For index traders, its all eyes on the ASX 200 on the open, with Aussie SPI futures sitting 15-points higher from the ASX 200 close. We should, therefore, see the index open above 7000, and subsequently, the 7k party is real, and we test the top of the GFC channel, posing the question whether to fade the open or join in the fun? Price action, as always, will reveal much about the psychology of the investment community, but one thing seems assured, betting against global equities is a low probability outcome at present and one where even if you are short the downside is limited.
A market at all-time highs is as bullish as you can get, let’s keep things simple, especially when implied vol is low, liquidity dominates, and real bond yields refuse to get excited about stability in the data flow. I guess the fact the Aussie rates market are pricing a 51% chance of a cut in February and Aussie 10-year real bond yields sit at -21bp is helping the equity story.
Throw anything at this market right now and it is swept away, and as for record-high valuations – Doesn’t matter. To promote a decent move to lower, and not just a synchronized wave of profit-taking, we are going to need to see news that is not yet known.
US-China trade getting the attention but failing to raise volatility
While the headlines focused on the signing of the US-China trade deal, and the 86 pages laying out the terms if you’re interested, but the fact is that tariffs are not being rolled back until after the US election and China adhering to the terms, so the headwind to global economics remains entrenched. Chinese firms have committed to importing $200b of American products, but this is based on ‘market conditions’, which, in itself, is open to interpretation. There have been headlines around the Trump impeachment process, but again, the market is unnerved by this given the firm consensus view on floors that it will be Trump standing toe-to-toe against either Biden or Sanders when we see the three Presidential debates between 29th September to 22 October. As a segway, I think Warren and Buttigieg debated the strongest in yesterday’s live TV debate (in IOWA) and, while neither are currently a front runner, it feels like it would be one of these two who would put up the most formidable fight against Trump.
Either way, S&P 500 closed +0.2% with the Dow +0.3%, with the Russell 2000 having a late-session surge, closing +0.4%. We’ve seen further modest buying in gold (+0.6%), and this makes sense with a market that must be eyeing the bullish moves in real Treasury yields, which are moving progressively more negative. We’ve also seen small selling in crude (-0.4%) and copper (-0.4%).
US Treasury’s, with US 5’s -2bp (at 1.68%) and 10s -3bp (1.77%), partially driven by a below-par US PPI report, following the recent CPI print. We now focus on tonight’s US (December) retail sales (00:30 AEDT) report, where the market looks for 0.3% growth, and 0.4% in the ‘control group’ element, so poor numbers here will promote a further bid in bonds, and rates, where the market is pricing in currently 20bp of cuts in the US over the coming 12 months. In FX, we watch USDJPY as the best proxy here, although the pair, despite holding the December breakout highs of 109.72, is a genuine snooze fest, trading a 21-pip range on the day.
FX volatility shot to pieces
On the subject of FX vols, someone needs to shake some life in this old dog – even GBP vols are as dull as you will see, with 1-week GBPUSD implied vol at the lowest levels since July 2019. That said, once the 30 January BoE meeting falls into the expiry, I would imagine we will see one- and two-week implied volatility rise and the market pricing higher expected moves in GBPUSD and the GBP crosses. There is clearly increased debate from traders on whether the BoE cut or hold in the 30 January meeting, and after last night’s UK CPI data hit a three year low, missing consensus expectations by 20bp (at 1.3%), and MPC member Saunders detailed “if easing is needed it should be done promptly”, the rates market has moved to price a cut at 67%. Let’s see tomorrows (20:30 aedt) UK retail sales, where the market expects a decent lift, ahead of PMI data (24th) and again poor numbers here could cement expectations.
Still, when we look at GBPUSD, which is where we have seen the bulk of the flow, the inability to hold below the 1.30 handle is interesting and this is a market happy to accumulate GBP longs under the figure. If we see rates pricing north of 75% then tactical cable longs could be interesting, although I am never an advocator of holding exposures over key event risks like this. In fact, I found it interesting that despite the poor inflation data and the re-pricing in UK rates, we are seeing the GBP closing higher on the day against USD, AUD and NZD. For those wanting to be short GBP at present it’s against the CHF where you are getting the strongest downside moves and the CHF is a rock now.
I like the daily chart of CHFJPY – the battle of the FX safe havens if you will – and here we see a strong bull trend. Can it continue is the question? The move is certainly mature and the easy money has been made but there are no clear signals to put on shorts with any conviction.
Published by Chris Weston, Head of Research, Pepperstone