that UK Prime Minister May has effectively secured a deal with her European Counterparts – one that includes an Anglo-friendly outcome on the Irish border, it’s been reported – bares the signs that (at the very least) the British and Europeans are on the same page. A long way to go: Nevertheless, there is an amplitude to cover for the negotiating teams on all sides relating to both respective issues to feel comfortable that, this time around, this is the true beginning of the end. The political machinations driving both matters forward are occurring (naturally) behind closed doors – away from the prying eyes of the press and the public. For all we know, both or either one of the conflicts may be well advanced towards a resolution. From what has simply been reported thus far however, little has materially changed – at least for now. Even when stripping aside the important point that even if these issues were to disappear, the bigger fundamental challenges facing financial markets would remain, the very many sticking points to arrive at an end in the Trade War or Brexit means that turbulence inevitably lies ahead, whatever the outcome. Asian action: The price action in markets, as it evolved throughout global trade, apparently reflects this notion. When the news broke about a possible step forward in negotiations between the Chinese and Americans, China’s equities flew, erasing a one per cent loss to close day one per cent higher. The Yuan – a better barometer– pared its losses to trade back at the 6.95 handle, and the Australian Dollar rallied above 0.7200 and the New Zealand Dollar paid a visit above 0.6750. The Nikkei, which had been down by 3-and-a-half per cent on less than one per cent breadth, rallied to contain losses to – a still considerable – 2 per cent, courtesy, in part, to a fall in the Yen to 114.00 resistance. European follow-through: Futures markets also turned to price in the relief-pop across US and European equities, and as news filtered through about the potential Brexit-deal during European trade, traders hit the buy button. The DAX, which would have certainly fed on the prospect of reduced tensions between the US and China, added 1.30 per cent, and the Eurostoxx 50 gained 0.96 per cent for the day. The FTSE100, it must be said, only managed to register a flat finish for the session; but this was largely due to the rally in the Pound. The GBP/USD rallied above the 1.30 handle briefly and the EUR/USD pushed above 1.1250, forcing the USD to recede from its 18-month highs – a dynamic that also saw commodities generally turn higher for a period. Wall Street fizzle: Flash forward to this moment (or really, to the moment at which this is being written): US equities are entering the final hour of trade having erased the gains attained in early trade. As has been described, the attractive headlines about the Trade War and Brexit have proven not enough to change the fundamental landscape, for now. The VIX remains hovering just below the 20-level, and a general sense of risk aversion has pushed the yield on 10 Year US Treasuries back to 3.14 per cent. Another day of losses for oil, that has seen the price of Brent Crude plunge to $US65.14, has also been blamed for the poor showing for US stocks. In a choppy end to the session caused by below average volume, the Dow Jones is down around 0.5 per cent, the S&P500 is down 0.2 per cent, while an early tech-bounce has (thus far) supported a flat day for the NASDAQ. Australia today: SPI futures have followed US indices down at the back end of the North American session, indicating that now the ASX200 is expecting a more-or-less flat open. It was another wipe out for the local market yesterday, with the Australian share market closing 1.8 per cent lower, led by losses in the healthcare and information technology sector. A handful of companies going ex-dividend, including heavy weight Westpac, certainly exacerbated he ASX200’s fall, however a breadth of 10 per cent shows this was a widespread sell-off. Australian trade could prove to be eventful today following Wall Street’s lead. The economic calendar is robust: locally, Wage Price Index data is released, while abroad, Chinese Fixed Asset Investment and Industrial Production data is printed. The Australian Dollar is exposed to downside in the event these three releases underwhelm – 0.7150 is a realistic level of support to watch for – and the ASX200 appears vulnerable to break below a key level at 5820, if Wall Street’s selling follows through.
  7. Written by Kyle Rodda - IG Australia Week starts soft: Global equities are down to start the new week. The stories driving the overnight moves are slightly different, but the themes remain the same: the dual risks of higher global interest rates and the prospect of slower global growth has put the bears (at least momentarily) back in control. It can feel repetitive to keep having to reel-off this story. Slower growth, higher rates, slower growth, higher rates – the message keeps echoing throughout markets, giving market participants a sensation of vertigo. Although it must feel trite, the inescapability of the slower growth and higher rates mantra speaks of the gravity of each concern. The fact is, markets are a smidgeon away from being half-way through November, and for most major-global stock indices, the recent ructions in equity marks means that the year has delivered nothing in return. Fears of peak growth: Now of course, to reduce the return on equities to the gains and losses delivered from January 1 to now is far too simplistic. For the many who have been in the market longer than that, or for those who have timed their run well, the year has provided ample opportunities to attain a fruitful profit. The point is however that whatever the market has been able to bequeath to the individual trader or investor, overall, equities are looking increasingly like they have hit their peak for this cycle. This is far from assured naturally and speaks only of a developing consensus – mere perception, quite possibly -- amongst market participants. However, considering how long investors had to wait for these condition, the many distractions that have enervated market activity in the second half of this year has led many to the belief that an opportunity has been squandered. Wall Street: It’s this frustration that underpinned market sentiment overnight. Big tech was once again the biggest loser on global stock markets, with the NASDAQ down by over 2 per cent, and the broader S&P500 down 1.13 per cent, at time of writing. The sell-off in the tech giants has pushed the P/E ratio across the NASDAQ, below 40/1 once again. Volumes have picked up throughout the day in US trade, but they have been hindered by the absence of bond-traders in the market due to the US Veteran’s Day holiday. That has deprived traders of the ability to assess the information contained within US Treasury yields – likely adding to the negative tone of US trade. Despite activity in rates and bond markets being subdued (if not totally missing), the US Dollar has flexed its muscles, touching a near-18 month high and looking primed to burst higher from here. Currencies: Much of the strength of the US Dollar, it must be said, is emanating from a much weaker Euro and Pound. Geopolitics and its economic ramifications (typically) dictated trade in European markets yesterday, pushing the DAX down 1.77 per cent, and dragging the FTSE (which did find some very limited support from a weaker currency and a bounce in oil prices) 0.74 per cent lower. The state -of -affairs of the European economy still appears ugly: there was a flaring of anxieties regarding the Italian fiscal crisis yesterday, which lead to a widening of bond spreads across the region; while the hope that a Brexit deal will be delivered by the end of the month is waning. It was these two narratives that drove EUR/USD below support at 1.1310, to presently trade just below 1.1250; and dragged the GBP/USD deep into the 1.28 handle, once more. Asia: The stronger US Dollar coupled with the “weaker global growth” narrative has seen the Aussie Dollar shed about half-a-per-cent, likely in sympathy with the offshore-yuan, which has plunged back into the 6.96-handle. This comes despite a solid day’s trade throughout the Asian region: although far from the strongest day we’ve seen from Asia’s equity indices lately, the CSI300 managed to add 1.19 per cent for the day, the ASX200 managed to close 0.33 per cent higher and above key-resistance at 5930, and the Nikkei and Hang Seng finished the day up 0.1 per cent on very thin volumes. Sentiment was probably given a boost by the massive “Single’s Day” in China – that generated approximately $US31b worth of sales in the space of 24 hours yesterday – however, the benefit was short-lived, with European and US traders from the far greater fundamental challenges facing the Asian region. ASX200: SPI futures are indicating a 57-point plunge for the ASX200 this morning, weighed-down by the weak lead from Wall Street, combined with the jump in implied volatility courtesy of the concerns surrounding global growth. The materials and health care sectors led the market higher yesterday, offsetting the fall in the financial sector caused by ANZ trading ex-dividend, in a day that saw breadth at a solid 60 per cent. Softer commodity prices and potential bearishness in Chinese equities present as the challenges for Australian shares in the day ahead. Copper prices have been dumped 1.6 per cent overnight, gold has fallen victim to the stronger greenback to challenge support at $US1200 per ounce, and oil has dipped by 1.4 per cent in Brent Crude terms – boding all in all poorly for the materials and energy sector in the day ahead. Oil update: Another oil update is certainly required this morning, after the sensitive politics of the black-stuff became inflamed overnight. It didn’t take long for it to happen: with all this talk coming out of OPEC of supply and production cuts in 2019 over the weekend – the result of which was enough to break oil’s 10 day losing streak yesterday – US President Trump waded into the issue via Twitter last night, tweeting “ Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” The comments from the US President – made only a matter of hours ago – has dumped the price of Brent Crude to a new 7-month low, and the price of WTI to a 10-month low, as traders seemingly increase bets that the US may boost oil production to offset reduced supply from OPEC+ if they were to occur.
  8. Written by Kyle Rodda - IG Australia Volatility lower; risks remain: Financial markets face far fewer risk events this week, but as has been repeatedly observed in recent months, that does not preclude the possibility of ample volatility. If anything, with so much global economic and political uncertainty at present, the absence of news can make already murky circumstances appear murkier. Traders are still jumpy and rather trigger happy, though implied volatility has been downgraded over the last week, primarily due to the passing some highly significant risk events. Last week's US mid-term elections delivered the outcome markets were expecting -- which in and of itself is perhaps the best outcome of all. While the FOMC stuck to their guns and kept market participants on notice: more than a major stock market correction is required to shift this Fed from its rate hiking path. A familiar story: The ability to price in – at the very least into US equity markets – the result of what was last week's two most significant events has undoubtedly been welcomed by punters. Each event cast a different light on the state of markets, with neither inspiring a great deal of bullishness. It was a sense of cautious relief, it must be said, that nothing too extreme came out of them. Ultimately, the Fed's meeting – which is far and away the more fundamentally important force in markets – provided little to the Bulls to be excited about: it reinforced the internal contradiction (pun intended) present in financial markets currently: strong economic fundamentals are finally feeding into wages and price pressures, meaning the Fed must hike rates, quite possibly at the expense of the upward momentum in stock markets. North American session: Wall Street dipped based on this on Friday. The increasingly familiar dynamic played out again: the prospect of higher interest rates gets priced into rates markets, and subsequently into US Treasury yields, weighing down equity markets, which spark a risk-off flight into US Treasuries, bidding-up that assets' price. The yield on benchmark 10 Year US Treasuries fell over 5 points on the day, as the growth laden NASDAQ fell 1.65 per cent, leading the S&P500 and Dow Jones down 0.92 per cent and 0.77 per cent respectively. The US Dollar climbed on the risk off play – as did (modestly) the Japanese Yen and Swiss Franc – driving gold prices down to $US1209 per ounce and pushing riskier assets like the Australian Dollar back-down to the 0.7226 mark. US data this week: The week ahead presents the possibility that this variety of market activity will manifest, even if only in brief patches, once again this week. As alluded to, economic data and event risk is much lighter, however some key releases of relevance to Fed policy leap from the calendar. Most significantly, US CPI data will be published on Thursday early morning (AEDT), prefacing a speech to be delivered by US Federal Reserve Chairperson Jerome Powell hours later, along with US Retail Sales figures the day after that. Inflation risk has entered the equation in a real way for market participants for the first time in years. While the US data releases this week could print and pass-by with very little reaction, considering the nervousness in financial markets at present, an awareness and preparation for possible spikes in volatility may be prudent. Europe: The end to Wall Street's week followed on from declines in European indices, which fell predominately for the same reasons as their US counterparts. The start of the week will be no less un-friendly than end of the last for European markets, after news, post the trading week's close, that UK Prime Minister Theresa May's latest Brexit proposal has been slapped down once again by the European Union – prompting (allegedly) that four more members of Prime Minister May's cabinet will soon resign. The developments open further downside in the EUR and GBP, which had already plunged further into the 1.13 and 1.29 handle even before this information was known. Oil: Arguably the most significant and news worthy price action occurred in oil markets towards the end of trade last week, as fears around slower global growth coupled with growing concerns of a supply glut pushed the price of WTI to $60.00 and the price of Brent Crude to $70.00. The tenth successive day of falls in the price of oil mark the longest daily losing streak for the black stuff in history, leading OPEC+ to call fall production cuts within oil producing countries. The situation could prove a political hot topic in the months to come: Western leaders (particularly US President Donald Trump) have maintained their vocal desire for lower prices, while the members of OPEC continue to struggle to organise a coherent view of what oil output ought to be given the current global economic and geopolitical back drop. ASX200: SPI futures are at time of writing indicating the ASX200 will recede further from the key 5930 support/resistance level and dip 37 points at today's open. This comes following a thin day's trade for the Australian market on Friday, which saw the ASX200 close 0.5 per cent lower on volumes once again below the 100-day average. Trade across the Asian region didn't deliver much for the Bulls: a weaker Yen failed to translate into gains for the Nikkei, dropping over 1 per cent instead; and Chinese indices dropped by nearly one-and-a-half per cent, and the Yuan slid through 6.95 on occasions, due to reduced optimism about a trade deal eventuating between the US and China. The ASX200 heavyweights appear set to face familiar headwinds today: auction clearance rates were again poor over the weekend, adding to fears about the potential effect the property market slowdown will have on the big banks; sluggish activity in Chinese equities and industrial commodities markets in general have amplified fears regarding global growth and its impact on the materials sector; and a lull in risk appetite has stifled the enthusiasm for growth stocks, diminishing the attractiveness of the local health care darlings. These separate narratives aren't new to market participants, and as always could quickly flip based on the vagaries of the market; but nevertheless, it appears they are for now enough to put the ASX200 on the back foot to start the week.
  9. Expected index adjustments Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 12 Nov 2018. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video. NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange. Special dividends this week Index Bloomberg Code Effective Date Summary Dividend Amount RTY GRC US 14/11/2018 Special Div 200 RTY TSBK US 15/11/2018 Special Div 10 RTY CFFN US 15/11/2018 Special Div 39 RTY RILY US 15/11/2018 Special Div 8 RTY CNS US 16/11/2018 Special Div 250 RTY SBSI US 20/11/2018 Special Div 2 How do dividend adjustments work? As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
  10. Written by Kyle Rodda - IG Australia The tone of overnight trade: All eyes back on the fundamentals – that’s the attitude now. The post US mid-term election rally stalled overnight, as investors turn their attention to this morning’s US Federal Reserve meeting. The Fed have kept interest rates on hold – that much was already baked into the price. Market activity to close the week will primarily be dictated now by how market participants interpret the language in the Fed’s accompanying policy statement. It’s been considered rather neutral thus far, and for equity markets, that’s not necessarily a positive result. Almost inexplicably, the US Dollar has rallied upon the release, despite very little new information being revealed in the statement. The argument for that may be that given October’s stock market volatility, a more dovish Fed was expected – true to form, this Powel-led Fed is not for turning, apparently sticking to the central bank’s existing outlook. Global price action: The conservative-bent to last night’s trade meant that equity markets traded more-or-less flat to lower. Asia provided a strong enough lead to the Europeans, however our region was last to the party in this week’s relief rally, so that meant little to European traders. Europe’s equities were reasonably mixed – generally down on the day. Stable and less risky assets therefore caught a bid, driving global bond prices higher. Bloomberg’s Commodity Index edged quite modestly higher, though both gold and copper traded rather directionless for most of the overnight session. The big mover in the commodity space was oil once again, with the black stuff continuing its tumble. WTI Crude has ticked into the $60.00 per barrel mark and Brent Crude has fallen to the $70.00 per barrel level, as traders adopt the position that there will remain a short-term surplus of oil in global markets. Wall Street session: At time of writing, Wall Street is entering its final moments of trade and the Fed’s monetary policy statement hasn’t inspired terribly much bullishness. Volumes are up on Wall Street, which is in stark contrast to European indices, that saw markedly below average volumes during their trading session. Activity in US Treasury markets is strong, with traders apparently judging that the Fed’s position is still one of firm, gradual rate hikes. The yield on interest rate sensitive US 2 Year Treasury note has ticked higher to a new post-GFC of 2.965 per cent, but the yield on US 10 Year Treasury Bond has remained hobbled by the outcome of the mid-week US mid-term election outcome, trading at 3.235 per cent. The spread between those two assets has thus narrowed once more to approximately 26 points. Currency markets: Across broader currency markets, the stronger greenback has exerted its influence: The Dollar Index began a rally overnight, and post-Fed has posted daily gains of 0.5 per cent. The USD/JPY is knocking on the 114.00 handle’s door, while the other popular risk off pair, the USD/CHF, fell to 0.9945. The USD/CAD has rallied, by way of a combination of a stronger greenback, lower oil prices and developing news of another breakdown in trade relations between the US and Canada. The EUR/USD has fallen deeper into 1.13 and the GBP/USD has dipped back to float within the 1.30 (perhaps in part due to the release of UK GDP data tonight). Regarding the latter two pairs, they came under pressure overnight after the European Union warned that the Italian budget deficit is running the risk exceeding the bloc’s limit of 3 per cent. That sent bond spreads wider and placed additional weight on European equities, although the weaker Pound apparently provided a minor leg up for the FTSE100, which finished the session in the green. The Aussie battler: The Australian Dollar hasn’t escaped King Dollar’s might this morning, falling to 0.7270 (or thereabouts). The very illustrative spread between US 2 Year Treasuries and the Australian Commonwealth Government Bond equivalent has expanded to 90 basis points. A spread that wide has in recent times precipitated a tumble in the AUD/USD, however it must be remarked that the Aussie battler isn’t trading quite so much on fundamental themes in the market. Improved global growth optimism and heightened risk appetite this week has supported commodity-bloc currencies, but the best explanation for the local units’ rally is an unwinding of short positions in the market. Although this is only a short-term phenomenon, and the fundamentals will likely reassert themselves, the AUD/USD’s break of its trend channel supports the notion that upside to 0.7310, even possibly 0.7450, exists. RBA Monetary Policy Statement: The Reserve Bank of Australia’s quarterly Monetary Policy Statement could be one determinant of this move. The document, released at 11.30AM this morning, will be perused by traders for hints regarding the outlook for the Australian economy, and forward guidance from the RBA about its rate hike outlook. It must be assumed that little-less than the rosy picture painted by the RBA about the economy should be expected. This is especially true given the statement accompanying Tuesday’s monetary policy meeting upgraded the central bank’s employment, growth and inflation forecasts. As always, the fine print, hidden meanings and other semantics will dominate the analysis of the document, with interest given to the RBA’s view on the strength of Australian households. Arguably, it’s the combination of high household debt, falling house prices and its impact on future consumption and inflation that is keeping interest hikes on ice, so any indication about these matters could prove significant. ASX200 today: SPI futures are indicating today that the sputtering end to Wall Street trade will manifest in a 13-point drop for the ASX200. Yesterday’s trading session was a fruitful one for Australian investors: the local index climbed over half-a-per-cent for the day, led by an 18-point contribution to the index by the financial sector. In positive signs for risk appetite, growth sectors – in the form of health care stocks and IT stocks – topped the sectoral map. The ASX200 closed trade at 5928, just shy of a very key resistance level at about 5930. The failure to break above this mark is telling, but not surprising – and will likely prove a formidable barrier in the future: doing so would be a clear indicator of an (on balance) bullish control of the market, after the bears took the reins during October’s correction.
  11. Written by Kyle Rodda - IG Australia The fallout: The US mid-terms have passed, and while there were signs throughout yesterday's trade that the vote would throw up a few curly situations, the outcome fell broadly in line with market expectations. The VIX has dropped and US equities, paced by the NASDAQ, have subsequently rallied, primarily on the knowledge that everything went according to plan -- proving the notion that the biggest drag in markets all-in-all is uncertainty. There are enumerable possibilities, all with various implications for traders, opened-up by yesterday's result, and one assumes that they'll be digested calmly by market participants in the times ahead. Ultimately, however, one major risk has been navigated through without much bloodshed, allowing traders to return their attention to arguably the more significant, fundamental issues at hand. Gridlock: The term that perhaps has been hurled around most since it was confirmed that the Republicans would hold the US Senate and the Democrats would nick the House of Representatives is "gridlock". In the so-called "age of bipartisanship", a split in power within congress all but assures the adversarial tone of the late-Obama era returns. In a representative democracy, in principle, that need not be cause for concern, but it does imply greater inertia in legislative action. That means Tax Cuts 2.0 (as they've been dubbed) are all but dead, buried and cremated, and that a push for fiscal restraint by the Democrats could complicate issues around budget policy and the national debt ceiling in the future. US bond markets: The possible dynamic has shown up in prices already. An analysis of the US Treasury yield curve reveals this. The fact yesterday's results ensure a possibly stagnant congress has been interpreted as a continuation of the status quo in the short term. The yield on interest rate sensitive US 2 Year Treasuries has ticked higher to 2.94 per cent over night on expectations that the current growth formula will go unchanged – and lead to a continuation of the US Federal Reserve's rate-tightening regime. Conversely, the yield on fiscal policy (read: debt and deficit) sensitive US 10 Treasuries has dipped slightly to 3.19 per cent, on the belief that a debt blow-out from Trump's planned tax cuts and infrastructure spending program will not go ahead. Currency markets: The consequence of this shift in expectations regarding US fiscal policy is the US Dollar has sold-off overnight. It appears the interplay of forces is the ideal recipe for a slower rise in the greenback: global growth remains supported in the short-term, benefitting riskier currencies, but lower long-term yields are making the USD relatively less attractive. The knock-on effect has seen the EUR and Pound rally above 1.1450 and 1.3140, supported by strong German industrial output figures last night; and commodity-bloc currencies such as our own Australian Dollar has definitively broken its downward trend to trade at 0.7280. The balance between a weaker greenback but greater risk appetite has kept the USD/JPY flat at 1.1340, while gold has also remained steady at $US1226 per ounce. What for the trade-war? The implications for the other major global macro-risk from yesterday's vote, the US-China trade war, has thus proven a touch unclear. China's equity markets closed lower for the day, the Yuan whipsawed, and prices in growth proxy commodities -- such as copper --fell, seemingly on the uncertainty of what a greater representation of Democrats in Congress means for US foreign policy. In principle, the philosophically liberal-internationalist Democrat party could lobby for greater multilateral engagement with China and other world powers, but in this new age of populism, old assumptions may no longer prove reliable. Futures markets are projecting a better day for the Asian region, however a flicker of greater volatility in Asian markets should be expected leading into the highly anticipated G20 summit at the end of the month. ASX200: SPI futures are indicating a 28-point jump at the open for the ASX200 this morning, as the local market looks to extend its solid gains this week. The day yesterday ended in a 0.4 per cent gain for Australian shares, on reasonably solid breadth of 64 per cent. Volume was below average owing to the major event risk of US mid-term elections once again, however a rotation away from defensive sectors and into growth stocks and cyclicals supported the narrative that the outcome of yesterday’s vote is positive for the equity bull market. The ASX200 now sits on the cusp of technically reversing the short-term trend brought about by October’s massive stock market correction, with a meaningful hold of around 5930 today the level to watch. Today’s major events: Amid all the news and analysis around US mid-terms, a quick refocusing on the week’s other risk-events will emerge in markets today. Of significance today: the RBNZ met this morning – in what is probably the key event for the Asian region – and kept interest rates on hold as expected. The tone struck by the RBNZ has thus far been judged as rather dovish, legging the Kiwi Dollar’s run higher above the 0.6800 handle. Turning attention to more pressing global event-risk, it comes no bigger than tonight’s meeting of the US Federal Reserve. The Fed won’t move rates, that much is known. The attention will be directed instead towards the Fed’s commentary about its flagged December interest rate hike, plus its views on further rate hikes into 2019.
  12. MaxIG

    America votes - APAC brief 7 Nov

    Written by Kyle Rodda - IG Australia America votes: Now we play the waiting game, it seems. The US electorate have set off to the polls to vote in their mid-term elections, and the world now awaits their decision. Financial markets aren’t exempt from the interlude, trading on very thin volumes, as traders opt to stick to the sidelines until a result is revealed. There appears a very general unwillingness to jump-in to markets ahead of the crowd on this event, presumably owing to the incredible surprises public votes have thrown-up in the past. A collective “let’s just wait and see” approach has been adopted by market participants, who will surely jump back into trading in a flurry once an outcome to the US mid-terms is known. As it stands, a reclaiming of the House of Representatives by the Democrats, and a hold of the Senate by Republicans is the bookies’ tip – a deviation from this outcome is where some degree of volatility may emerge. ASX200: SPI futures are presently indicating a slim 8-point dip at the open for the ASX200, following a day where the Australian share market rose by almost 1 per cent. Volume was nearly half of the 100-day Average-Volume-At-Time yesterday, courtesy of not just looming US mid-term elections, but also the Melbourne Cup public holiday in Melbourne. The lull provided opportunity for the bargain-buyers to jump into the market and try to pick-up a few good deals. The thin trading accentuated the bid-higher of the ASX200, resulting in a day’s trade of 70 per cent breadth. The day’s rally was certainly little to crow-home about: the thin volume exaggerated the upward move and took the ASX200 index merely to the top of a sideways trading range (between 5805 and 5875) that the market has occupied since the start of the month. RBA: The event of most significance during Asian trade yesterday (outside the horse race, presumably) was the RBA’s monetary policy meeting. No move and few surprises were what punters expected, and the price action in markets reflected that – the AUD/USD barely budged, trading between 0.7205 and 0.7215 after the release. There was some interesting detail in the accompanying policy statement however, that illustrated the gradually shifting perspective of the RBA on the local economy: the unemployment forecast was revised down to 4.75 per cent by 2020; the inflation forecast was pinned-down to 2.25 per cent by some point in 2019; and the central bank’s assessment on credit growth acknowledged it had now “eased”. Asia: Across the broader Asian region, a continuation of the week’s themes played-out. Like the ASX, thin activity propped up the Nikkei and Hang Seng, with the latter experiencing volumes a relatively significant 17 per cent below average. Chinese indices witness more-or-less normal trading and it showed in the results: the CSI300 (for one) was down -0.6 per cent for the day, primarily due to traders exiting their long positions in Chinese stocks again, after the excitement about possible progress between the US and China on trade negotiations fizzled. Futures markets are projecting a flat to weaker start to Asian session today; however, as the results of US mid-terms filter through throughout the day, expect outsized reactions in Asian equities if some surprises eventuate. Wall Street session: As of this week, Wall Street closes at 8.00AM (AEDT). At time of writing, the lacklustre trading and thin volumes that has characterized markets the world over this week is generally holding true for US stocks, too. A fine green layer of paint is covering equity indices today, with the Dow Jones, S&P500 and NASDAQ all slightly higher for the session, following a down-session in European shares earlier in the day. A bounce in US tech stocks has underpinned the move, with the NASDAQ experiencing very close to normal trading activity throughout the North American session. US Treasury Yields have furtively ticked higher overnight, taking the yield on benchmark 10 Year US Treasuries to 3.22 per cent, and the yield on the US 2 Year note to a new post-GFC high of 2.92 per cent. US Treasuries and Currencies: The price action in US bonds will be worth watching once mid-terms are done-and-dusted, especially given that the next major risk event this week will be the meeting of the FOMC on Friday morning (AEDT). Equity markets have often sold-off based on a spike in bond yields in the recent past, and if the Fed on Friday espouse a hawkish view for rate hikes in 2019, the repricing of US interest rate expectations could spark some sort of sell-off in US Treasuries and global equity markets. As it applies to the US Dollar, currency markets have also proven stagnant ahead of US mid-terms. The greenback is weaker, but that appears largely due to a (very) modest bid higher of the Pound and Euro on the back of Brexit optimism. Despite the uncertainty of the US elections, the Yen remains weaker and gold has dipped to $US1226 per ounce. Oil: The most significant price action over the past 24 hours has been the continued fall in oil prices. The price of the black stuff plunged further last night -- to the low$US62 and $US72 per barrel mark in WTI and Brent Crude, respectively -- as fears of undersupply, courtesy of fresh US sanctions on Iran, were quelled. News that the White House had provided temporary exemptions to some countries to continue importing Iranian oil, coupled with a pledge from Russia to aid the Iranians move their oil stockpiles onto global markets, have been the major drivers of the sell-off. One must also surely assume the Saudi's are boosting their output to stave-off more bad press after the murder journalist Jamal Khashoggi. Nevertheless, the fall in oil prices has weighed on USD/CAD and dragged the overall Bloomberg commodity index down for the day.
  13. MaxIG

    US Mid-Terms Preview - 6 Nov

    Written by Kyle Rodda - IG Australia I'm mad as hell and I am not going to take this anymore! It was this sentiment in November 2016 that raised political-renegade and anti-establishment Republican Presidential candidate Donald Trump from rank-outsider and laughing-stock to President of the most of powerful country in the world. No one seemed to see it coming, and as electoral college votes were slowly counted on Election Day almost exactly 2 year ago, the world sat in awe as what was considered a near impossible feat only 18 months prior came to shocking fruition. America, we were told, was about to become great again. Almost two years to the day has passed, and with arguably the most significant US mid-term elections in recent memory to be decided by the American voter over the course of the next 24-48 hours, the question becomes: will the American polity deliver another shock to the world? If there's one thing that 2016 reminded financial markets participants, it is that the map is not the terrain. Pollsters, pundits and market traders may try to price in the probabilities of a series of outcomes, but all the information that makes up our complex political reality remains too difficult to access and understand. A humbleness is always required when forming assumptions on what truths the democratic process may reveal: a modest acknowledgement that though the world may look clear and complete to our own eye, a total comprehension of the various and unique realities occupied by the several hundred million of individuals dictating the historical process remains beyond the reach of a single mind. In saying this, it does not mean an honest enquiry should not be undertaken to induce a possible explanation for the events of the past, and subsequently infer what this may mean for events in the future. It's telling that the quote included in the opening sentence of this commentary comes from the classic-American film, Network, produced all the way back in 1976. In the film's famous monologue, its protagonist -- a ranting T.V. anchor turned prime-time cultural evangelist named Howard Beale -- delivers a deranged and scathing assessment of modern American life: "Everybody knows things are bad. It's a depression. Everybody's out of work or losing their job...and there's nobody out there who seems to know what to do, and there is no end to it". The rant finally ends with Beale imploring his viewership to go to their windows and scream "I'm mad as hell and I am not doing to take this anymore!" Though the cultural context of the film was vastly different to that of 2016 America, the voting members of the American public at the year’s Presidential election proved they felt the same. After 9 years of what must have felt like empty promises from the political elite about an economic recovery that never trickled down to the middle class, America's silent majority finally cracked and spewed forth into mainstream society. They were sick of society's rich getting richer thanks to policies that didn't seem to be designed to help them; and they were tired of the fact that the members of the (supposed) elite class were shipping off their jobs -- to workers in some foreign nation, no less, and all in the name of saving a buck at their expense. It was these set of circumstances -- which have been grossly simplified here, of course -- that galvanised a significant sub-section of American society to scream at the ballot box in November 2016 "I'm mad as hell and I'm not going to take this anymore". Though in our reality it was not a psychotic T.V. anchor who proved the mouthpiece of the people, but a New York businessman, turned reality TV star, turned social media provocateur, who promised them that he could return to them what was rightfully theirs’ -- and in doing so, Make America Great Again. This social upheaval turned the global political order upside down. The once inexorable forces of globalisation, political liberalism, and expanding economic interconnectedness were all the sudden turned on its head. The enraged and forgotten people of American society were set to reclaim their destiny. But as the world awaits the latest expression of the God-given and inviolable right of the US voter to exercise their choice on who will compose their chambers of congress, the question is: are Americans, as they were in 2016, still mad as hell? It may be cynical, but in a representative democracy like the US, voters will vote for those who can promise to improve their quality of life and economic fortunes. In the lead-up to the 2016 US election, the fledgling US economic recovery had seemingly fizzled, with little sign of any benefit to the middle class. The economy was beginning to flatline, the jobs being created were low skilled and undesirable, wages and living standards were stalling or going backwards in real terms, and the stock market was trading sideways. US voters felt poorer, their opportunities appeared dim, and the future didn't look like it would provide anything better. Move forward to November 2018 and it feels as though the world (and the American voter) is in a very different place. The US economy is roaring, growing at 3.5 per cent according to the last reading -- a pace strong enough to keep the US labour market at full capacity and the unemployment rate to 3.7 per cent. Inflation remains stable despite the ever-tightening labour market, but as of Friday night's Non-Farm Payroll figures, wages growth is above 3 per cent per year for the first time since the GFC. The stock market, despite experiencing two major corrections this year, has also hit record highs twice in 2018 and consumer sentiment is still trending upward towards 15-year highs. Love him or loathe him, US President Trump has played a major role in bringing about this sense of economic euphoria. Politicians often over-state their influence and importance to the fortunes of the economy. The US economy was trending in the direction it currently finds itself in for several years, with the extreme monetary policy enacted by the US Federal Reserve likely its greatest driver. However, massive (and probably unnecessary) late-cycle fiscal stimulus from the Trump administration has sent the US economy into warp speed; while his chest-beating and patriotic fervour has ostensibly unleashed investors’ animal spirits. The question is now though, whether voters will attribute their relatively better lot in life to US President Trump, and award him at the polls. Undoubtedly, other issues come into consideration for the very diverse American electorate when voting Republican or Democrat. Irrespective of the very many and meritorious issues motivating the US electorate, logic does suggest that if the popular narrative is true -- that President Trump was elected based on social and economic dissatisfaction, and that he himself is responsible for turning this around -- some kudos at the ballot box could be forthcoming. Betting markets at first glance aren't supporting this notion: the bookies have the democrats winning back the House of Representatives relatively comfortably, and the Senate looks set to be held by the Republicans. Such an outcome, although far from an endorsement of US President, would not be a calamity for him. It's well known that an incumbent President generally loses seats in congress come their first mid-term elections, as the sheen comes-off "the new guy" following the realisation that he (or presumably she, when the day arrives) can't meet every expectation they set as a candidate. (Source: The Conversation) With this all considered: what could this all mean for financial markets? First, the major caveat must be that the major forces behind economic activity will almost certainly remain the same: the US economic cycle will continue to unfold, and the US Federal Reserve will likely persist with its rate hiking cycle. Amid the political noise, when it is all said and done, the economy will do what the economy intends to do, meaning the flow on impacts to financial markets, particularly regarding the risk to equity markets of higher global interest rates, will keep broadly unchanged. In saying this, there are several areas where marginal changes may be witnessed. Primarily, the best outcome for financial markets is often the expected one -- the one already "priced in" -- so a Democratic house combined with a Republican senate might be the ideal scenario here. Looking further into the many nuances though, several elements of the Trump doctrine and policy platform may come under fire consequent to the retaking of some power from the Republicans by the Democrats. The biggest issue up for grabs must be the trade war and broader US-China relations. The past week has seen a softening stance from the White House towards China, which has talked up the imminence of a deal between the two warring nations. An extra dash of Democrat blue in congress reintroduces the globalists to the equation, who will likely prove much more sympathetic to the notion of making peace with the Chinese. President Trump will maintain his executive powers, implying that he can continue to slap-on his tariffs on national security grounds if he sees fit. However, with a more divided congress, horse trading becomes a bigger thing, meaning concessions demanded by Democrats could temper Trump's hawkishness. A de-escalation in the Trade War would be considered good for Chinese and therefore global growth. The possibility of static or reduced tariffs would assay come anxieties regarding slower Chinese growth and would possibly mark a definitive turn-around in China's equity bear-market. The Yuan would also appreciate, leading to a short-term pop higher in the Australian Dollar, supported by a probable jump in commodity prices all the way from iron ore, to the classic barometer of economic growth prospects: copper. The Japanese Yen, gold prices and even the US Dollar would fall on the back of higher risk appetite, although the greenback would likely sustain its trend higher in the medium to long term by way of virtue of the US Fed's interest rate hikes. The Nikkei and DAX, which have been the heaviest hit of developed market indices in this trade war, would probably experience an uplift, courtesy of reduced anxieties about industrial tariffs -- especially on automobiles -- and softer Chinese growth. Similar gains would be experienced on the Dow Jones, and to a lesser extent the S&P500, which would benefit from a rally in industrial stocks. The ASX200 would participate in the global bounce in growth optimism, led by gains in commodity prices and subsequently the materials sector. Persistent concerns about the strength of the big banks however— due to domestic challenges regarding higher global funding costs and the softer Australian property market – would still smother optimism. The other hot issue of financial market import coming out of the US mid-terms will be US President Trump's fiscal policy. Such as with the trade-war, greater checks and balances on the President from increased influence by the Democrats on the White House would force some fiscal restraint. The twin deficits building because of Trump's fiscal profligacy would be curbed, easing pressure on bond yields towards the back end of the curve. Economic growth might well slow down somewhat as stimulus is removed, taking some of the heat out of the US economy; but price pressures would settle somewhat because of a more stable economy, removing some of the impetus for the US Fed to hike hastily. The outlook for earnings growth in US equity markets would probably weaken as fiscal stimulus waned - though it must be remarked this would have happened to some extent anyway considering Trump's corporate tax cuts have already been absorbed by shareholders. Ultimately, although inflation risk would be reduced, significant enough price growth would almost certainly remain. The US Federal Reserve's interest rate hikes would stay atop of the list as the biggest risk to share market performance, as higher rates stretch the valuations on growth stocks in sectors like US tech further, undermining the upside to equities indices such as the NASDAQ. A possible benefit, though, would be the counterbalance from the Democrats’ influence in congress on the often-unpredictable President Trump, but that may come in the form of improved sentiment alone. Overall and in the end: as has already been stated, but bares mentioning once more, speculating on the political, economic and financial market outcomes of the democratic process is fraught with danger, and must be approached with humbleness. It's nigh on impossible to tell with complete certainty what the US mid-term elections will hurl at the world, let alone financial markets. The Trump election shocked the world in 2016, as the American polity stood-up to make their dissatisfaction known to the global community. Whether such resentment can be mobilised again and cause another historical upset, only time will tell. One thing is for certain though, and that this mid-term election is a referendum on President Trump's legitimacy, and will have tangible impacts on global politics, economics and financial markets in the months and years ahead.
  14. Written by Kyle Rodda - IG Australia A historic week ahead? One does get the sense that some of the biggest risks plaguing financial markets -- over the course of several months, if not years -- may be coming to something resembling a definitive end. This isn't to suggest that extreme bouts of volatility, like those experienced throughout the month of October, have been put behind us; but that we are at least reaching a critical juncture for some of the biggest macro-economic challenges facing market participants. There's a cliché often quoted in markets, and that is that the only thing worse than bad news is uncertainty. Though the potential for heightened risk and volatility remains ever present amid a constantly shifting fundamental landscape, perhaps a closure to some of the bigger challenges hanging over global markets may prove enough (at the very least) to unshackle sentiment and support renewed bullishness amongst investors and traders. US event risk: Just in the United Stated alone, several events pencilled into the financial market calendar this week jump-out as possible flash points for some of the big global economic issues. US mid-term elections on Tuesday give a gauge on the much-speculated-about mood of the American electorate and provide insight into what capacity US President Donald Trump will possess to exercise his policy platform in the future. The FOMC Meeting on Thursday will clarify whether the global share market correction experienced last month may derail the Fed's plans to hike interest rates again in December – and then a further three times in 2019. And the introduction of US sanctions on Iran on Monday (US time) will provide a firmer understanding of to what extent the removal of Iran from global markets will have on whipsawing oil prices. European and Asian event risk: Looking beyond the trials and tribulations of financial markets in the United States, promising signs of major breakthroughs regarding Brexit and the US-China war have emerged. News reports over the weekend have warmed the idea that a Brexit deal could be negotiated, by some time before November 21. The reports suggested that Prime Minister Therese May is inching toward a deal that would allow the UK to remain in the European customs union -- possibly alleviating many of the deal-stalling concerns relating to the Irish border. Regarding the US-China trade-war, markets were bolstered by leaked reports -- since contradicted by some members of the White House -- that US President Trump, following his "long and very good” conversation with Chinese President Xi Jinping, had instructed his cabinet to draft a trade-deal with China NFPs and US fundamentals: The prospect of resolutions to several of the world's major economic and geopolitical issues supported investor sentiment on Friday but proved inadequate in sustaining the week's share market turnaround in the face of the week's most significant economic release: US Non-Farm Pay rolls. The data reaffirmed that the US economy is still booming, printing a better than expected jobs-added-number of 250,000 (versus a forecast 190,000) -- a figure strong enough to maintain the unemployment rate at 3.7 per cent despite a climb in the participation rate. As is always highlighted, with the US economy having long been at nominally full employment, it was the wage growth number that preoccupied market participants: in what amounts to the strongest growth in wages since the GFC, the data revealed that workers earnings had climbed on an annualised basis by 3.1 percent. The Fed and US rates: The strong US labour market numbers were a stark reminder to market participants that with the US economy running so hot, the subsequent signs of a build in price pressures may turn interest rate considerations from the US Federal Reserve from a matter of choice, to one of absolute necessity. Interest rate markets immediately reflected this reality, driving bets of a December rate hike from the Fed back around 80 per cent. The dynamic bid the US Dollar higher, and prompted a self-off in US Treasuries, pushing the yield on Benchmark US Treasuries 8 points higher to 3.21 per cent. US equity markets were dragged lower by way of virtue of this dynamic, led by the NASDAQ – which added to the losses sustained after Apple Inc. results contained a profit guidance downgrade – to close 1.04 per cent lower. Global currency action: The reminder that US interest rates may hike in a steeper trajectory than expected pushed the EUR and Pound lower, which dropped below 1.14 and 1.30 respectively – before those currencies rebounded because of greater Brexit optimism. The solid gains made by the AUD/USD, which had itself climbed during Asian trade above 0.7240 on the back of the greater hopes of an imminent US-China trade deal, were unwound, dragging the A-Dollar back below 0.7200. The CAD fell in tandem with our local unit, though some of the losses with regards to the latter came consequent to the considerable fall in the price of oil to $US72.00 per barrel (in Brent Crude terms). The Japanese Yen also declined, as did the Swiss Franc, proving the conviction behind the move into the Greenback. While the only currency that truly maintained its rally against the US Dollar was the Chinese Yuan, with that currency holding to 6.89 level on the belief that China's policy makers have what it takes to support and stabilise a slower Chinese economy. The greater confidence in China’s markets also galvanized a rally in emerging markets assets: the MSCI Emerging Market index leapt to its highest level in 30-days. ASX200: SPI futures are now indicating a 5-point drop at the open for the ASX200, following a Friday that brought a mixed day for the ASX200, as well as the Asian region. Confidence that China has the fortitude to stimulate its way through slower economic growth, coupled with the prospect that a US-China trade deal can be reached, drove the CSI300 over 3 per cent higher, and the materials sector on the local share market one per cent higher. The materials space was primarily responsible for the ASX200's 0.1 per cent gain, only marginally offsetting the 0.38 per cent bank-led fall in the financials sector. It will be a dichotomy that may dictate trade once more today and into the early stages of the weak, after auction clearance rates demonstrated further signs of weakness in the domestic property market. The potential softness in bank stocks, combined with several RBA-related event risks, and the still uncertain global backdrop, may test the positive price action witnessed in the ASX200 this week, which fought gallantly to close last week's trade above 5930 support/resistance, and display tentative signs of a recovery from October's market correction.
  15. Expected index adjustments Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 5 Nov 2018. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video. NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange. Special dividends this week Index Bloomberg Code Effective Date Summary Dividend Amount RTY COLB US 6/11/2018 Special Div 14 RTY HFWA US 6/11/2018 Special Div 10 RTY MPX US 8/10/2018 Special Div 10 RTY NHTC US 9/11/2018 Special Div 18 SPX ROL US 8/11/2018 Special Div 14 How do dividend adjustments work? As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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