It was a strange trading session yesterday, with S&P 500 and Dow futures trading lower through Asian trade without any really clear smoking gun, however Asian equities actually deviated and were largely supported.
Some attributed this weakness in US futures to the reported North Korea missile test, others to the weekend news that Donald Trump was acting ‘less presidential’ by accusing Barack Obama of tapping his phone’s, without any real immediate evidence. It is amazing that markets have given these sort of accusations such little genuine concern, given the magnitude of the allegations and it almost seems traders are comfortable with almost anything Trump says these days. What we do like though it seems, judging by the strong rally last Wednesday (of 1.3%), was when he sticks to an autocue and a script the market will reward him with a renewed feel-good factor. This is when he sounds presidential and confidence flourishes through markets.
‘Trump on, Trump off’ (TOTO) is the new ‘risk on, risk off’.
In an overnight trading session really devoid of any major market moving news, resonating in very low ranges in prices across multiple financial markets, there has been some focus on Trump’s second attempt at pushing through the controversial travel ban. By all accounts, it bans travellers from similar regions as the first and rejected attempt with the exception of Iraq. Again, this story is not really one for markets to be concerned with, but it highlights the lack of news focus in the session.
Aside from Trump, which is always fascinating viewing, there has been some good buying of Japanese yen, which one could interpret as giving the trading session somewhat of a negative bias. There has also been a turn of focus from the trading community on whether the RBA (at 14:30 AEDT today) move to a modestly more hawkish setting and acknowledge the improvement in global economics. It’s interesting to note that on one hand the swaps market are pricing in 13 basis points of tightening over the coming 12 months. So, in simplicity terms (i.e. not taking into consideration time value) there is a 52% chance of one rate hike over the coming 12 month, so the market is of the view that the argument should be when the RBA hike rates, not cut.
However, if we look at inflation expectations in the Aussie bond market (see the white line on the Bloomberg chart) we can see five-year inflation expectations have dropped from around 1.93% in January to sit at 1.68%. This is interesting as the US and European inflation expectations have actually been increasing of late, while Aussie generic Aussie bonds yields have stayed firm (orange line).
It suggests to me the RBA should err on the side of caution for now and clearly not signal a bias to tighten policy, although they should maintain its recent adopted optimistic setting. They can be more upbeat on key commodity exports, especially as we head into a seasonally strong period for the likes of iron ore. However, a number of commodity analysts have suggested the wheels could fall off as we head into the second half of the year, especially HSBC who recently put out a note suggesting “iron ore is set for a massive fall this year”.
So watch the Aussie fixed income market today on the RBA’s narrative, and naturally the AUD will be especially sensitive to any changes in outlook. AUD/USD has traded in a tight range on the session of $0.7571 to $0.7610, with price struggling to break back above the 7 February low and we can see some indecision from market participants. On the USD side of the ledger, I think it’s important to also point out that the USD is missing a short-term catalyst (that could push AUD/USD lower), with a hike at next week’s Federal Reserve meeting almost fully priced in.
We can also see some weakness creeping into the commodity complex, with copper down 1.6%, while iron ore and steel futures are 1.7% and 0.8% lower respectively. We can certainly put iron ore futures on the radar, with price trending lower (see chart below) and really since the peak on the 21 February on a number of occasions we have seen price trade above the prior day's high, only for the sellers to smack the price back down. Is this the start of something more sinister or is the pullback the bulls needed within a bullish longer-term trend? This argument needs to be resolved and will be interesting viewing.
It’s worth highlighting that while the materials sector had a strong day yesterday if we use BHP’s ADR (which is currently down 2%) as a proxy for the space and it suggests those who bought yesterday may be somewhat disappointed. The fact SPI futures are down a mere four points suggests if we do any weakness in the miners we should see signs of stability in the bank's staples and utilities.
