Everything posted by MaxIG
Fed minutes: The week’s blockbuster event dropped over night: the release of the FOMC’s Monetary Policy Minutes. Equity markets have staged a tentative turnaround globally this week, but it has all been occurring in the shadows of what could be gleaned from last night’s Fed minutes release. When all is weighed up, the document reaffirmed the Fed’s hawkishness, revealing in-depth discussions ranging from cutting the word “accommodative” from the central bank’s language, to debating the possible need to hike rates above the “neutral rate”. A spike in volatility in financial markets wasn’t forthcoming on the back of the release, most likely because traders have been analysing it in a far different context to the one in which it was written: the meeting precipitated the recent equity market rout, and therefore appreciate circumstances have duly changed. US markets: However, the detail in last night’s minutes establishes the new environment within which future Fed policy discussion will take place – both for the Fed itself and amongst market participants. Reaction’s to the Fed minutes were relatively dull overnight, seemingly due to a reluctance from traders to jump-the-gun. Benchmark US 10 Year Treasury yields climbed modestly to 3.17 per cent and the US Dollar has taken advantage of a weaker bid on the Pound and Euro to climb slightly. Wall Street has suffered somewhat, erasing earlier gains on earning’s optimism to trade more-or-less flat-to-down for the day. The trade dynamic gives a curious impression for equity indices, a struggle between an apparent binary: a battle of forces, if you will, between optimism regarding solid earnings growth and pessimism regarding the impact of higher global rates. ASX yesterday: SPI futures have absorbed the lead on Wall Street and translated it (currently) to a 13-point drop at the open for the ASX200. No cause for alarm naturally, following a day where the Australian share market put-in a broad-based rally, to bust back within the upward trend channel it abandoned during last week’s equity sell-off. The ASX200 was registering an oversold reading on the RSI leading into yesterday, and a basic breadth reading of 74 per cent yesterday across the index recognized the sell-off was a tad overdone. The growth stock heavy health care sector ran with the lead of US big tech, to top the markets winners; while the only sectoral laggard for the day was the materials space – though that can somewhat be discounted by the unlucky timing of news from BHP regarding that company’s production downgrades. ASX day ahead: The day ahead will probably be a grind for the ASX200 given a weak Wall Street lead, but a hold within its trend channel, the bottom of which is around 5890, should be considered a win for the bulls. As always, the core strength in the market was underpinned by a bounce in the banks yesterday, a theme that may well continue today given the boost in global bond yields, but will likely fizzle in the weeks and months ahead. Activity around the Asian region was also settled, with Chinese equities for one catching a small bid on rumours that a further cut to China’s banks reserve-ratio-requirement may be imminent. The general relief-rally provided the fuel for a pop in the MSCI All-Asia Index, pulling that index away from its near-18-month lows. Aussie employment: The major event risk for Aussie markets today will be domestic employment data, out of which the ABS is forecast to print a steady unemployment rate of 5.3 per cent and an employment change figure of 15.2k. Only the most extreme outcome to this release will shift the dial in financial markets, especially that of interest rate markets, which continue to price in no-move from the RBA until early-2020. A sprinkle of volatility could be seen in the AUD/USD, as that pair hugs support just above 0.7100, but as always, will probably take a stronger lead from activity in the greenback. The spread between US 2 Year Treasuries and 2 Year Australian Government Bonds has narrowed of late, supporting the AUD/USD – however a repricing of interest rate expectations for the US Fed could widen this spread once again, potentially pushing Aussie Dollar back towards previous lows at 0.7040. Europe: Taking a glance at other risks entering the end of the week, European markets continue to remain a source of uncertainty. European bureaucrats have gathered for a multi-day summit in Brussels, to discuss the many seemingly intractable issues facing the continent. A Brexit deal this week is becoming a diminishing prospect and is showing up in pricing across the region’s financial markets. Adding to the tension is a slight spike in anxiety relating to the Italian fiscal situation, stoking fears of greater animosity between Europe’s leaders and a general instability the European Union’s political structure. Credit spreads have widened in sovereign bond markets as a result, weighing on the Euro and Pound (which also receded on the back of weaker CPI figures overnight), sapping strength from the major European equity indices consequently. Oil: Oil markets deserve a mention, given the human-tragedy that is defining much of the volatility found in the price of the black-stuff now. Fundamentals first: US Crude Oil Inventories surprised to the upside overnight, sending the price of Brent Crude to the $US80.00 per barrel mark. The real developments in all markets this week centre, however, on the alleged murder of journalist Jamal Khashoggi by the Saudi Arabian regime. Putting aside (the far more important) humanitarian implications of this situation, speculation has increased that the Saudi’s will exploit the leverage they possess in the form of their massive oil reserves to suffocate scrutiny on the subject by members of the global community. The details of the matter are far too nuanced to do justice to here, but the approach taken by global leaders to the Saudis and the subsequent Saudi response could prove one of the major determinants of oil price volatility moving forward.
Wall Street: It's still early days, but investors appear to have regained their nerve overnight. The Asian session was tepid, to be sure, however a rally in European and US equities reveal a market that has found its appetite for equities again. As the existing narrative would imply, much of this was underpinned by a fresh appetite for rate-sensitive US big tech stocks, which according to the NASDAQ, rallied almost 3 per cent overnight, leading both the Dow Jones and S&P in the realms of 2 per cent higher. Implied volatility fell, but remains relatively high at around 18, so of course it would be foolish to claim the recent sell-off is authoritatively through. In stating this, commentary has shifted away somewhat from risks from rates and tariffs, to anticipating the fruits of what is expected to be a bumper reporting season – particularly after the likes of Goldman Sachs and Morgan Stanley posted impressive results early this morning. Europe: Likely owing to being largely oversold to begin with, the strong activity in European equities come despite a mixed-news day for the region. Like much of the global-share-market following last week’s equity rout, valuations and dividend yields within European indices have become more attractive this week, apparently enough to attract buyers into European share markets, even against doubts regarding the strength of the region’s upcoming reporting season. UK data provided some impetus for the bulls last night, after labour market figures showed that the unemployment rate held at 4.0 per cent and average earning climbed by an above forecast 2.7 per cent. The GBP/USD pushed-up just below the 1.32 handle on the news, however rate markets were more-or-less steady, as traders ostensibly tie their BOE rate-hike bets to the outcome of souring Brexit negotiations. Macro-backdrop: The boost to investor sentiment has infused equity traders with glimmers of confidence, though the greater appetite for risk hasn’t necessarily flowed through to other asset classes. Yields on US Treasuries were flat the last 24 hours, and despite climbing back above the 112-handle against the Yen, the US Dollar has failed to catch a major bid. Risk proxies like the AUD and NZD are a skerrick higher, with the Aussie Dollar floating about 0.7140, but gold is still finding haven buying, holding above a support line at $US1224. Moreover, proving that last night’s rally isn’t on the firm basis of greater confidence in global growth prospects, the Bloomberg Commodity Index edged 0.1 per cent lower, even considering a sustained increase in oil prices amid fears of lower supply because of a potential rift between the US and Saudi Arabia. ASX: The strong overnight lead has SPI futures pointing a 28-point jump for the ASX200 at this morning's open, following a day in which the Australian share market popped modestly higher from its oversold levels. The pop was reflected primarily in the activity in bank stocks, which rallied-off its own oversold reading, to collectively climb 0.55 per cent for the session. It was the materials space though that led the index higher, courtesy of a 1.4 per cent rally, despite the limited price gains in commodity prices yesterday. The day's trade establishes an interesting dynamic for the ASX200 today: the index fought unsuccessfully throughout trade to re-enter last week's broken trend channel. Futures markets has this transpiring at the open - a positive sign for the Aussie market. Regional data: Despite leading to limited price action across the region, Asia was littered with fundamental data yesterday. It was kicked-off early morning our time, upon the release of key New Zealand CPI data, which revealed stronger than expected consumer price growth of 1.9 per cent annualized for that economy. The algo-traders seemed to kick-in post the event, pushing the NZD/USD to the significant 0.6600 handle, before human rationality took over the pair lower, primarily on the knowledge that the data wouldn’t change materially the RBNZ’s interest rate views. Chinese CPI data was also printed yesterday, revealing an-expectation figure of 2.5 per cent – up from the previous 2.3 per cent. Once again however, although inflation is proving to be running a little hotter in China, trader’s judged that the news wouldn’t shift the dial for policymakers and promptly moved on. RBA’s Minutes: Of domestic significance, the RBA released the minutes from their recent meeting, with very little novel information to glean: “members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy”. The reaction in market was one of the more muted from an RBA release, registering barely a reaction across financial markets. There were some interesting points discussed from a purely academic perspective in the document – some substance for the economics-nerds – especially relating to hot global asset prices, but nothing in the way of potential policy approaches from the central bank. FOMC Minutes and Reporting Season: Approaching the half-way mark for the trading-week, investors prepare for its pointier end. The major event will transpire tomorrow morning local time, in the form of the FOMC Minutes from the US Federal Reserve’s last monetary policy meeting. Of course, most of panic and volatility in global markets has come because of the Fed’s hawkishness in recent times, so market participants will peruse the details of tomorrow’s minutes for insights that confirm or deny fears about higher global rates. The broader market will also engross itself further in US reporting season, with Netflix (for one) posting what is being considered currently a better than forecast set of numbers, by way of virtue of a smashing of subscription growth estimates.
Dead cat bounce in Asia? The ASX200 really couldn’t catch a bid yesterday. Most concerningly, it happened within a back drop of slightly higher volumes, showing that the sellers truly washed out the bulls throughout the day’s trade. The Asian region kicked-off the week sluggishly in general, unable and unwilling to run with the lead provided by Wall Street on Friday evening. The action in Asia prompted calls of a dead-cat bounce across global equities, something that has since been proven premature, based on the mixed day witnesses overnight in the European and US session. There just appears such a general reluctance for investors to search for value in the Asian region, despite the cold-hard numbers implying that pockets of it exists. Of course, P/E ratios and yields never tell the full story, and often lag actual changes in earning’s forecasts. Yet still, it does feel surprising, if not concerning, that the pockets of value that exist aren’t being seized by investors. Where are the buyers? It’s none-truer than on the ASX200, ahead of a day in which SPI futures are implying a 1-point jump at the open. The Australian share-market is presenting as a trifle oversold, with the daily-RSI stuck at multi-year lows, but downside momentum slowing-down only gradually. An absence of growth investors has stripped the Aussie shares of much of their bid, in-line with investor behaviour across most equity markets in the face of rising global rates, but again, the curious point – one that sets the ASX200 somewhat apart at present – is the missing search for underling value. In principle, it shouldn’t be too difficult to find: the sell-off across the local market has pushed yields just-shy of 4.50 per cent, while the project 1-year P/E ratio for the overall index is just above 14:1. It could be that a VIX above 20 is too higher to attract buyers at this stage – it will be an important litmus test for the market as to whether the ASX200 catches a bid when this unwinds. ASX Downside: To be fair, there are some considerable headwinds for Australian investors that may preclude them from behaving in the same fashion as their US or even European counterparts. The banks look ugly now – less so the hard numbers, but more from the superficial perspective that their brands have been (justifiably) diminished by the effects of the Financial Services Royal Commission. The best-yielders on the Australian share market are comprised in a big-way by the banks, so a lack of yield chasers in the market could come based on a sizeable reluctance to buy banks, even at apparently cheap prices. Following a day for the ASX200 that only saw the energy space catch-a-lift, entirely due to a since faded bounce in oil prices, buying impetus could be difficult to come by in the day ahead for the index, as support around 5800 returns to trader’s sights. RBA Minutes: It won’t change much the trading dynamic for Australian shares, but some useful insights regarding the Aussie-macro backdrop will be handed to us in the form of RBA Monetary Policy Minutes today. The interest generally will be directed towards any idea into the confluence of factors stifling the Australian households: financial stability will be one, a lack of wage growth another, so will high levels of private debt amid falling property prices, along with increasing retail interest rates, and (to a lesser extent) how global risks will affect the local economy. Despite the abundance of information, for traders, the dial probably won’t shift in rates market expectations that an RBA hike won’t come until 2020; nor in the AUD/USD, which will probably find support at 0.7100 even in the event of the most dovish tone to the minutes. China: Zooming out the microscopic lens for a moment: Australian financial markets are being served no favours by what is transpiring in Chinese markets. It was another rough day for China-bulls, who were legged by a fresh bout of selling after news broke that US President Trump – while riffing in an interview with CBS – may consider a fresh round of tariffs on the Middle Kingdom’s economy. Counter-arguments based on fundamentals aside, there seems to few willing to bet on a strong Chinese growth story at presetn. The comprehensive Shanghai Composite hit lows not registered since November 2014, while the narrower, blue-chip laden CSI300 languished around 2015 lows. This week will be illuminating for investors regarding whether the growth-outlook is indeed this poor for China, with CPI data day (for one) kicking-off a slew of Chinese fundamental data releases. Chinese growth, global growth: Perhaps it is so that the actions of Chinese policy makers are raising concerns about the country’s dubious growth prospects. Markets seem to interpret any policy intervention from the government or PBOC as a minor concession that things in the economy aren’t so great. The logic makes sense: there is the view that China’s economy is a touch opaque, and that Chinese data is prone to some level of manipulation. The offshore Yuan is manifesting signs of this scepticism, as the PBOC apparently conforms to the markets desire to devalue the Yuan, to potentially the key psychological barrier of 7.00. How far Chinese, and broader Asian indices, may fall before bottoming out is becoming an increasingly interesting question, as sentiment overrides the highly attractive valuations to keep the bears in control. Overnight: The underwhelming display in the Asian session translated into mixed European and US trade overnight. There was little depth of fundamental data, and though Brexit negotiations and fears of deteriorating ties between the global community and Saudi Arabia persisted, it wasn’t enough to incite panic in market participants. US Retail Sales disappointed slightly, but trade was defined more by a general lack of confidence in US investors: US Treasuries ticked higher and the USD dropped –benefitting gold again, driving its price temporarily above $US1230. A rotation away from growth stocks – that is, the tech-giants – continued by way of virtue of fears surround trade-wars and higher global rates, driving the NASDAQ lower, and the Dow Jones and S&P500 weren’t able to catch and hold onto their early-bid, selling-off in late trade as investors struggled to grasp whether generally higher growth-risks will manifest in the upcoming earnings season.