ASX at the close


by Chris Weston, IG

Volatility continues to show its hand, although this could be the new normal through Q1, as markets continue to grapple with falling inflation, spiralling commodities, crazy bond yields, political uncertainties and ultimately a market that feels central banks have no juice to meet their mandates.

Statistics don’t lie and while we have seen the S&P 500 rally for six consecutive years, you have to go back to the late1800’s for the last time the US benchmark saw a seventh consecutive year of gains. Whether we see the S&P 500 break into unchartered territory this time round is unclear, although sell-side strategists will of course tell you markets are going up and that is thematic with the consensus target of 2,228 (and a potential gain of 10%).

I will continue to hold a positive bias as long as the market can hold the 12-month moving average at 1,868 and the uptrend drawn from the 2011 low.

Intel to break-out of its recent trading range?
The current Q4 earning season in the US therefore is really so important. Naturally, the market will react to the earnings numbers and guidance, however listening to CEO’s on economic trends around housing, the consumer and manufacturing is so important. Forward order demand for resource players and how low oil could impact their business mean there is also in view, therefore, there is really something for everyone, not just equity traders.

Watch numbers today from Intel, Bank of America, Schlumberger and Blackrock. I am keen to see if the double bottom on Intel at $35.33 to $35.26 can hold, as this is a stock that has performed well and has low short interest and a break here could set a new trading range.

Asia has been mixed today with Japan finding solace from a shocking machine orders print, therefore solidifying the idea that the Bank of Japan will probably have to put its foot down a little more. China is seeing modest gains, while the ASX 200 is lower after factoring in the weaker US lead.
It seems the Chinese market saw some relief from the December financing numbers.

The concern I have is that if you look at the strong increase in the aggregate financing figures (at RMB1690 billion), new yuan loans (provided by the larger banks) made up 41% of the total financing figure, down from 74% in November. This suggests the shadow banks had a very active December extending credit into the economy; hardly thematic of deleveraging. A 1.2% decline in their foreign currency reserves also works against those who feel the yuan is set for a sizeable crash this year.

Copper and oil futures have also seen some short covering and are nicely higher in relation to yesterday’s ASX 200 cash market close. With this in mind, you could make a case that resource-listed names should have seen some reasonable short-covering today. Not the case, although it is supporting the AUD to a degree and this tells me that local traders and investors see the move as nothing more than a dead cat bounce. There is so much ill-will towards resource names right now and while some would see this as a perfect place to invest (think contrarian) this mind-set works well if you believe governments and central banks can step in to fix the issues.

Strong Australian jobs report, but the RBA should still cut in March
The Reserve Bank of Australia are one of the few central banks that can still affect monetary policy through the use of interest rates. However, today’s December Australian employment report certainly isn’t thematic of a central bank about to cut rates twice over the year (which is what the swaps market is basically pricing in). 41,600 full-time jobs being created is a strong number, but a 0.1% rise in the participation rate, and importantly also the employment to population ratio (to 60.8%) has made this even more robust.

The main issue is the unemployment rate at 6.1% is still far too high, but for now the numbers are keeping the AUD bears at bay.

Short EUR/AUD (A$1.4367 at the time of writing) looks compelling in my opinion. Firstly, you are trading with the trend, which, of course, should always be the case. RBA rate cuts are largely in the price, although the Australian economy could be the big unknown this year and the RBA will not cut in February which the market is giving a 10% probability to.

On the other side of the equation, the market has seen a favourable ruling from the Advocate General of the European Court of Justice on Mario Draghi’s OMT (Outright Monetary Transactions) policy from 2012. This has all but cemented the view that the European Central Bank will pull the trigger and expand base money, in-turn buying government bonds in the secondary market.

For me though, €500 billion of ECB bond buying will do very little in terms of generating inflation and if we look at the swaps market inflation expectations in Europe continue to fall. €500 billion represents around 5% of GDP, which is in-line with the Bank of England when they started QE and subsequently ramped up the purchases to a much higher level. Hence, in my mind the ECB will have to go hard in the second half of the year.
With two-year bond yields already negative in over half of European countries and many five-year paper also so low, the question is, will we see German 10-year bunds trading below 30 basis points and onwards in the coming months? The ECB can’t be pleased to be buying assets that are simply so expensive.

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  1. migtronixMEMBER

    Yes Chris German 10Y bunds halving and matching Japan will surely mean recovery is just around the corner.

    If S&P keeps rising for another 13 years Australians might consider investing in equities.

    But the weaponization of finance is not just about economic sanctions against nations, says Bremmer. The U.S. uses similar tactics against banks and other institutions that are in allied countries who may not want to support U.S. sanctions. “So we say ‘Okay, no problem. We’ll just fine you $10 billion or we’ll take away access, we’ll take away your license to do business in the U.S.,” says Bremmer. “That’s not exactly an economic sanction but that is using the almighty dollar, which is a much more effective tool than a nuclear arsenal.”–with-shift-to-more-sanctions–u-s–relationship-with-europe-eroding-132100751.html

    • Not sure I was saying that a move lower would aid the recovery.

      I think it shows investors have priced in Qe, imflation is low and in select EMU countries outright deflation.
      QE is merely replacing the money paid back from LTRO 1 and 2… It won’t do anything except move assets.. Banks has lost the the ECBs vision of being the vehicle that is the link between the central bank and the real economy.

      Europe is in for a horrible time and QE will need to be increased time and time again

      • migtronixMEMBER

        You weren’t, it was the “recovery just around the corner” cnbc line that never seems to die.

        I’m with you on ECBs fate

  2. Brent is currently cheaper than West Texas. Brent being sweeter than WTI would suggest that the heavier hydrocarbon chains are not as over supplied as the lighter ones (gasoline and kerosene). The sour bench marks also do not seem to have moved as much.

      • It will be interesting to see who got caught in this. I am sure someone mid size has been given a massive spanking.

        Plus I wonder how many non-market Forex trading operations have been caught.

      • @Cornflakes – Yes, indeed it will. The number of notes I have read recommending to be long EURCHF is just silly. Hate to think of those institutions writing FX options assuming 1.2 was the floor.

        Do hope Mig and the rest of you are all OK. Recall he was trading the Swissy at various times.

      • migtronixMEMBER

        Hell yeah buddy! I been trading swissy as a hedge to waiting for the peg to bust! Dreams finally came true!!! Mmmm long tail….

      • There was always a risk the peg would be pulled at some stage but I thought it was going to take a bit longer for the SNB’s nerves to crack (like five years or so).

      • migtronixMEMBER

        My bet on going long swissy at 86/87 (the posts are out there somewhere going back while) is parity would mean SNB had to blink. I didn’t think it would ever be in this quick fashion but parity in USD had to be an issue…

      • Yeah that negative 25bps yield was a disaster for my savings!

        Haha – just wish I had calls and not just cash

        USD/CNH next

        Nature abhors a vacuum – markets abhor a peg

    • Chris Beauchamp, market analyst at IG said: “My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks.

      “However, it’s not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there’s something bigger afoot.”

      • migtronixMEMBER

        Sure why not, probably will need a few beers to wash down all the coke I’m going to insufflate…

      • Thanks for supporting criminal cartels.

        My memory’s of Calif and users is like watching one way traffic culminating in a cliff, even the ones that don’t lose it all end up hollow shells.

        Skippy… someday I might link a historical perspective of coke for you and the massively destructive social consequences… seems some forgot its effect on Wall St too.

        PS, sort of like snorting VaR…. if you know what I mean….

      • Who pays for the criminals in government in the first place and how was that allowed or engineered and by who.

      • The central bankers because it’s their money. The cartels are only criminal because of govt, ask Big Pharma about that sometime skippy…

    • migtronixMEMBER

      this is GOLD! I love these sessions.

      Speaking of gold… ha ha ha apparently not going to 1000 any time soon.

      • AUD about to round trip the numberwang

        Oil and then this – wouldn’t own financial stocks in this climate. Some bodies are going to float to the surface soon.

        FAZ time…

    • VAR budgets globally getting wound in right now

      Waiting for Ol Yella and Draghi holograms to ring the NYSE Bell tonight on CNBC – calling for calm (and promising free money) as Liesman’s bald patch gets sweaty and he claims stawks are on sale here…

      • migtronixMEMBER

        It appears the SNB had grown increasingly concerned about cost of maintaining the cap on the franc. The European Court of Justice preliminary ruling yesterday removed potential barrier to a ECB’s sovereign bond buying program. The SNB likely anticipated, as do many market participants, for the euro to come under more pressure going forward. ”

        Ding ding ding

  3. Clownshow on Bloomberg TV feeling sorry for the Swiss people !

    The Swiss just got 20% richer

    The only reason to feel sorry for the Swiss is because their stupid Central Bank wasted a pile of good money buying Euros and other associated crap to try and manipulate their currency lower.

    What is wrong with the world

    • Someone at the Fed has been telling… THE TRUTH

      In theory, the rapid aging of the global population is likely to have additional adverse implications for U.S. stock values. Ang and Maddaloni (2005) find that using the fraction of retired people in the population predicts excess returns in the four largest equity markets outside the United States. Evidence also suggests that U.S. and foreign markets are integrated. This implies that if a tight relationship exists between the M/O ratio and P/E ratios in foreign economies, their demographics are likely to impact U.S. equity values as well.


      • Agree with Gunna – great find.

        Always vaguely wondered wrt ASX what effect on P/E of more people taking money out of super than putting in might be.

        Figure 2, where they fit straight lines to totally non straight scatterplots is good for a chuckle too.

      • Like this is news?

        The paper is 05 and many have pointed out the hyper connectivity of global markets.

        Skippy…. Butterfly’s… Massive Butterfly’s….