Having suggested yesterday that it feels as though “the winds of change are upon us”, we subsequently go onto print new all-time highs in the Nasdaq 100, and a closing high in the S&P 500. The positive aspect I take out here is that rather than blindly pick the top, the higher probability trade always comes when the market provides clear evidence that others share my view too and the weight of money is aligned. That hasn’t materialised yet, and we continue to react to price action, which after last nights move shows the bulls continue to dominate.
From an incredibly simplistic standpoint - A market at all-time highs cannot be any more bullish.
In the absence of any tier one economic news, US corporate earnings took increased significance and by-and-large the numbers we saw hitting the wires inspired. The fact Brent and WTI crude prices ticked higher are equally as positive, as we saw inflation expectations tick a touch higher - so with nominal bond yields moving lower across the US fixed income curve, the net result was that US ‘real’ yields moving a few basis points lower. The combination of lower implied volatility, lower ‘real’ (or inflation-adjusted) bond yields and FOMO, is such a powerful force. Again, I am incredibly cognisant that much good news is baked in here, and there is a clear level of euphoria in the price. At the very least, with implied volumes so low it is cheap to hedge portfolios.
Oil finding better sellers in Asia
Oil continues to get good attention here, although we are seeing better sellers through Asia today, with both Brent and WTI down 0.6% apiece, and that is bringing out USD/CAD buyers in appreciation. In the early Asia session, we saw the weekly API inventory report show a sizeable 6.86m barrel build, so its no surprise to see sellers in play, as the market will head into tonight’s (00:30AEDT) official DoE inventory report expecting a far bigger build than the current guesstimate of 810,000 barrels.
I struggle to see huge upside in crude from here, although the Saudi’s have given a view that they intend to wait for facts, and presumably a lower export rate from Iran, and that may not be clear until May. Of course, the collapse in the barrel we saw in October will still be fresh in all of OPEC’s minds, and with global spare capacity running at 3.3mb/d and inventory levels above their five-year highs, both the Saudi’s and UAE can afford to hold off from any explicit guidance. Either way, the daily chart of crude gives no indication that the bears have any say right now, although expect the communication to ramp up from Donald Trump should the crude price work one-way, and specifically, if we see a renewed bid in gasoline prices.
It’s also interesting that Sinopec (Asia’s largest refiner) is moving back to import US oil again, after a seven-month break. While China has been angered about the moves from the White House to sanction Iran, are these actions from Sinopec a reflection that we are reaching a closing point in the US-Sino trade talks? It’s interesting then that both Robert Lighthizer and Steven Mnuchin will travel to Beijing next week to address some of the marquee issues at hand. This comes at a time when US business groups are demanding a full removal of tariffs on Chinese goods.
The door firmly open for RBA easing – why wait?
Through US trade it was all USD flows, with decent buying versus the CAD and the NOK. There has been limited follow-through in these crosses in Asia and its all AUD flow today. As was the case in the Q1 Aussie CPI playbook yesterday, a trimmed mean inflation print of 0.3% QoQ opened up the flood gates and a green light to buy bonds and rates for the May/June contracts. That has played out, with trimmed mean hitting 0.3% taking the year-on-year rate to 1.6% and further away from the RBA’s 2-3% target band and Aussie 3-year yields are down a monster 14 basis points (bp) at 1.28% on the session.
The question we have to ask is how these numbers feed into the key statement seen in RBA minutes, where recall they detailed that “members also discussed the scenario where inflation did not move any higher, and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances”. If we go off this statement alone, it’s easy to understand why we are pricing 11bp of cuts for the May RBA meeting and 20bp by June. A full cut is now priced in through to August and a full two cuts over the coming 12 months making the RBA arguably the most aggressive central bank in the developed world, at least in the eyes on the market. The belief is, if the RBA feel unemployment is going to languish at 5%, why wait?
Of course, in this environment, the yield plays, while health care enjoyed the weaker AUD, and we have a market that has hit 6390.5 and the best levels since December 2007, on volumes 20% above the 30-day average (for this time). A close above 6373.5 would be another positive.
The question, fielded by many, is whether the AUD/USD holds the 70-handle now and finds a new range below the handle? It is likely to be sticky, but fast money/leveraged funds are ramping up their shorts here, and if there is further good-will towards the greenback then it is a matter of time.