The two overarching macro themes the market honed in on overnight have been the response from European and US traders to the Senate passing its tax plan and that no deal has yet been formally reached in the Brexit negotiations.
Certainly, if we take the latter issue we can see just how complicated and emotive the process to reach a formal agreement is, with many influences impacting the outcome. In this case, all looked to be going in the way of a more positive affair, with the Financial Times running a headline that a deal between Jean Claude-Juncker and Theresa May had been reached at their luncheon and that there would be “no divergence”, or in this case a hard border for Northern Ireland away from the EU and its customs union (or single market). This sent GBP higher across G10 FX, with GBP/USD getting the bulk of the flow and trading up to $1.3539.
However, things are never that straightforward and just as Theresa May was tucking into her main course, Arlene Foster, the head of the Democratic Unionist Party (DUP) and May’s partner in the minority government, detailed the party had little interest supporting a deal that involved Northern Ireland having a separate customs agreement from the rest of the UK and should have a customs border with the EU. GBP came crashing back down on this news, with GBP/USD hitting a low of $1.3412 before buyers moved back in. Keep in mind that this situation remains highly fluid and there are certain respected political commentaries in the UK who feel we may even see a deal where all of the UK adopts a status of what has been labelled ‘regulatory alignment’, which is effectively a more palatable term for being in the EU customs union. If this turns out to be true it would a big GBP positive, so be careful if running GBP short positions as we are in a critical stage in the Brexit negotiations and while it could go either way. Although, in my view from the other side of the world and being no expert in politics it seems the commentary actually looks quite constructive here.
As mentioned, the other big issue was how European and US traders would trade the Senate’s passing of their vision of tax reform. When the ASX 200 closed at 16:10 aedt S&P 500 futures were up 0.8%, so Asia had been expecting a reasonable rally in US trade, although one of the other talking points on the floor was why Asian equities hadn’t fared better, especially in Japan where USD/JPY had tested ¥113 and this should have been favourable to Japanese exporters. What we have seen though is a fairly upbeat session, but perhaps not as strong as we had anticipated and perhaps the best way to highlight this is that S&P 500 futures were trading at 2659 at 16:10 aedt and currently sit at 2640, so 0.7% lower than where we closed. This here lies the key reasoning as to why we are seeing Aussie SPI futures 26-points lower and our opening call for the ASX 200 sitting at 5965.
The other clear theme overnight is the further rotation out of growth and momentum sectors, such as tech (the S&P 500 tech sector is -1.9%), and into value plays, where we see money moving into financials and consumer discretionary. One market that is getting some attention is the Russell 1000 value index, which has really picked up some steam here and breaking out to new all-time highs. We can trade this using ETF’s, so put the IWD ETF (iShares Russell 1000 value index) on the radar, although we can see a potentially bearish reversal candle on the daily chart which needs close attention. Industrials and materials have also fared well too and this bodes well for ASX 200 material names, although we did see good flows here yesterday, with the material sector contributing nine index points to the broader ASX 200.
The leads for the materials space are again quite constructive here, with spot iron ore and hot-rolled coil (HRC) steel gaining 3.7% and 1.6% respectively, with a 1% gain in iron ore futures. Moves in HRC seem key here, with the price now hitting the highest levels since April 2012 and pulling away from iron ore and this only incentivises the steel mills to pay up for iron ore, through the positive impact this has on margin. BHP’s ADR is actually lower by 1.1%, suggesting some weakness here on open, however, as a guide for pure-plays Vale’s US-listing has gained 3.9% so materials, and also industrials seem to be the sectors to be leveraged too right now it seems.
Oil is lower by 1.5%, so there are headwinds to the ASX 200 energy space today and the Aussie financials are in the dog-house and again this is a serious consideration for Aussie index traders.
On the docket today we have a decent line up of event risk in Australia, so AUD and the rates market could get a bit of a workout, but obviously that really depends on the outcome of the data. We go into the session with the swaps market pricing a 32% chance of a hike from the RBA by August and from the recent narrative from the RBA this seems fair. The data out today won’t necessarily change this pricing to any great capacity, but they a small but valuable pieces of the longer-term Australian economic puzzle. So at 11:30 aedt we get the Q3 current account balance and specifically the net exports contribution to tomorrows Q3 GDP. The market expects 25bp here, so any major deviations could see economists revise their forecasts for tomorrows Q3 GDP forecast, which currently sits at 0.7% qoq. October retail sales are also announced at the same time, with expectations of 0.3%. Then we get the RBA rates statement at 14:30 aedt, although one would be surprised at any major changes to the wording.
Still happy to stay out of AUD/USD positions here and would look more favourable at longs on a daily close through $0.7644 or below $0.7551 and again $0.7532.
Originally published by Chris Weston, Chief Market Strategist, IG