Chris Weston, Chief Market Strategist at IG Markets
With so much event risk for traders to navigate through last week, the price action did not disappoint. The fact that the S&P 500 closed one point from its opening level is incredible considering the index traded in a 62-point range. What we do have is some sort of clarity, and traders are expressing this by buying specific risk assets. We have clarity that the Federal Reserve will raise rates in December which is now fully priced in. We’ve seen the Bank of International Settlements wade into the argument today to urge them to act.
We have clarity that OPEC will not influence prices and Asia-based traders have had their chance to vote by pushing Brent through the $43 level.
We have clarity that the yuan will be a reserve currency in 2016, and that the European Central Bank have eased policy and have also curbed the trade-weighted USD from printing new 12-year highs by not meeting the lofty expectations.
US markets have rejoiced in the fact that Friday’s payrolls were strong enough to cement expectations of a hike next week, but not strong enough to influence the path of rate hikes in 2016. The market is assigning a 40% probability of a second rate hike by March, which would effectively bring the Fed funds rate to a new range of 50 to 75 basis points. This seems like a clear benchmark by which to assess how the USD will trade. As Janet Yellen should detail in more depth next week, whether they hike again will be purely data dependant. If we do get another hike, I suspect it will be closer to the June meeting.
Asian markets have fed off the US markets upbeat price action, although US futures have remained unchanged today and there are no clear indications if we’ll see the S&P 500 make an assault on the 2100 area today. European markets are showing no signs of stress to the strong showing from Marine Le Pen’s Front National in the regional elections and the results seem priced in. We are calling the French CAC up close 1%, although 59% of client flow has been trading the index on the short side today. For now, it doesn’t seem like the regional elections are causing any duress. A second round of elections will follow on Sunday where there could potentially be some interesting tactical alliances formed, but for many there has been acknowledgment that the Front National have moved on from being a protest party to having a genuine chance of taking the April 2017 national elections.
Locally, the ASX 200 rallied to a high of 5230 (+1.5% on the day), on what was strong market breadth. The banks initially put in the bulk of the points, but we’ve seen the financial sub-sector and the broader market roll over quite aggressively. While there is no smoking gun that I can see, I suspect the numerous (and progressively) bearish articles on Australian housing aren’t helping, while the energy space is being aggressively sold in reaction to the lack of hawkish narrative from OPEC.
(ASX 200 financial sector)
Good domestic data should resinate positive risk flows. We get a number of the data points this week that have been quite reassuring for the Reserve Bank – business and consumer confidence, and November employment. October home loan data is also released, but the jobs data will likely cause the biggest market reaction. It’s worth noting that the consensus of 10,000 net jobs being lost is the first negative consensus since February.
AUD/USD continues to eye the October highs of $0.7382 – despite testing this level on Friday, it failed to close above this important level. There is even more intense speculation around iron ore prices and how the AUD has fully diverged from the key export, although we are seeing iron ore futures pushing 1.7% higher today. A number of offshore strategists have pushed the idea of short AUD/USD trades at current levels, but I am sceptical of shorting at current levels as a break of $0.7380 would be highly positive. When a currency doesn’t do what it should do, you have to take notice. If we look at the various oscillators, we can see momentum is starting to wane and roll over, so if shorting, I would do it in small sizes. However, the ‘value’ trade is to sell into the $0.7450 to $0.7500 area.