We round out 2017 today on what looks to be a flat note, with Aussie SPI futures lower by 9 points, and our ASX 200 call sitting at 6075, with US equity indices predictably little changed on the day. Clearly, today is one where we can turn the page on the year that was and continue reflecting on the dynamics ahead.
If we see over $2.5 billion in turnover I would be very surprised and from 11:30 aedt it seems likely the market will drift into the close, but we will take a 7% year-to-date index return (13% on a total return basis), certainly relative to where expectations for index returns where at the start of the year.
Aussie tech and Healthcare have been the two sectors which have driven the outperformance for the full-year, but energy and materials is where the recent flow has been and both sectors have outperformed over a 3-month, 1-month and 5-day period and this momentum factor suggests that investors and traders are happy to hold these names going into 2018. Certainly, with BHP trading at the highest levels since May 2015 and eyeing a break through $30 in January, BHP has helped the ASX 200 materials sector to push to the highest levels since early 2012 and the sector has almost doubled since January 2016.
Leads today for the materials space are somewhat constructive for today’s open, with copper leading the way again and pushing through $3.30, with a gain of 0.7%. What a run we have seen in copper since 6 December, with price moving from $2.95, but to be fair it has almost been a perfect storm for price appreciation, with the likes of aluminium also having seen strong moves too. Whether global growth has been propped up by a build in credit it is undeniably strong and copper partially reflects this, while China has pushed its biggest copper producer to temporarily halt production for environmental issues and China’s November copper import statistics were highly impressive too. I like to assess the power behind the underlying trend by how price reacts to moves into the 5-day EMA (exponential moving average), and as one can see on the daily chart, the price has traded into, but held and closed above this short-term average every day since 12 December. So I am happy to stay bullish on this metal given the trend in play and hold this bullish stance until price subsequently closes below the 5-day EMA and this same trading bias can be applied to aluminium too.

Outside of industrial metals and iron ore futures have seen a strong gain, while gold is up some 0.5% and also looks bullish here, where a test of $1300 looks achievable soon, despite the extended run of form. The combination of a weaker USD at a time rising US inflation expectations seen in the bond market (i.e. US 10-year ‘breakevens’) has to be seen as a positive combination for golds and wider precious metals.
The ASX 200 energy sector is up some 20% year-to-date and sitting at the highest levels since 2015 and one suspects we should see the sector round out the year following the form seen in the S&P 500 energy sector, which is up 0.03% at the time of writing. The moves in the ASX 200 energy sector this year won’t shock too grealty given the bullish moves in the barrel since late June, although we are going to need to find some inspiration from somewhere to push the US crude through $60 and to form a new range of $60 to $65. Aside from pipeline explosions and Saudi budget expectations, oil traders have seen the release of the weekly Department of Energy (DoE) inventory data, with total crude inventories falling 4.6 million barrels (vs 3.8 million eyed by the consensus). We also saw a small build in gasoline inventories of 591,000, which was actually below the 1.29 million expected, and this was partially offset by a chunky build of 1.09 million barrels in distillates.
By way of news flow through the session and in Europe it has been confirmed that 4 March will be the date of the Italian election, so a date that many will look forward to as a potential volatility event. There has been no negative reaction in European asset and why should they? This date had been talked about for a while and to be fair the markets have been more enthused to sell USD’s, which has taken EUR/USD into $1.1950 and into the 27 November supply of $1.1962, with USD/JPY through the 113 handle. It’s hard to recall a time when FX forecasters had a view that every G10 currency will gain against the USD in the year-ahead, but that is where we are. So the idea of bubbling inflation in the US financial system and a central bank that may actually need to hike three, maybe even four times at a time when interest rate markets are priced for two hikes is being outmatched by relative monetary policy changes in other G10 central banks and of course relative differences in trade, the current account and the broader fiscal position. There seems little doubt that relative current account dynamics are supporting the AUD right now, although we couldn’t see AUD/USD hold above 78c overnight, despite hitting a session high of $0.7809. Like copper, watch the 5-day EMA as a guide for the trend in AUD/USD and stay long until price closes below here.
Outside of European news and we have seen a second tier data releases in the form of weekly jobless claims (245,000 vs 240,000 expected) and the November trade deficit of advanced goods at $69.7 billion (vs $68.1 billion in the prior read). Certainly, the trade data is a mild USD negative, although this is offset by a 0.7% gain in wholesale inventories (vs 0.3% for the consensus read), with slight revisions higher in the prior read and this should partially offset the trade data, where inventories could support the Q4 GDP print. A slight move higher on the day currently seen in the US Treasury market, with yields across the curve modestly higher, with the US 10-year Treasury (by way of a guide) currently 2.43%.
Aside from financial markets, a happy and prosperous New Year to all….
Originally published by Chris Weston, Chief Market Strategist, IG