Asian stocks have flown out of the gate and there almost feels like we could be seeing the start of FOMO (Fear of Missing Out) trading. To many, losing money is only moderately worse than missing an opportunity and the flows today have been reminiscent of this phenomenon. There is certainly an eye on 5000 on the S&P/ASX 200 and the recent move from 4706 has been of high quality with good volume, and good participation (the percentage of companies trading above the 20-day moving average has increased from 25% to around 50%). In turn, the consensus price-to-earnings multiple has increased from 15x to 15.7x.
Earnings continue to come in at a rapid rate with 54% of the market having reported 1H16 numbers and 60% beating on EPS, 65% on sales. Forward guidance has been mixed.
Data in the region has mostly been poor, with Aussie employment data giving traders pause to reflect on whether the 20 basis point uptick in the unemployment rate (to 6%) and 40,000 full-time jobs lost in January was ‘new information’. Aussie two-year bond yields initially fell five basis points, taking AUD/USD to a low of $0.7133, but sellers (of bonds) have emerged. Looking at the swaps curve there is no change in rate cut expectations, with the market pricing in 33 basis points of cuts over the coming 12 months. The ABS saying today that ‘new members in the survey sample added to the jobless numbers’ highlights that correctly estimating the jobs data is foolish. It’s worth pointing out that trend unemployment actually fell to 5.8%.
Japan’s January trade figures were woeful with a 12.9% decline in exports and an 18% collapse in imports. This is more fodder for those who think Japan’s economy is a disaster waiting to happen. The Nikkei 225 has come off the day’s highs, but the focus from Japanese trader’s remains on the CNY fix, which was fixed at 6.5152 (85 pips weaker) today, as well as the likelihood of monetary easing from the Bank of Japan in March. Betting on further easing in March is a 50/50 outcome, but if they don’t ease in March, they will in April.
Chinese inflation eased on both the consumer and producer prints and this is a positive as it lowers real lending rates in China for businesses. The mainland equity markets continue to be well bid with a key focus on fiscal measures and talk around infrastructure investment rising 15%.
Interestingly, and for the first time in a while we’ve had greater interest from Asia-based clients in today’s EU leaders meeting and whether they have missed the boat in selling sterling. IG’s EU referendum market still gives a strong bias for future inclusion in the Union (our market is 65-70), but GBP/USD one-week implied volatility is sitting at 12.63%, the highest level since the general election. To put this in perspective, this is double the five-year average, which shows traders are on edge. Short GBP/AUD has been a preferred trade and the pair finally succumbed to adopt a one handle. FTSE traders don’t seem to be as concerned however, although our current call is for a flat open after yesterday’s solid gains.
Our FTSE cash call is underperforming our DAX call today, with the DAX holding a much stronger correlation of late to the Nikkei and our flows and FTSE futures much more sanguine on upside ahead of todays key EU leader meeting.
Other consideration for upcoming trade:
The S&P 500 has rallied over 1% for three straight days, a fate we haven’t seen since Q4 2011. The actual percentage gain is also the best three-day bounce since last August.
Participation and breadth has been strong and while the S&P 500 has rallied from the double bottom low of 1810 (on 11 February) we have seen the percentage of companies above the 20-day average increase from 28% to 75%.
All eyes on the 29 January high of 1947 (in the S&P 500); a break here would be very positive.
US January industrial production increased 0.9%, 50 basis points above consensus, with capacity utilisation looking strong. We get jobless claims tonight, but don’t expect these numbers to have too great and impact.
The US yield curve (two-year treasuries versus ten-year treasuries) steepened to 107 basis points with reasonable selling across the curve. US banks look subsequently strong and a clear reason why credit default swaps (CDS) spreads on Citigroup (N:C) and Morgan Stanley (N:MS) have come in nicely. CDS insuring Macquarie and the big-four Aussie banks debt have also come in too.
Europe looks even stronger, with an 8.5% gain since 11 February in the Eurostoxx 50. The percentage of companies above the 20-day moving average has increased from zero (the 11 February low) to now stand at 54%. The percentage of stocks at four-week lows has fallen from a staggering 72% to just 2% at present. The European Financial Sector ETF (EUFN) has rallied 9.4% in this time.
The Federal Open Market Committee (FOMC) minutes haven’t given traders any new colour and it’s no surprise that many ‘members saw downside risks’. There has been no reaction in the June Fed funds future and markets are still only pricing a 12% chance of a further hike by June and 36% by December. Voting member James Bullard suggested today that he ‘didn’t know how markets price in zero hikes in 2016’. Semantics Mr Bullard.
UK (January) retail sales will be released at 20:30 AEST with the market expecting a strong rebound of 70 basis points.
Stay long Freeport-McMoran Copper & Gold (N:FCX). Good news on debt reduction followed by a sizeable stake from Carl Icahn suggests further upside.