Broader Asian trade turned a touch sour yesterday, with the Nikkei 225 and Hang Seng closing down 1.9% and 2.1% respectively and signs of volatility are creeping back into Asian equity markets. We saw focus placed on tighter financial conditions in China, with the PBoC choosing to withdraw liquidity from the system and stepping back from its regular use of reverse repos. A theme to watch in the session ahead as it could promote volatility in China sensitive assets.

We can see that the trade has switched rapidly from one of positioning for outperformance from energy and materials stocks and now the flows seem to be headed back again into tech again, with fast money moving from one sector to another seemingly every three days. We saw stability in the US tech mega caps yesterday and overnight this stability has turned into outperformance with the S&P 500 tech space up 0.7%, while we have seen materials -0.6% and energy -1.3%. A flatter US treasury yield curve is certainly very helpful for tech share price appreciation and again one of the take-outs of the overnight trade continues to be buying in the longer-end of the Treasury curve, with the US 10-year now at 2.32% (-2bp on the day).
The broader S&P 500 has seen range contraction, with the index trading between 2633 and 2624 and currently up just 0.1%, but on subdued volume. However, despite the lack of any real move in the US, Aussie SPI futures are actually indicating a positive feel to the ASX 200 open, with SPI futures sitting at 5948 at 16:10 aedt (and the close of the ASX 200) and now residing at 5974. So our call is for the ASX 200 to open closer to 5968 and one suspects Aussie banks should put in the points, with the financial sector likely to be up some 0.5% or so.
In terms of overnight themes’, and there is still strong focus from traders on the Brexit negotiations and whether Theresa May and Arlene Foster of the DUP party can come to any agreement on Northern Ireland’s borders. There continues to be optimistic remarks that all parties are having constructive talks, but the bid is coming out of GBP and GBP/USD is falling under its own weight here. It promises to be a very interesting few days, and we are to hear of a new deal announced in the coming 24 hours. Recall next Thursday and Friday is not only the day we get a rate hike from the Federal Reserve but its D-Day for Theresa May, with the EU Council making some big calls at its meeting on this same day. Sinisterly waiting in the wings is Boris Johnson and Michael Gove, who could strike shortly after if there is no formal agreement, with calls they could lead a cabinet revolt. GBP would not like that one bit.
Much of the overnight media focus has been on Trump’s decision to recognise Jerusalem as the capital of Israel and this has led to some buying of USD/ILS (Israeli shekel), but certainly the news hasn’t really resonated through broader markets, as one would expect, although some will also be watching to see if there are increased tensions between Saudi Arabia and the US from here. Outside of geopolitical issues, we have seen the US ADP private payrolls show 190,000 jobs added in November, which was bang in-line with analysts’ forecasts and gives us increased confidence that the 195,000 consensus call for tomorrows non-farms payrolls report will be somewhere in-line. Not that the jobs report really makes much difference anyhow, as the market has made it mind up on next weeks Fed rate decision and really if the USD and US Treasury market are to move its really going to be more about the outcome of the average hourly earnings, with expectations this increases 0.3% mom or 2.7% yoy.
As mentioned, the S&P 500 energy sector has lost ground and naturally this will happen when US and Brent crude fall over 2.5%. The large falls have mostly been attributed to the sizeable 6.78 million barrel build in gasoline inventories (as part of the Department of Energy weekly inventory report), although we did also see a 5.61 million draw in crude inventories and oil was actually losing ground going into the inventory report. Either way, oil is lower and Aussie energy names will not find too much inspiration from this.
Elsewhere in commodity land, we can see iron ore, steel and coking coal futures lower by 2.6%, 1% and 2% respectively and this may weigh a touch on a few of the bulk plays, although Vale’s US-listing is down a modest 0.5% and BHP’s ADR suggests an open 4c higher. Copper was all the talk yesterday after a huge fall, but stability is being seen today, as is the case with gold, which is unchanged on the day.
The AUD has been one of the weaker plays in G10 FX markets, joining the CAD and SEK as the weak links In G10 FX, with some focus on the Bank of Canada rate decision and the somewhat cautious language which has caused the CAD to spike 150 points on the statement. AUD/USD has traded lower into $0.7557 and again it’s the bond market that everyone is focused on, with the yield differential between Aussie treasuries and US treasuries narrowing a touch. The market really didn’t like the Aussie Q3 GDP print, specifically the consumer spending element, which was the weakest quarter since Q4 2008. All eyes on China today and whether they again allow liquidity to ebb out of the market.
Bitcoin has garnered further attention with the price now through 13,000 and it’s move continues to steamroll on. Onwards and upwards it seems and while a wall of money flows into this market every single day (notably in Korea) it seems the launch, this weekend, of the CBOE futures offering is being taken as a positive and not one where traders suddenly have a new avenue to short Bitcoin. Hedge funds do not short a market that is flying, it makes little sense…however, when price does turn and there is confusion, even panic and the bid dries up then watch the short sellers come out in droves and this is only going to mean downside moves, when they happen, could be even bigger from here on in.
Originally published by Chris Weston, Chief Market Strategist, IG