A few moves in markets to focus on, with the EUR the currency to be short in FX land, while iron ore futures (+2.95%) and oil had a strong night. U.S. fixed income has been modestly bid, with yields across the curve down a couple of basis points, and ‘real’ yields (10-Year) falling 4bp.
In FX land EUR/AUD has been the big mover in the G10 block, although EUR/CAD shorts also look interesting here, with a 1.7% rally (since the ASX 200 close) in U.S. crude helping petro currencies. DoE official inventories increased a less-than-forecast 867,000 barrels, while we saw a large 3.74m barrel draw in gasoline inventories. On the EUR side we saw headlines from an ECB source, pushing back on market optimism around tightening of policy this year saying ‘ECB wanted to communicate reduced tail risk not step to the exit, March message was way over interpreted’.
If we look at the German yield curve, we have seen a very modest steeping here, with 2’s moving down a couple of basis points relative to 30’s and arresting the 26bp of flattening seen in the last 2 weeks. Spreads relative to U.S. yields haven’t really changed, with the U.S./German 10-Year yield spreads at 204bp.
U.S. politics, is as ever in the spotlight, with talk that House GOP members are weighing another try on Obamacare vote. This just seems bizarre. Other traders are starting to talk about the 28th April and the U.S. debt ceiling vote, where 60 votes are required to pass an increase here and that means Democrats have to back Trump. This will be painful I feel. More short-term, there is some talk that Gary Cohn (Head of National Economic Council) will deliver a briefing to President Trump tonight on various options for tax reform, although it is not clear if these details will hit the wires. One to watch out for anyhow.
As mentioned, there has been little move at an index level in the U.S., with better buying in energy and consumer disc. Our ASX 200 call sits at 5880, so some pockets of strength could be seen, but a flat open is largely in play. We could see this as a breather of sorts before we resume an assent into 6000, but I would also question if we are starting to see signs of euphoria being priced in.
I suggested looking at the valuation of the ASX 200 yesterday and that the ASX 200 can squeeze into 17, perhaps 17.5 time’s forward earnings. This would represent a lofty premium to the long-run average and we know in the last decade or so this is a level the fund managers have been happy to increase cash weightings in the portfolio.
The Aussie equity index currently sits at 16.24x, so it is expensive but not outrageous by any means. What is flashing red though are the market internals and if we go off Mr Buffett’s rule of being fearful when others are greedy then there are signs that this may be in play, although if you read Twitter (as a proxy of retail sentiment) you would still feel the world is about to cave in.
We can see 29% of ASX 200 companies above their top Bollinger Band, which is actually the highest percentage reading since February 2015 and the second highest reading in the last five years. It shows a sizeable move away from the mean (i.e. the 20-day moving average) and the prospect of reverting to this mean is elevated – in essence, the elastic band has been stretched a touch too far. We can also see 40% of ASX 200 companies are at 4-week highs, while 82% of stocks are above their 50-day moving average. These internals are not at a confluence of extremities, but they will if the market can get to 6000 in the next week or so.
Therefore, I am willing the market into 6,000, as the prospect of a market trading closer to 17x forward earnings, extreme readings displayed in the market internals and huge technical resistance would mean fantastic shorting opportunities. Keep in mind that SPI futures traded to 6011 in March 2015, so the futures market will be heavily traded going into this level. That is if it gets there.
