Trader thoughts - the long and short of it

Steady gains have been seen in the FTSE 100 and European equity markets, although the likes of the DAX still have much work to do, and price action still shows strong indecision and a lack of conviction to push the index higher.

The S&P 500, however, has poked its head out above and printed a new high in this run, with small gains seen in the Nasdaq 100 too. Although the focus in earnings was firmly placed on Caterpillar and McDonalds. Both of these names pleasing the market with strong results. Certainly the daily chart of Caterpillar is an absolute beauty and is a trend followers dream and I see no other way to trade this than from the long side.

Caterpillar seems to be in a nice spot at present and investors will always like it when management not only beat expectations, but upgrade guidance higher than what the analysts had been expecting.  

Aside from earnings, much of the focus was political in nature with the Senate moving ahead with the Obamacare repeal, which Mitch McConnell says should be at the end of next week. Nothing seems easy in Washington, especially with claims from Reuters (which was later denied by State Department spokeswomen Heather Nauert) that 'Secretary of State Rex Tillerson is considering resigning his position amid a rash of staffing changes at the White House.'

Certainly the USD should be on the radar, with the USD index showing signs that the selling could have abated for now. Aside from small baby steps toward political progress, we saw the US Conference Board consumer confidence print a very impressive 121.9, far higher than the 116.5 eyed by economists and matching the March print, which in itself was the highest since 2000. We just need a confident consumer to do something far more convincing in the retail spending, notably given how poor the last retail control group print was.

Focusing on the US dollar index, we can see price action on the daily chart has shown a reasonable bid off 93.37, which has certainly been assisted with EUR/USD finding strong sellers from $1.1712. A close below yesterday’s low of $1.1625, which seems unlikely, would increase the probability of a mean reversion move towards $1.1477, although everyone seems hell-bent on buying a pullback in EUR/USD. USD/JPY has been a star of the session, with price having found good buyers off the 61.8% retracement of the June to July rally at ¥110.98 and now finding itself testing trend resistance, where a move through ¥112.08 would be bullish and no doubt driven by momentum building in the US 10-year treasury sell-off, which has really been at the heart of the USD move.

Put the TLT ETF (iShares 20 year+ treasury) on the radar, where further selling here should drive price below the 7 July low of $122.58 (yields rising). Again, this should benefit the USD, given its sensitivity to the back-end of the US fixed income curve.

Of course, all eyes on tonight’s FOMC meeting, but again it’s hard to see this being a huge USD driver, or at least the market is not positioned for new news. such new news will change the course of the USD sell-off and we can see the market going into this statement with the prospect of a December rate hikes pared back to around 40%, which again seems fair knowing what we know. Its these sort of Fed meetings that can shock though, especially when sentiment towards the USD is so depressed, but it will come in the form of subtle tweaks and notably around inflation dynamics, and of course, balance sheet normalisation.

In terms of market movers, it’s really been all about the oil market, although base metals and spot iron ore are also seeing green on screen. US crude has broken out above the recent double top and closed +3.3% at $47.90. The market seems to have become quite excited about the Saudi’s looking to limit output in August, but whether we can see price break back into $50, it will likely take its near term direction from the upcoming weekly Department of Energy report, where the trend has certainly been for larger draws of late and stocks have fallen. This has been a source of positivity for the bulls. There has been some discussion about the improving picture in the physical space too, so it doesn’t seem out of the realms of possibility we see US crude move into the $50 zone again soon. While on the subject, energy stocks in Australia should find good buyers on open.

In terms of today’s Aussie open and the fact SPI futures have moved up 33 points suggests an open for the ASX 200 around 5760. Momentum is building ahead of next week’s Aussie earnings season, although whether it is enough to take it to the top of the range is debatable. I would like to see SPI futures break the 14 July high of 5729 (currently 5701) to give some confidence that the ASX 200 can build on the recent moves, but that will require banks to push nicely higher from here and that means CBA has to inspire when they report on 9 August.

For me today, the focus will turn back to the AUD and rates market with Q2 CPI at 11:30am AEST and the RBA Governor speaking at 1:05pm AEST. The market goes into today having priced out rate hikes across the curve somewhat this week, but we can still see 18bp (or a 72% chance of a hike) of tightening priced in by April 2018. A quarterly trimmed CPI print above 0.7% should increase these prospects and send the AUD/USD towards 80c, with the pair trading a range of $0.7970 to $0.7902 on the session, where it current sits mid-range. A quarterly print of 0.3% or below should see the pair settle nicely below 79c.