ASX at the close

By Chris Weston, Chief Market Strategist at IG Markets

US equity markets continue to power ahead. Given the current momentum, we could see the September (and all-time) highs being tested fairly soon.

A sense of calm has descended on the capital markets once again. It seems the volatility we saw a couple of weeks ago is behind us for now, with the VIX falling back in line with the year’s average at 14%. Fed president James Bullard’s recent comments were a key catalyst, although we have seen the BoJ, BoE, ECB, PBoC and now the Riksbank in Sweden all coming out with dovish or equity-supportive actions. This has given investors the confidence to put money to work in the equity market.

Solid earnings beats from US corporations have given the market rally credibility, helped to a degree by the fact the yield on offer in the equity market is above that of the US 10-year bond. Pullbacks in the equity market will be jumped on ,with everyone seemingly a trend trader again. The Dow Jones, S&P 500 and NASDAQ are not technically overbought yet.

Further gains in the US market will put backbone into other developed markets. However, it seems global liquidity and fund flow is still headed for US shores, presumably because profit margins are still so much better than in most other regions. The German DAX, for example, is still 10% away from the highs made in June and yet still hasn’t cleared the 50% retracement of the recent sell-off.

ASX 200 looking toppy

In Australia the ASX 200 is flat today with banks under pressure, although there isn’t any clear cut catalyst for today’s move and its been good to see the market ignore the World Bank lowering its China growth estimate for 2016 to 7.1% . Perhaps there are a few longs who have taken some exposure off the table ahead of NAB’s pre-market release tomorrow. The market is looking for cash earnings of A$5.1 billion and a 99c final dividend with 2H net income margins of 1.89%, but of course there are areas investors will be keen to explore. A miss would naturally affect the broader market.

Technically, there are signs we could see a slight pullback in the Australian market here, with the stochastic and 14-day RSI starting to roll over, as well as the index finding good sellers at the 61.8% retracement of the August-to-October sell-off (at 5466). I wouldn’t be surprised to see a move back to 5400 in the short term from here, but we have seen a period of underperformance relative to US markets. It’s likely this will continue.

The question now is whether the Fed will rock the boat in today’s meeting? I personally can’t see this happening and, judging by the fact the S&P 500 closed at session highs, it seems the wider trading and investor community don’t either. Implied overnight options volatility in EUR/USD (12.48%), AUD/USD (16.1%) and USD/JPY (13.96%) are certainly elevated, but that is happening because the market is still somewhat on edge after the recent moves. Plus, of course, we do have the Federal Reserve demanding the capital markets’ attention.

All about the Fed

There has been a lot of water under the bridge since the last FOMC meeting. But if we forget about all the news flow and repricing of interest rate markets since the 18 September meeting, in theory there is reason for the Fed to be quite positive, at least from a capital market perceptive. Since the last meeting, the US ten-year treasury has fallen 33 basis points. Retail gasoline prices have fallen 10% (currently at the lowest levels since December 2010) and the S&P 500 is only 1.1% lower, while the USD (on a trade-weighted basis)  is up 1.5%.

These moves do lower the prospect that the Fed will talk specifically about the capital markets, but it certainly doesn’t give them scope to be hawkish. With inflation expectations falling, it will be interesting to see if the statement explores inflation expectations in more depth, especially as Mr Bullard planted that seed on 16 October.

We should see the Fed end its QE program, pushing the US into a new era of monetary policy, although the cynics still feel that QE4 is just around the corner. The statement should continue to voice a ‘significant under-utilization’ of the labour market and a ‘considerable’ period of time between the end of QE and the first rate hike.

Recall the Fed’s last set of projections portrayed the funds rate would be at 1.37% by December 2015. The market is pricing the funds rate at 45 basis points by this period, so someone is clearly wrong. If trading is taking advantage of price misalignments, then this is perhaps one of the biggest divergences in many years. While we won’t get any new projections, rhetoric suggesting their view hasn’t materially changed could cause a USD rally. The fact we have already started to see a bear flattening of the US yield curve today (with the two-year treasury up three basis points today) is interesting.

The USD is consolidating, and is in a triangle pattern on the daily chart. My best guess is we will get a break to the upside, with the USD index needing to break above 85.71 (spot now at 85.41) for this pattern to play out. Traders will be looking to buy the break here, which should coincide with EUR/USD trading towards $1.2600, USD/JPY towards ¥108.93 and AUD/USD to $0.8800. Watch price action in the NZD too, with the RBNZ due out shortly after the FOMC meet. With soft inflation, it’s realistic to believe the statement will be fairly neutral.

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Comments

    • PS

      “We should see the Fed end its QE program, pushing the US into a new era of monetary policy, although the cynics still feel that QE4 is just around the corner. “

      Cynics you say? Call us realists. As Charles Ponzi said the other day, QE is like Hotel California. You can always check out but can never leave!!

  1. GunnamattaMEMBER

    some evening poetry…..

    In a world where capital could be free…..

    When regulation of any sort is socialism
    Then the requirements to meet it should be seen
    From the outlays side of the ledger, and this prism
    Therefore an impediment to the working effectiveness of greed

    To get the corporate behaviours to maximise value
    We could remove Prime Ministers like Rio and BHP
    And why should we care about paper mill dioxins
    If we can be sure that it all ends up in the sea

    To maintain the focus on the outcomes we need
    We’d point out to the press on which the punters imbibe
    Of the bullshit of audited decisionmaking processes
    Which must apply before any public servant can decide

    Just imagine the efficiencies there will be to be gained,
    On that day when companies are free to decide
    Who and how investors can leverage access to information
    In corporate disclosures and the information they hide

    We could craft policy to cultivate lifters
    Who work hard on reducing their tax
    And shaping the public mindset to understand as we do
    That it’s those 40 hour toilers each week who are lax

    In a world where people are simple chattels or costs
    We might engage with risk like the neighbours of Union Carbide
    And in that world we might also free capital from account
    From those moments where the odd financier has told, a suitably risk managed pork pie

    To pay taxes as Google or Amazon
    To care for the environment like Monsanto or BP
    To care for their labour like James Hardie
    Oh to dream……
    In a world where capital could be free

    © Gunnamatta 2014

    • I remember the days when we had real competition and a plethora of banks to choose from, now there is no choice and it doesn’t matter what logo the bank uses, you’re still getting screwed. I tried so hard in the 90s to stay with a smaller bank, but every time I moved to one they got gobbled up by a big 4 and I ran out of small banks to open accounts with. Colonial, Advance Bank, National Mutual, St George. Every time the got bought out by ANZ, CBA, Westapc or NAB my banking experience went down and my fees went up.

      Banking is just one of the seas Australia has been screwed over since the 80s. Funny how we could have only 16m people but be spoilt for choice and provide for nearly everything, but now with the population ponzi we are worse off and less choice.

  2. The Traveling Wilbur

    With inflation expectations falling, it will be interesting to see if the statement explores inflation expectations in more depth

    Waiting to hear Americans talk about inflation is like waiting to hear about a blind man describing colour. Or the LNP describing social equity.

    And when they do get it (inflation (e.g. Reagan), accurate descriptions, equity) they don’t want it. In the case of the latter especially.

  3. All the repricing since the September Fed meeting has been driven by falling breakevens. It seems like traders think it’s a given that falling breakevens mean more easing or delayed tightening. But, reading between the lines, the Fed doesn’t see it that way.
    For the first time since 09, it seems like the Fed is saying they don’t believe the breakevens. That it’s just a blip driven by a flight to safety move into nominal bonds. And this message has been coming from the dove camp.
    So if this really is the thinking at Fed at the moment, it’s possible that the markets may be very disappointed.

      • migtronixMEMBER

        Bwaaahaaahaahaa what credibility? They have the reserve currency and that’s all the credibility they need. Besides give Draghi a week and he’ll do something 10x more credibility reducing. Like NIRP. Oh wait.

      • The Traveling Wilbur

        LOL. Ah… I wish Mig was here to respond to that one.

        In his absence, the obvious “what credibility” will have to suffice. When she had to backtrack the entire ‘there will be order’ element of her first speech she lost the Fed *any* credibility it had left after starting Q3.

        EDIT: And like Rumplestiltskin, Blood Mary and 3d1khd he is summoned by the invocation of his name. Eire. Evening Mig… where ya been?

      • migtronixMEMBER

        LOL. Ah… I wish Mig was here to respond to that one.

        In his absence, the obvious “what credibility”

        Wait, what?

      • The Traveling Wilbur

        @Mig

        When I started my response to Gunna’s post, your response was not yet present. Once I’d posted mine, it appeared under yours.

        The *only* thing I edited in the edit was the addition of the “EDIT: …”.

        Early halloween scariness. (yes it took me 5 minutes to write it – I was distracted by an NCIS episode).

      • migtronixMEMBER

        I got that Wilb 😉

        Was playing on the fact that the response I provided was your in lieu

      • Gunna,
        I think that’s the way they would see it as well. If you walked into a Fed meeting now, you would ask yourself; what has changed since we met in September; has unemployment, consumer or business confidence collapsed – No. So what has changed – bond markets have had a hissy fit.
        If they start responding to market hissy fits they lose credibility. Like when Bernanke cut 75 basis points or something after the Soc Gen trading scandal in early 2008. It looked stupid.

      • GunnamattaMEMBER

        Mig, I get your point – and largely agree with it but credibility is a relative concept. I think the Fed has enough to move the markets still, and tend to the view that if they fail to end QE because of the bond hissy fit then they will move it by a tad less in future, and that other things will move it correspondingly more.

        It is the exit from all this, however long and torturous the road may be where the Americans need to keep control

    • migtronixMEMBER

      Sorry but can’t see it, if the markets are disappointed the algos go nuts, it’s not even the same world as 08 thanks to their “liquidity” stupidity.

      • All I’m saying is that markets are pricing in decisions based on the way the Fed has behaved since early 09.

        But it’s not early 09 now. US unemployment is below 6%, not close to 10%. And whether they are wrong or right, unemployment is the measure the Fed uses to gauge excess capacity/ output gap.

        Commentary from the Fed since the September meeting has been that they don’t take falling breakevens, at this point, at face value, that it’s just a blip.

        They’ve only got 2 objectives, they couldn’t care less what the market does over the next 24 hours. Biggest misconception is that the Fed tries to please the market (up to a point).

      • The Traveling Wilbur

        Wait until G20 starts Mig. You’ll get all the volatility you want then. I’ll skype you live coverage of it if you like. I won’t even have to get off the couch – I can just point the cam out the window (and down a bit).

  4. The Traveling Wilbur

    PS

    In Australia the ASX 200 is flat today with banks under pressure, although there isn’t any clear cut catalyst for today’s move … . Perhaps there are a few longs who have taken some exposure off the table ahead of NAB’s pre-market release tomorrow.

    Perhaps… perhaps indeed. Though if anyone would be kind enough to explain why the futures market for the ASX dropped through the floor, not only while everyone was still actively buying (almost) everything they could get their hands on for the first 30 minutes of trading, but also *before* trade started, then, I’d be more willing to consider such a good-natured view of today’s market activity. Don’t get me wrong, I’m sure this week’s releases played their part, but was that *all* there was to it?

    Enquiring minds want to know.

      • The Traveling Wilbur

        Yes… obviously… but why… what was their raisin eater for today’s pointlesness? (exiting longs on banks being an exception to the stupidity).

      • The Traveling Wilbur

        Thank you for pre-emptively answering exactly what I was going to ask. Which allows me to switch to statement mode. If it’s too late to hedge them (which could be kind of fun) then dump them tomorrow. I can’t think of a better time to do so. Unless you’re waiting for restocking in China… (but that topic’s been done to death on this site… and if you are, then you’re a braver man than I McDuff).

        And if that’s all you’re still holding, well done you over the last three weeks. You must have cleaned up.

        That said, my theory is that tomorrow will be a good day to buy (anything but Junior miners). Once the world realises that the world doesn’t come to an end when QE3’s ex-parrot day draws to a close that is.

      • Pretty much my thinking really, but as longer term AUD hedges they might still work. The action part of my brain does say sell though.

      • The Traveling Wilbur

        The action part of your brain been looking at the chart of iron ore vs the AUS/USD pair recently? That play (as a hedge) has been working again ever since the recent rally started.

        You might have a point. But if you’re just waiting for FMG to buy out the juniors once their toes turn up, I wouldn’t put my money on that one.

  5. An island nation like Jamaica, where wholesale power costs about $300 a megawatt-hour, could generate electricity from solar panels for about half as much. Similarly, wind power in Nicaragua may be half as expensive as traditional energy.

    “Clean energy is the low-cost option in a lot of these countries,” Zindler said by telephone. “The technologies are cost-competitive right now. Not in the future, but right now.”

    Climatescope was developed two years ago by Bloomberg New Energy Finance, the Multilateral Investment Fund of the Inter-American Development Bank Group and the U.K. Government Department for International Development to track clean energy in 26 Latin American and Caribbean nations. This year’s report includes 19 African nations and 10 in Asia, research supported in part by the U.S. Agency for International Development.

    Now that will worry some energy rent seekers

    http://mobile.bloomberg.com/news/2014-10-26/treasury-liquidity-squeeze-seen-in-dealer-who-shut-off-machine.html

  6. Is Fairfax completely daft?
    They have a semi- paywall that is totally destroyed by refreshing cookiies.
    They are now totally dependent upon girlie story click bait ( that includes isil).
    Genuine Journalism is MIA

    Pretty tragic to witness what has become of a once great media flagship. Enough is enuff!
    Goodbye Fairfax – long live the Blogs!

    • Fairfax is a joke of a paper, full of raging left wing bias that protect the elites. No investigative journalism, it’s only purpose is to protect its financial interests from both the population ponzi and property market.

    • Mig, a tip for you and the Wilbur, put all your money inthe bank until this excitement rolls over. If the algos interact anything is possible on the downside.Ww

      • migtronixMEMBER

        If anything is possible then what makes you think the banks won’t rollover and be bailed-in?

      • The Traveling Wilbur

        My goodness, a sheep in Wolf’s clothing! Now that is original.

        But more seriously, yeah thought had crossed my mind breifly… but the next few days should be nothing to what happened when the markets thought (months ago) rate rises were going to be coming sooner than expected. A bit like the introduction of the CT really. It is an ex-python sequeeze. Move along. Nothing to see here…

        But thanks for the input Flossie (not so original). Appreciated.