It’s been a funny old session with a number of markets showing a pick-up in range expansion.
Naturally, we have to go to Bitcoin, as this has not only been the poster child of trend and momentum throughout 2017, and so often we see such punchy moves. Of course, liquidity is always at the heart of these moves and when there is any kind of pick-up in flow that needs to be worked through the exchanges, then we see sizeable and pronounced moves, at least relative to other more ‘traditional’ markets. However, the overnight session takes the award here, with Bitcoin trading into 11400 at 01:11 aedt before dropping 21% and into 9000 before the buyers have bravely waded back in. As mentioned, liquidity is at the heart of this move and perhaps this is the flush out of a hugely extended position it needed to have. But again the lesson here is if you are going to dance at the disco make sure you’re closest to the exit when the fire breaks out.
Elsewhere, we have seen the US tax debate suddenly push traders into selling US tech names, largely on the idea that many of these giant multinational companies actually have an extremely low effective tax rates of 18.5%, which is below the 20% proposed. Of course, many of these names have performed very well in 2017 and there seems to be some rotation into financials as we enter the final furlong of the year. However, we see the Nasdaq 100 lower by 1.7%, with the S&P 500 tech space -2.6%, while financials are gaining 1.7%. The broader S&P 500 opened and traded up to 2634 but traders have sold into the move and the index is currently modestly lower, although interestingly, we can see transport stocks and small caps working well.
There has been a focus on US Q3 GDP, which was revised up to 3.3% (annualised) from 3% and the positive aspect of this was business investment increased some 4.7%, with equipment investment 10.4%. Core PCE (the Fed’s preferred inflation read) ticked up to 1.4% from 1.3% as expected. Janet Yellen also commanded some attention from market participants, and although much of her language was a repeat of what we heard last week, most have focused on her concerns about rising debt levels and this is an aspect we will be closely watching as the Senate floor debate the tax plan and we should see the vote coming out later today.
There has been a move in the US fixed income markets and we can see better selling in the longer-end of the curve, taking the 2’s vs 10’s curve up a few basis points. The USD hasn’t reacted too greatly, although we also need to remember that we also saw some solid German inflation numbers and this has supported the EUR, while the market is bravely increasing GBP longs ahead of Monday’s luncheon between Theresa May and Jean-Claude Juncker.
USD/JPY has been where we have seen USD strength with a move into ¥112, while AUD/USD traded down to test a session low of $0.7552. Interestingly, and this is a theme I have been focused on for a while now, we can finally see a yield premium demanded to hold US Treasuries over Aussie Treasury’s in the two- and five-year maturities. We haven’t seen that dynamic for around 17 years! Further out the Treasury curve, we can see the yield premium demanded to hold Aussie 10-year Treasury now at only 9bp, the lowest premium over US Treasuries since June 2000. This is clearly an AUD negative, although the big support mechanism still remains that the RBA has a neutral, and a glass-half-full outlook.
For AUD traders, keep an eye on Aussie Q3 private capital expenditure at 11:30 aedt, with calls for 1% growth here, which of course feeds directly into next week’s Q3 GDP calculation. The fourth estimate for business spending intentions for 2017/18 will also be in play, with the AUD likely to find buyers if we see the spending intention figure north of $110 billion. A disappointing number which would promote AUD selling would be below $100 billion. China’s NBS manufacturing print (at 12:00 aedt) is expected to show a slight slowdown in the pace of expansion, with the index expected to print 51.4 (from 51.6).
So aggregating the moves together we can see Aussie SPI futures -12 points, which (when we adjusted for the ‘fair value’ weighting) results in an open for the ASX 200 at 6004. It’s obviously the last day of the month, so we could see some massaging of portfolio positioning, however, the ASX 200 looks to close out November up 1.7% and outperforming most European markets, and in-line with US indices, although it’s been Hong Kong and Japan which have really powered ahead in November. Recall, that much was made of how terrible November is historically and a seasonally devoid of equity appreciation.
ASX 200 financials will need to hold in to keep the ASX above 6000, and one suspects some of the good-will from the strong moves in European and US banks feeds through into stability for our banks. Industrials worked well yesterday and I see an elevated risk this materialise again on open. Materials may struggle, with BHP’s ADR suggesting a weaker open to the tune of 0.9% and we can see copper looking heavy, as does gold, while on a brighter note iron ore, steel and coking coal futures have gained 2%, 2.4% and 3.6% respectively.
Aussie energy names will be the central focus, with US crude closing -1.2%, while Brent has fared somewhat better lower by 0.4%. On one hand, we have seen the weekly DoE inventory report showing a sizeable build in gasoline and distillate inventories, although crude inventories did fall 3.4 million barrels. On the other, there have been much focus and pre-positioning ahead of tonight’s OPEC meeting. There has been a barrage of headlines for traders to work through, but notably, the Kuwait oil minister has said the committee recommends a 9-month extension and this was backed by the Russian energy minister, who detailed “everybody recommends that oil cuts be extended”.  With these dynamics in play, it will be interesting to see how Aussie investor and traders deal with these leads, so the ASX 200 energy sector will be the must-watch space of the day.
Originally published by Chris Weston, Chief Market Strategist, IG