We have an interesting lead for Asia this morning, with the S&P 500 pushing up 34-handles or 1.2%, on volumes 9% below the 30-day average. Breadth has been solid, with 95% of stocks higher on the day and all sectors closing higher, with energy (+2.2%) and tech (+1.6%) the clear shining lights.
Three indicators I look to the assess the overall feel of the world’s most liquid equity index, is the S&P 500 cyclical/defensive sector ratio, the S&P500 high beta/low volatility ratio and the small-cap/large-cap ratio. Like many others, I also focus on credit, notably the high yield to investment-grade credit spread (white), which narrowed 3.9bp on the day to 295bp. Here, I have overlapped the spread to the S&P500 (red), which I have also inverted to better highlight the relationship, and we see stocks have out-flanked credit.
S&P 500 cyclical/defensive sector ratio – We saw this ratio close up a touch, but it was unconvincing and has been working so heavily in favour of defensive areas of the market. The set-up looks like a sizeable head and shoulders reversal pattern. I still favour this lower.
High beta/low volatility ratio – The ratio lifted from 1.0149x to 1.0245x, showing high beta names outperforming stocks which tend to have lower volatility moves. A close play on the cyclical/defensive sector ratio, although this chart is more defined and a closer play on the price characteristics of the companies and their historic moves relative to the benchmark (S&P 500)
Small-cap (Russell 2000)/large cap (S&P 500) ratio – With the Russell 2000 closing +1.02% and S&P 500 +1.2, we saw the ratio close down a touch. In a truly bullish move, we’d want to see small caps having the bigger % move here. To be fair, there is incredible momentum here anyhow and has been a solid pairs trade for traders, and being long the S&P500 and short Russell 2000 has been working like a dream since July.
So, a positive move in stocks, but I remain unconvinced here given these factors mentioned above. The bulls will have an eye on the daily chart of the S&P 500 and will want to see a move through 2950, which takes price through the 50-day MA and top of its recent range. While on the weekly chart we see stochastic momentum still headed lower, with some solid buying support into 2822/25, and until these levels are taken out it’s hard to feel the markets have a role in driving the Fed to steepen the yield curve by getting fully ahead of market pricing.
What is key for us here in Asia is what is already discounted given the moves in S&P 500 futures and therefore how it affects our open. If we look at the change in the S&P500 futures from 16:10aest (the official ASX200 close), we can see a +0.4% change in futures, so it’s clear some of the positive moves in the cash session were already priced into Asian markets. Aussie SPI futures were trading at 6420 at 16:10 aest and currently reside at 6440, so we can feasibly see the ASX 200 opening 20p higher or +0.4%. Looking at the daily chart of the ASX200 it feels an elevated risk that we are grinding out a trading range of 6600 to 6400 for the near-term.
Valuations are far more reasonable at a 12m P/E of 16.03x, closer to the 10-year average of 15.04x and now less than one standard deviation from the long-term average.
Energy should work well, with WTI crude sitting up 1.5% since the ASX200 close. Iron ore sits +1.1% since 16:10, while copper is unchanged at $2.60 p/lb.
In FX, we’ve seen the NOK the outperformer in G10, and that shouldn’t surprise given the upbeat equity markets and solid moves in Brent crude. The CAD has been the weaker link, so naturally, NOKCAD has been the big mover in G10 FX, with a rally off the lowest levels since 1985. The USD index closed up 0.2%, and trades at the top of its recent range, while much continues to be made of the trade-weighted USD, which sits at an all-time high.
We saw a poor 3-Month US Treasury auction, while Fed member Eric Rosengren gave fairly hawkish commentary and has been partially attributed to the USD flow. US Treasury’s were offered, and that would have accelerated the USD move, with US 2-yr Treasury’s closing +7bp, leading the 2s vs 10s curve to bear flatten 2bp to 5.4bp.
We also saw US 10-year ‘real’ (inflation-adjusted) yields gaining 4bp, with implied volatility in the S&P 500 and 30-year treasury futures moving lower, so, one could think we are seeing carry buyers. However, if traders are looking for carry, then the bid has been confined to the USD, as we have seen weakness in the BRL, TRY and MXN, even against the JPY.
The fed funds future is now pricing a 17% chance of a 50bp cut in the September FOMC meeting, which, as argued of late has been an easy trade for rates traders, and a cut of 50bp is just so unlikely…Mr Powell should cement these expectations in the upcoming Jackson Hole Symposium, although the fact he has called for radio silence from his Fed staff ahead of this conference suggests Powell could be gearing up for something punchy.
EURUSD sits below the 1.11 and despite being hugely under-loved is eyeing a test of the 1 August pivot of 1.1027. And, while all the talk is about fiscal stimulus in Germany, the near-term driver remains the 12 September ECB meeting and the idea that the swaps market is pricing in a 55% chance of the deposit rate cut to -60bp. How would the EU banking sector react to this cut even if it is well telegraphed by markets? USDCNH has rallied 0.4% on the day, so all eyes, as always, on the CNY fix at 11:15aest, and whether the PBoC raise the mid-point by less than the streets models.
AUDUSD sits just off session lows of 0.6762 with focus on the RBA minutes at 11:30aest. With a 16.7% chance of a September rate cut, we are not expecting these minutes to be a vol event, and AUDUSD overnight IV sits at 7.26%, which to put this into context is the 20 percentile.
Published by Chris Weston, Head of Research, Pepperstone