It’s shaping up for another tough day at the office for Asia-based traders, although that said, there were some pockets of green in the commodity space, although even those have started to head lower and that is of interest given RIO get the ball rolling for the ASX 200 1H earnings season. Reporting numbers after the ASX 200 close.
Gains currently seen in iron ore futures (+1.8% on IG’s pricing) cut an isolated existence, with high-grade copper, nickel, zinc, which were putting in gains, now heading the same direction as seen in US and Brent crude, which are down 2.6% and 1.8% respectively. For equity sentiment to turn more positive again we are going to need to see crude hold the 30 January lows of $63.62, or high yield credit spreads will further widen and equity markets will find further duress. Keep an eye on the HYG ETF (iShares high yield ETF) as the price is just trading through the November lows of $86.22 and where a closing break would open up far stronger downside – one for the radar, as is oil, which along with implied volatility and moves in US fixed income (and the USD) are the core variables of this market.
The S&P 500 has followed in the wake of from another weak European trading session, with the German DAX having closed through the October to February support zone and the 200-day moving average. Strange things happen when markets traded below the 200-day average, where we can also see rallies in the DAX price contained into the five-day (exponential) moving average, which now recedes at 12,892 and thus I am hoping the shorts push price here one more time and on current price action is where I see higher probability place to initiate shorts. Back to the S&P 500 though, and while there are a two hours until the close of trade, we can see the market did make an attempt to rally on open, tracking up to 2763, but this is seemingly a market happy to sell rallies, and technically, the fact the sellers came in after the re-test of the November uptrend could be significant.
(Daily of the German DAX)

The headlines have predominantly focused on the fact that after more than 400 odds days without a 5% pullback in the S&P 500, this has now played out, which in turn has caused the White House to express that they are ‘concerned’ about the moves in markets.
If we look at the hourly chart of the S&P 500, there was a floor in the market into 2736/34 and as I type that has given way, so it seems increasingly likely that the US index may be headed towards the 2685-50 region. The bid has dried up here and the sellers are having a far better time of it. We can talk about weakness in crude being so important, but we also have implied and realised S&P 500 volatility headed higher, with the VIX index pushing to 18.6%. This, in-turn, has likely brought about a fresh wave of selling from funds who use volatility to assess how much exposure they have to equities and credit. Right now we are seeing these players, as well as funds who have sold volatility to enhance the yield in the portfolio, getting out of the market in droves – volatility is key.
Looking around the market for signs of a lead for Asia, we can see S&P 500 financials (-2.3%), energy (-2.4%), homebuilders and healthcare  (-2%) struggling, although tech is showing leadership, with gains in Apple and Amazon. This is some positive because any leadership in financials has been lost, despite the reemergence of a steeper Treasury yield curve, where we can see the 30-year Treasury seeing a touch of selling and this underperformance from the back-end of the curve highlights the growing confidence that longer-term inflation expectations are rising. Interestingly, we can see further strong US data in the form the ISM service report, where the index printed 59.9 (versus 56.7 eyed), with strong increases in new orders and employment sub-component of the index. In fact, the new orders component was the second highest read ever…animal spirits are alive and well, although when we marry this up with the recent ISM manufacturing read these two data points are thematic of an economy running closer to 4% growth and perversely it seems good data is now being taken as bad news.
We can also see small gains have been seen in the USD index, although our focus today falls on AUD/USD, as well as the crypto space, which continues to find further bad news with Etherium, Ripple and Bitcoin gold losing a fifth of their value. This is clearly the reverse of FOMO and there is a fear of being in and not one where I would be keen to try and pick a bottom in this price move.
AUD/USD, will today look to the December trade balance and retail sales (-0.2% expected) at 11:30 aedt, while we can look to the RBA meeting at 14:30 aedt knowing absolutely nothing is priced for this meeting, in fact, just 2.5bp of hikes (or a 10%) is priced into 30-day bill futures for the May meeting and we are going to need to see far stronger wage data (due at the end of the month) to even justify this pricing structure. There are valid reasons for the RBA to feel more upbeat, but this is not the meeting to do so and ideally, they shouldn’t do anything to give the AUD bulls scope to re-initiate longs. Whether this data becomes an equity story is yet to be seen, but Aussie SPI futures are already eyeing move through 5900 and sit some 55- points lower than at the time of the ASX 200 cash close.
Clearly, there is still much time before the open of equity markets in Asia, but this is not a market to buy with any conviction and if anything the price action and poor tape in global equities is enough to raise cash levels in portfolios. As mentioned in reports early last week, hedge because you can and while its cheap, not because of you are forced to and right now traders and investors are being forced to hedge and actively manage drawdown… and it’s expensive. That said, I am happy to be shocked but this seems a low probability given Japan and Hong Kong look likely to struggle today. So our call, as it stands, for the ASX 200 open sits at 5973 and not a great day for any company to report numbers, such as RIO are, as good news is only rewarded by outperformance and bad earnings (relative to consensus expectations) often results in the share price getting chopped up.
Originally published by Chris Weston, Chief Market Strategist, IG