It seems US equity markets have hit somewhat of a sweet spot and no doubt the new all-time highs seen in the S&P 500 will attract new retail money into the market. There’s nothing like being under-invested and seeing the word ‘new highs’ on the front page of each newspaper. Usually the contrarians would say this marks a top, but we feel traders will still follow the money in the short term.
There are still some positive signs despite the recent gains; market breadth is good, the index closed on its high, confidence among money managers is high, but not near extremes. More importantly though, bond yields are significantly lower than previous highs and gold hardly looks like it wants to go up. Clearly US investors are continuing to look around and see that valuations are not at extremes either, and are still offering the best returns out there. Especially when you have Japan and the US coaxing investors into risk assets and the ECB standing ready to reflate if needed. There’s clearly some short covering going on, and while the last statistics we can find are from March 28, you can see the trend in the level of short positions has been coming off sharply.
We didn’t learn much from the Fed’s minutes, and it’s a touch disappointing to see the leaking of the them as the bigger story. Clearly this is a situation regulators will be looking at in more depth and it’s just as well that the narrative contained little new information. Of course the minutes were on the hawkish side, but they were based on a meeting pre-payrolls, and since then we have heard from a number of key board members including James Bullard (who also speaks today) who expressed an interest in putting less emphasis on the unemployment rate and more on the level of actual job creation.
Asia has had a modest reaction to the strong advances in Europe and the US, but gains are gains and the bulls (of which we belong, at least on the equity side) will take them every day. The ASX 200 is up 0.8% and it didn’t take long for the goodwill towards materials names to abate. Of course the big release of the day was the March employment report which was poor in every way. One thing traders have come to know though is that it is lottery, and trading around it is fraught with dangers. The end result is that unemployment continues to trend in-line with prior weakness in job ads and other business surveys. Most economists would say unemployment is one of the best leading indicators of inflation, and with the RBA leaving the door open, it would probably be feeling that it is playing the situation quite well right now. Our view has been that the bank would not cut this year, however if the unemployment rate does trend towards 6% then it looks as though the money markets are prudent to price in a 25 basis-point cut by year-end.
It was interesting to see traders buying AUD/USD around 1.05, especially those who were kicking themselves for not going long around 1.04. AUD/NZD remains one of our favourite low beta plays, and while we didn’t get the bounce we felt may come, today’s employment numbers feed into our longer-term view that the pair should trade sub-1.20. As we highlighted yesterday, New Zealand has a housing problem and this was evident today with the Real Estate Institute of New Zealand publishing that Auckland house prices rose 16% year-on-year, while national house prices increased 2.4% in March versus February. It is also taking 31 days to sell a house (median) compared to last year at 35.
Japan has had a strong day, despite modest short covering from JPY traders. The question many are asking is, ‘is USD/JPY ready to trade in the ¥100 to ¥105 range’, or ‘would corporate Japan feel more comfortable with a stable ¥95 to ¥100 range’? Of course that would depend on the industry, for example if you price WTI oil in JPY terms, it is looking to break out to the upside. But that’s what it’s all about – importing inflation – but if we see a level above ¥110, things could get a little out of control.
Perhaps the most fascinating moves today have come in the Japanese government bond market. Yields across the curve were on the rise in early trade; however they absolutely collapsed when treasury auctioned ¥600 billion of thirty-year bonds. This was largely seen as a litmus test for the market, as real money accounts wanted to see strong demand. This provided them with confidence that yields will stay low for longer, subsequently providing the trigger to search out yield in external bond markets. Whilst the bid-to-cover was over three times subscribed, the average yield was significantly above the underlying market. The end result has been a nine basis-point range, which is huge. The point is, the JPY and subsequently the Nikkei will take its cues from the Japanese fixed income market in the short term because the BoJ is trying to push investors out of domestic bonds and into foreign holdings. The trick forex traders are trying to work out is exactly where the money will flow.
So as things stand, European markets look set for a breather, but like the US it seems traders are in a buoyant mood and one could make a case that any dips will present themselves as a buying opportunity. On the docket we get inflation reads in Germany, France and Sweden, while we also get unemployment figures in Greece which should show 26.6% of the country is ‘technically’ out of work.
The highlight will be the weekly claims in the US and consensus is for an improvement lower to 360,000. A number that prints in-line will probably have limited effect, however a figure that comes out significantly below will certainly cause more pain for gold longs and could raise a few questions among traders on how closely the Fed will be watching this series.