Trader's thoughts - The long and short of it

US markets back, Wall Street up

US markets returned to trade last night, and with a little over two hours before Wall Street close, a positive day looks to be on the cards for American stocks. If realized, it’ll be one that comes on the back of markedly lower volume following the Presidents’ Day holiday. At that, as far as the [indices:S&P500] goes, the market is not yet seriously threatening that highly anticipated resistance level at about 2815. Given market circumstances, this “V” shaped rally in US (and global) equities could lose juice before that point. That approximate level, though, is being treated as the line in the sand: it’s where rallies have gone to die in the recent past and will be watched closely as it looms larger on the horizon.

Dollar lower; yields falls

Activity in other asset classes is proving supportive for US stocks presently. The market landscape didn’t shift last night – just like it didn’t at the back end of last week. Regardless, the themes contributing to the evolution in price action thus far this year still possess momentum. Rates and bonds markets are progressively shifting towards levels that reflect an economic slow down in the US, albeit at a manageable tick for now. The USD has pulled away once more from its highs, as yields fall in US denominated assets (ever so slightly) quicker than those in the UK, Europe and Japan. This combined with the afterglow of last week’s trade-war developments is underwriting strength in commodities, with the Bloomberg Commodity Index up another 0.35% overnight.

Currency dynamics

The beneficiaries of the weaker USD in currency-land are for all to see. Despite little changing in the global growth outlook, sentiment and speculation has supported riskier currencies. The Australian Dollar, despite pulling back at stages during Asian trade, is still the risk-growth proxy du jour, climbing towards the 0.7200 handle once more. The CAD is similar – lifted by WTI oil prices too. Across the G4 currency complex, even in the face of monumental economic, political and financial headwinds, including the possibility of new auto-tariffs imposed by the US, the EUR is back in the middle of the 1.13-handle. The Cable shrugged off a mixed labour market data to trade beyond 1.30 once again; while greater risk sentiment and a dovish BOJ has hindered the Yen.

FOMC Minutes positioning

It’s not outlandish to infer that markets are behaving in the fashion that they are in anticipation of tomorrow morning’s FOMC Minutes. Although staring down the barrel of slower earnings growth on Wall Street, and a mixed outlook for economies and risk assets in Europe and Asia, US stocks and other “growth” proxies, in the last 48 hours, have performed well. The function is twofold: markets remain in the mindset that a supportive Fed will limit downside for US equities in the short-term; while the “event risk” of the FOMC minutes themselves is driving traders away from USD denominated assets. The FOMC release isn’t expected to shift the prevailing “dovish”, or “patient” Fed view; but the element of short-term risk is seemingly having some effect on current market behaviour.

Australian economic data

That segues to the risk events this week for Australian markets: yesterday it was RBA minutes, today it’s wage growth figures, tomorrow it is unemployment numbers. The RBA Minutes reminded traders of the softening economic outlook in Australia, and though brief, manifested in a warranted pull-back in the AUD. Like any central bank release, the skill in interpreting it is by reading between the lines. The rise of certain contingencies arguably conveys the most information, and there were two conspicuous ones in yesterday’s minutes. Firstly, it was the dive into the details of what impact the slowing Australian property market may have on ailing consumption; secondly, it was whether iron ore prices could remain elevated, and continue to support the nation’s terms of trade in the immediate future.

Australian wage growth today

Naturally, the middle road was taken on each subject, however the matter is this: the fact each needed to be raised as a subject at all betrays their importance, and potential risk to Australia’s growth outlook. Ultimately, the pulling of these threads leads back to the RBA’s core concern – and at that, in a small but meaningful way, the local data traders will receive this morning: local wage growth figures. The prospect of a more hawkish RBA hinges on the tightening labour market’s ability to deliver a pay-rise to Australian workers. Fundamentally: it’s this key ingredient touted as the offset to the consumption-sapping impacts of mounting private debt levels, weak retail demand, and the oft-cited “reverse-wealth-effect” brought about falling property prices the country’s major capitals.

The ASX 200’s next challenge

Inspired by overseas leads, and a push above technical support/resistance at 6100/05, Australian stocks have traded independent of the mixed economic outlook. SPI Futures are indicating presently a 12-point jump at the open for the ASX 200, building on yesterday’s close at 6106. Bank stocks led the charge higher and were able to offset a uke warm set of corporate earnings. BHP might be the key one today, after yesterday’s earnings were mixed, but enough to support bullish sentiment in that company’s stock in overnight trade. Given yesterday’s break and hold above 6100 resistance, the next level bulls will be eyeing is likely to be 6160, before September 2018’s high (and closing price) at 6230 comes into view.