- US equities lead the way higher, with the S&P 500 closing on the highs of the day, with a gain of 1.5%. 97% of stocks were higher on the day, with volumes 15.5% above the 30-day average.
- The market is keen to see if the S&P 500 can close Thursday’s gap. Therefore a break through 2181 on the S&P 500 and 18479 on the Dow would suggest new all-time highs could be seen.
- Permanent voting Federal Reserve member Lael Brainard’s comments were predictably dovish and helped take some of the heat out of the selling in US fixed income markets. The US 10-year treasury closed down a mere one basis point.
- The lack of any real move in the bond market is reflective of the modest re-pricing in implied interest rate hike probability, with a hike by December falling a modest three percentage points to 57%.
- Regardless of Lael Brainard comments the S&P 500 was oversold if we look at the market internals, with a mere 11% of companies above the short-term 10-day moving average. The percentage stood at 64% last week. Clearly we have seen a technical driven rally.
- The VIX (US volatility index) closed down 13%.
- The US dollar index fell 0.3%, but we have seen some covering in short AUD/USD positions. AUD/USD hit a session low of $0.7494 and found buyers ahead of the 31 August low of $0.7490. A close below the August low would have spurred even more aggressive technical selling.
- In Asia, we are calling the ASX 200 to have a strong snapback with our call at 5282 (+1.2%), with the Nikkei opening at 16765 (+0.6%). Expect BHP Billiton Ltd (AX:BHP) and Commonwealth Bank Of Australia. (AX:CBA) top open 2.8% and 1% higher respectively.
- The ASX 200 itself was a short-term trading ‘buy’ yesterday based on market internals. Not only was the rate of change (in price) grossly oversold on the daily chart, but a mere 10% of stocks were above their 20-day average. This was a 2.5 standard deviation from the five-year mean.
- Event risk in Asia today will centre on China August data dump at 12:00 aest. Consensus is we see industrial production at 6.2% (from 6% in July), retail sales 10.2% (unchanged), fixed asset investment +7.9% (8.2%). In Australia, we get the NAB Business confidence and conditions at 11:30 aest. RBA member Kent also speaks at 08:30 aest.
Federal Reserve member Lael Brainard stole the headlines with a fairly dovish speech that was hardly indicative of a central bank looking to hike this year. Still, the implied probability of a hike this year has only fallen very modestly and we have seen little in the way of moves in fixed income markets. We have seen a slight calming of nerves though and traders were more than happy to buy developed market risk assets, with emerging market assets and credit also performing positively.
Keep in mind that European and US equities were already rallying into Brainard’s speech and those brave enough to fight the progressive bearish equity sentiment yesterday were rewarded with a US stock market that closed on its high, with excellent participation. Expect Asia to follow suit.
The trade of 2016 has been and remains doing the exact opposite of what feels right and this is what we saw overnight. Moves lower in equity markets of late had been aggressive, but the internals (I have looked at the percentage of companies above their 10-, 20- or 50-day moving averages) had fallen at levels where over the years this level of participation has marked key low points.
The key question for today is how traders act after the open of the various Asian markets and the pricing in of the overnight moves. Specifically, I am keen to ascertain whether traders use this strength to sell into, or whether we see a genuine belief that markets can push higher here. Price action therefore from 10:30 aest will portray so much about market sentiment.
Traders will largely be keeping an eye on the China data dump at midday (aest), but I am not so sure this data will rock sentiment too greatly, unless of course it’s a disaster. However, what we have seen of late is that boring is good and as long as China keeps of the front pages then we can look at other macro factors.
Today’s price action holds many clues for both investors and traders on whether participants feel the recent spike in implied volatile is over or likely to raise its head again.
(Bloomberg chart showing the ASX 200 on the top pane and the % of companies > 20 day average)
