The bulls are firmly back in control of sentiment at present, but the risk of a reversal remains a threat. For now, the re-test of the March highs ($42.49) in US crude has seen investment-grade credit spreads tighten some six basis points, high yield credit tightening up quite nicely and subsequently promoting a pretty hefty sell-off in all parts of the US yield curve (especially the belly). Importantly, rates traders are still unswayed and the Fed Funds futures continue to only price in 4.5 basis points (or 18% probability) of tightening for the June FOMC meeting, even though the economist community are far more hawkish on the potential outcome. With subdued market expectations on Fed rate hikes and negative ‘real’ rates in so many bond markets, the S&P 500 looks destined to break the 1 April high of 2075 and push into 2100.
Again, the view that traders are structurally bearish, but tactically bullish seems true. There are good numbers in JP Morgan, a strong close above US$60 and we could see traders push the S&P 500 through 2075, which in turn should have positive ramifications in other markets.
This positivity has spilled into Asia, where the Nikkei has gone on a run and the fast money crowd, sensing a move in USD/JPY into ¥110, have closed their shorts. This short-covering run has the potential to push the Nikkei to my target of 17,000, but, of course, that depends on what level traders start to ease into USD/JPY shorts again. Perhaps, the key highlight of the session was China’s trade data for March, which is surely another thorn in the China bears’ side. While the trade surplus fell 8.4%, the overall quality was better with good export growth, and imports falling less than expected at -7.6%. China continues to be a source of inspiration and economics aside the Hang Seng and CSI 300 are flying today. For those with a preference for the ETF space, upside in the FXI (iShare China ETF) looks good here, so watch for an upside break when the NYSE reopens
Good buying has been seen in emerging market assets, although client’s preference has been in the developed space with AUD/USD the natural proxy. AUD/USD hit a high of $0.7717 and a daily close (07:00 AEST) above the 31 March high of $0.7726 will take the pair to downtrend resistance at $0.7820. A poor Australia (April) consumer confidence read hasn’t really resonated and the interest rate markets continue to assign a low probability of near-term rate cuts. The June meeting is priced at a 32% probability of easing and that’s down from 43% a week ago. The ASX 200 has stormed through the March downtrend today and, importantly, the SPI futures (June) have smashed through the 38.2% retracement of the March to April sell-off (5213 to 4870) – the ASX 200 seems to have found its mojo, although no one seems too convinced. Gains have been broad based and on good volume, with energy and material names, unsurprisingly, leading the charge.
Expect Europe to feed off the strong Asian session, and while S&P 500 futures have pushed up modestly, our Europe market calls have warmed in appreciation. There is still an air of anticipation around the Doha meeting and a failure to meet the demands of the market could easily see the barrel under strong pressure and risk assets heading south. In the short-term, traders will be all over today’s DOE oil inventories after this morning’s API numbers showed a strong increase in inventories. There seems upside potential to the 773,000 consensus build.