As we tail off into the close of the S&P 500 the leads are certainly souring, although tech for a large part of the session worked well, helping the NASDAQ to continue the outperformance seen last week. Walmart have been at the heart of the sell-off, while Apple has shown real leadership, as investors continue to focus and find inspiration from the capital to be returned to shareholders this quarter.
The S&P 500 did rally meaningfully off the earlier low but has found sellers easier to come by into 2837 and as I type the index is selling off into the close (currently -0.5%). A focus on the daily chart shows a third day of strong indecision to push prices higher and there is a clear battle between the bulls and the bears here. The bulls will probably take a 0.5% sell-off in the face of a further sell-off in the bond market across the US Treasury curve, with a fairly poor $28 billion auction of 2-year notes a worry, with the US 2-year Treasury sitting up 3 basis points at 2.31%, while the 10-year Treasury did trade above 2.90%, but finds itself unchanged now at 2.88%. These moves have promoted a 0.5% gain in the USD, with a few short positions closing ahead tomorrows FOMC minutes (due at 06:00 aedt).
Certainly, the USD move is something we flagged on Monday, with the USD index trading below Fridays low and closing nicely above the high, which in price action world is called a key outside reversal, the fact this reversal occurred at 88.00 seems key. 88.00 has been a rock-solid support for the USD, so with the market looking to explore the FOMC minutes and assessing just how much more confident the Federal Reserve have become in achieving their policy targets, there has been some anxiety expressed from speculative FX traders. Also keep in mind the market is keen to focus on the recent inclusion of the word “further”, with regards to the scope they have in raising rates. We also need to consider the big event risk coming next week, with Fed chair Jay Powell giving his Congressional hearing and potentially signalling the Fed could be more active in raising short-term rates given the fiscal stimulus being rolled out. 

EUR/USD has been the driver of the 0.6% rally in the USD index, with EUR/USD sitting at $1.2337 and below the 5-day EMA (exponential moving average), with no real love from FX traders for the slightly above consensus German ZEW survey and there is an increasing focus on whether the pair trades into the 9 February swing low of $1.2205. USD/JPY now sits 0.6% higher at ¥107.27 and has scope to push another 100 pips higher in this run and into the late January lows before we really look to fade this move, although a further sell-off in equity markets could promote JPY inflows here. Of course, this pair will be super sensitive to the Fed minutes, not to mention rhetoric from Fed members Harker and Quarles (both considered ‘centrists’ on the dove/hawk scale) in upcoming US trade. Potential moves in the US fixed income curve is another consideration with another big bond auction of $35 billion in 5-year notes and a reopening on $15 billion in 2-year floating rate notes (FRN). Certainly, the Nikkei 225 should find some solace from the moves in USD/JPY, although our call for this index sits down a touch at 21880.
The dynamics in the USD and the Treasury markets have weighed on the gold price, which sits down 1.2% at $1328. The clear risk for gold bulls is that we see further short covering in the USD and price falls into the 8 February low of $1307.13, which is also the neckline of the pronounced double top, not to mention minor horizontal support at the 16 October swing high. It’s interesting that we are seeing solid moves in the crypto space, although the good-will is confined to Bitcoin and Litecoin (Ripple, Etherium, Bitcoin gold and cash are lower) and while likely completely unrelated some have made a contrast with gold in the past. We can also see decent selling in copper too, while oil is flat on the day.
AUD/USD is going to see the lion’s share of activity from clients today, with Aussie wage data due at 11:30. The move on the day naturally comes from a quarterly figure coming in at or below 0.3% qoq, or above 0.7% qoq, as this could promote a move in the interbank rates market. As things stand we are looking for small but important pieces of the economic jigsaw that could force a change in language from the Reserve Bank and the playbook gives us some scope to modestly re-price the 5.5bp of hikes priced in for August and 16bp for December. AUD/USD goes into the data looking heavy, with price just moving through Thursday and Friday’s low of $0.7892 and it seems on balance we go into this data point seeing higher risks of being underwhelmed.
Aggregating this to the Aussie equity open and our call currently sits at 5915, with SPI futures -28 points from 16:10 aedt (the official close of the ASX 200). In terms of levels, a close through the 5935/50 region (the series of recent highs and downtrend resistance drawn from the 9 November high) would open up greater upside, while a break of 5884 opening up downside although one suspects neither of these levels will be tested today. So another weaker open eyed and one suspects BHP will be the heart of that move and following in the wake of its 4.6% sell-off in the London-listing, with its results underwhelming, with higher costs resulting in a 3% miss to EBITDA and a near double-digit miss to NPAT. It’s hard to be excited about BHP at present, despite the prospect of solid free cash flow in the second half and at this juncture a 55c dividend is not going to be a big enough carrot for investors. It’s a busy day for equity traders, and on the docket today we get numbers from CCL, DOW, FMG, FXJ, IGO, LLC, SBM, STO, SYD, WES and WOR among others.
(Daily of the ASX 200)

Published by Chris Weston, Chief Market Strategist, IG