8@eight: ASX set for firmer start

By Chris Weston
Updated October 17 2017 - 9:18am, first published 9:10am
The information of stocks that lost in prices are displayed on an electronic board inside the Australian Securities Exchange, operated by ASX Ltd., in Sydney, Australia, on Friday, July 24, 2015. The Australian dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg
The information of stocks that lost in prices are displayed on an electronic board inside the Australian Securities Exchange, operated by ASX Ltd., in Sydney, Australia, on Friday, July 24, 2015. The Australian dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg
MARKETS. 7 JUNE 2011. AFR PIC BY PETER BRAIG. STOCK EXCHANGE, SYDNEY, STOCKS. GENERIC PIC. ASX. STOCKMARKET. MARKET.
MARKETS. 7 JUNE 2011. AFR PIC BY PETER BRAIG. STOCK EXCHANGE, SYDNEY, STOCKS. GENERIC PIC. ASX. STOCKMARKET. MARKET.
Stock information is displayed on an electronic board inside the Australian Securities Exchange, operated by ASX Ltd., in Sydney, Australia, on Friday, July 24, 2015. The Australian dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg
Stock information is displayed on an electronic board inside the Australian Securities Exchange, operated by ASX Ltd., in Sydney, Australia, on Friday, July 24, 2015. The Australian dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg

There feels like a certain fatigue playing through US markets in the session and it warrants paying attention to price action, as always, as a pullback of sorts is a growing possibility.

The long and short of it

  1. I say pullback "of sorts", as this is a market where participants are hoping for a fall, first, so they actually know the index can fall and second, so they can buy at lower levels. However, given the trend in so many global equity markets and the backdrop of low inflation and what is likely to be decent third-quarter earnings in the US, pullbacks seem limited and that suggests an elevated possibility that the S&P 500 can build on its 14.2 per cent gain year-to-date (16 per cent on a total return basis). But as mentioned, the risk of a 1-2 per cent pullback is somewhat elevated here and while earnings are a near-term driver and high yield credit spreads are at multi-year tights, I would most closely look at the US treasury market for inspiration and certainly wouldn't be advocating short positions here just yet.
  2. Economic data has been fairly light, with the market not really focused too greatly on the New York Empire manufacturing print, and preferring to view the moves that have resonated from the far stronger, 6.9 per cent yoy, producer price inflation (PPI) from China, which some have suggested have seen strong flows into LME and CME copper, while many are also likely prepositioning ahead of Thursday's China Q3 GDP print (consensus +6.8 per cent). Take a look at the daily chart of high-grade copper, with price having firmly broken out and trading at the highest levels since July 2014. If this is a reflection of global economic trends then the world is a happy place right now. Oil has also been fairly well bid, with Brent and US crude closing up 1.2 per cent and 0.8 per cent respectively, with traders seeing disruption stemming from tensions and fighting between Iraqi troops and Kurdish troops and Iraqi forces capturing oil fields in Kirkuk, with estimates (source: Bloomberg) that disruptions here could affect 275,000 barrels a day.
  3. It's interesting that the moves in crude haven't really seen much of a bid in the S&P 500 energy sector, which closed up a mere 0.2 per cent and this suggests small support for Aussie energy names at the open. It also interesting that there hasn't been any move higher in inflation expectations, in fact, we have seen a very modest drop here and this has pushed up US "real" (or inflation-adjusted) bond yields fairly markedly given nominal bond yields have moved higher across the curve, with strong selling seen in the front-end of the curve, which has resulted in a bear flattening. US 5-year "real" treasury yields, therefore, have increased a sizeable seven basis points (bp) and at 20bp are at the highest levels since 17 July. It's no wonder then that precious metals have struggled (given their inverse relationship with bond yields and the USD), with gold and silver losing 0.9 per cent and 1.8 per cent respectively.
  4. I mentioned earlier to focus on bond markets, as a continued move higher, specifically in "real" yields, while clearly good for the global reflation trade (buy US banks here, notably with Morgan Stanley and Goldman Sachs reporting tonight), will pose a risk for equities and specifically for companies where analysts look closely at future cash flows and discount these cash flows back to the present, in order to derive a net present value (NPV). The higher the risk-free rate (or in this case, a US treasury bond), the less compelling (on a relative basis) the future cash flows from these companies becomes and this could pose an issue to sentiment, although we are some way from the tipping point yet.
  5. We have also seen a modest move higher in the US dollar, with the US dollar index up 0.3 per cent and while this is a small absolute move, the USD is actually up against all G10 currencies on the day and performing well against most emerging market currencies too and it's no surprise then that AUD/USD has dropped 0.5 per cent.
  6. One key talking point that has garnered much interest has been the emergence of John Taylor as a prospect for the Federal Reserve chair and his odds of taking this position have increased to 18 per cent, just below Janet Yellen (at 20 per cent), with both candidates leaping ahead of Kevin Warsh in the betting stakes. Jerome Powell remains the clear front-runner here, but reports that Taylor had a strong interview with US President Donald Trump did cause some support from the greenback. Trump is set to meet with Yellen on Thursday, so we could see headlines from this meeting and naturally if they are upbeat and positive then we could see the USD under small pressure, with a slight bull flattening of the treasury curve.
  7. We have just seen good numbers from Netflix and the stock is currently up 2.6 per cent, with compelling projections of fourth-quarter net streaming ads and revenue and this support sentiment, although obviously, its weighting on futures is very small. Still, the stage is set for somewhat firmer open in Asia, with the ASX 200 eyeing an open at 5860 +14 points), with BHP indicated to open around $27.13 (+0.8 per cent), suggesting miners could do ok, although Dalian bulk futures are a worry, with iron ore, steel, and coking coal lower by 2.5 per cent, 1.9 per cent and 2.9 per cent respectively. Spot iron ore did close up 0.7 per cent though. Financials seem key today, so if the ASX 200 is going to find buyers after the unwind of the auction then this is the sector to watch.
  8. Market highlights
  • SPI futures up 11 points or 0.2% to 5839
  • AUD -0.5% to 78.50 US cents
  • On Wall St: Dow +0.4%, S&P 500 +0.2%, Nasdaq +0.3%
  • The Dow closed at 22,956.95
  • In New York, BHP +1.1% Rio flat
  • In Europe: Stoxx 50 +0.1%, FTSE -0.1%, CAC +0.2%, DAX +0.1%
  • Spot gold -0.3% to $US1299.67 an ounce
  • Brent crude +1.2% to $US57.83 a barrel
  • US oil +0.9% to $US51.93 a barrel
  • Iron ore +0.7% to $US62.94 a tonne
  • Dalian iron ore -2.6% to 449 yuan
  • Steam coal +0.4% to $US96.15, Met coal +0.0% to $US181.50
  • LME aluminium flat at $US2136 a tonne
  • LME copper +3.7% to $US7134 a tonne
  • 10-year bond yield: US 2.30%, Germany 0.37%, Australia 2.75%

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