Chris Weston, Chief Market Strategist at IG Markets
With the S&P 500 trading to a new record high and continuing to eye the top of the multiyear channel resistance, there seem to be a number of countertrend moves taking place. Around the Asia region today, equities are generally offered, with the Nikkei leading the way. The USD has been sold, predominantly against the JPY and AUD, while the JPY has been the star as it rallied against all G10 currencies. Commodities are generally flat, although energy is seeing better buyers.
A few thoughts from the trading day:
1) There seems to be a growing view that the USD is looking a little overcooked and might be due for a period of consolidation. Certainly looking at USD/JPY, sellers have been prevalent all day, which is not a surprise when the nine-day RSI and stochastic oscillator are at such extremes. Since 15 October, dips have been buying opportunities and this should not change, so on current news flow I would be more looking closely at working bids into the ¥117.63 region (the 38.2% retracement of the ¥115.45-to-¥118.98 move).
2) The forex market has centred predominately on USD/JPY today, with comments from Japanese finance minister Taro Aso at the heart of this. We last heard commentary that the JPY moves were too extreme from Mr Aso in late October, so we shouldn’t be shocked, especially as the Japanese lower house has been dissolved today. Recall corporate Japan would prefer to see the government talking up the JPY and even defending it on moves above ¥110, so the government has to be seen to be helping. Expect more of this supportive language as we enter the 14 December election.
3) Assets which have a strong negative correlation with the USD could see better days ahead, with gold (which currently holds a negative 63% 30-day correlation with the US dollar index) potentially seeing better upside. The commodity seems to be holding the 20-day moving average and could squeeze to the top Bollinger Band at $1229. Ultra short-term momentum seems to be favouring the bulls, although the real test will be whether the move can extend through the 21 October high of $1255 and print a higher high on the daily chart.
4) Overnight, a survey from the New York Federal Reserve of primary dealers (the dealers that deal directly with the Fed) showed consensus that the Fed will lift the funds rate in June 2015, and that it would be between 75 and 100 basis points by year-end. Given the fed funds future (December contract) is currently at 51 basis points, it suggests the USD could have good longer-term upside potential, while the US treasury should head towards 3% assuming the forecast is correct. It seems the market is too dovish with regards to Fed expectations.
5) US headline and core inflation beat expectations last night, although the numbers at 1.7% and 1.8% respectively won’t concern too many. Energy prices have fallen some 30%. Recall the IMF recently said every $10 fall in energy would aid world growth by 0.2%. The falls so far should be good for around 70 basis points of global growth.
6) WTI crude seems to have bottomed, with Brent looking to reclaim the $80 a barrel level. Libya appears to be rallying the troops for production cuts. Iran, Venezuela, Ecuador and Angola are seemingly on board with cuts to the current target of 3 million barrels. It’s worth remembering that this group is around 22% of total OPEC production, with Iraq (11.4% of total production) and Saudi Arabia (31.6% of production) still not publicly backing this growing consensus. Still, given actual production is currently 30.97 million barrels a day, it would still be above the current target even if they cut production by 500,000.
7) The ASX 200 has continued its sell-off, with the index trading down to a low of 5292. It has found better buying below 5300, and on a number of indicators looks oversold after pulling back just over 4% from 7 November. The bears seem to have been getting the upper hand of late and surely the index would be down more if the miners and energy names weren’t seeing solid short covering.
8) Take a name like Horizon Oil (HZN), which is currently up 6.8%. Prior to the open the stock was trading over two standard deviations from the 20-day moving average and with the 9-day RSI at 14, all we needed to see was a slight bit of good news and a strong rally could be seen.
9) Fortsecue Metals saw $29 million of short selling volume on Wednesday – the second-highest ever, so the 1.1% move higher in the spot iron ore price is seeing short covering today. News that Chairman Andrew Forest had bought 4,000,000 shares on market since 19 November could inspire some confidence. Then again, if you had mirrored his last action and bought on 17 June, you’d be down 32%. It’s a tough space and it’s hard to make a clear investment case here.
Our European calls are generally flat, although some very modest weakness is seen in the FTSE. On the docket in upcoming trade, we get UK public sector net borrowing, while traders will be keen to see if Kansas can follow a similar trend as Philadelphia in its manufacturing read. The thoughts on the ECB will be at the heart of the moves, with Mario Draghi set to collide once again with Bundesbank head Mr Weidmann. We’ve already heard from Mario Draghi this week but that was before the woeful PMI data out yesterday.