Couldn’t help post this headline "U.K. JUDGE SAYS BREXIT COULD BE DELAYED UP TO 2 YEARS", SKY SAYS. GBP has rallied into $1.2530 on this and not only has the parliamentary vote sufficiently muddied the waters here, but Justice Brenda Hales is questioning whether more ‘comprehensive’ legislation is required. Brexit may never happen and if it does it could fall on another presidential year…oh the fun.
Overnight leads are fairly upbeat today for the Aussie market, but for index traders the Nikkei and S&P 500 are the vehicles of choice for expressing a long bias. USD/JPY above Y109 is going to be a strong tailwind for Japan and our call here is 17850 (+1%). Go back to the June lows and we can see Japanese banks up over 40% vs the Nikkei +19%. While the macro thematic has been long banks (I’ve been pushing the XLF) it seems Japanese banks are the place to be, as traders sell bond duration and out of the long end of the curve.
USD/JPY hit a low of Y101.20 at 15:50 on the day of the US election and has put on a lazy 800 pips in 4.5 days….the BoJ, it seems, pulled off a master stroke in its September ‘Comprehensive review’ by keeping its 10-yr JGB at zero, allowing the yield differential between the US and other developed markets relative to Japan to widen. Heroic stuff.
The fact US retail sales grew 0.8% (out overnight) is one thing, but the retail control group (the element that feeds directly into the GDP calculation) was also at +0.8% is big news and twice the consensus call…anyone expecting a big pick up in headline inflation (specifically due to base effect of higher oil prices) are seeing this now in the data flow…Inflation is going higher and not necessarily due to Trumponomics!
We also know Paul Ryan has won re-election for speaker of the House and markets will like this as it’s a voice of balance. We are also hearing German Finance Minister Schaeuble has called on the ECB and Fed to end its low-interest rate policy..one suspects this will not shock, but it puts wind to the backs of the emerging bond bears.
US markets seem so comfortable here at the moment. Overnight we are seeing the VIX -7%, high yield and investment grade credit spreads narrow (relative to US treasuries), the USD basket has held the 100 mark, while emerging markets have reversed and have rallied strongly (the EEM ETF is up 1.8%).
A 5% rally (3.2% from the ASX 200 close) in US crude has clearly helped and we should see the Aussie energy plays see better days here – The S&P 500 energy sub-sector is up 2.4% by way of a guide. Everyone is getting excited the 30 November OPEC meeting. We get the DoE official oil inventory report tonight at 02:30 AEDT (consensus is for +596,000 barrels), so this is an event risk.
Bulks and to a lesser extent base metals are getting destroyed here as well….iron ore spot is down 6.5%, futures -7% and rebar -3.6% and this could manifest on itself as the Chinese retail trader is seeing this disco burn down and will feel they are far too distant from the exit door. Immediately, I think bulks = AUD, WTI = CAD….then we see a bearish outside day reversal materialising and the momentum is now to the downside…Short AUD/CAD is looking like a trade is would have on the radar, although we need a lower low is the upcoming session to confirm the reversal.
This all plays into a fairly uncertain open for Australia…IG’s call is 20 points higher or so, but BHP and CBA ADRs are down 1.9% and 1.4% respectively.. So either the ADRs are wrong (is suspects CBA’s is) or our call has downside, as energy (with a 7% weight on the market) is not going to lift a market where miners and banks are down, that is if we use BHP and CBA as proxies of the space. BHP sources 40% or so of its EBITDA from oil, so I suspect that will support and the two stocks mentioned will not be down as suggested.
For traders who don’t mind dabbling in US stocks put DryShips (NASDAQ:DRYS) on the radar….they have rallied from 1300% since the US election, but in earlier trade today they were up 2025%...one for the bravest of souls!
