We start what is a huge week for market participants on a fairly soggy note, with our call for Asian markets mixed, with small weakness in Australia, offset with modest buying in Japan and Hong Kong.
The week really has something for everyone, whether you are a stock picker or trade FX, futures or fixed income. It’s interesting that the US volatility index has fallen for four consecutive days and at 13.3 is hardly thematic of a market fearful of a breakout in volatility. I still think we need to use the S&P 500 as a guide and until the index can break out of its 2116 to 2180 range then risk aversion should be contained. Recall 40% of the S&P’s market cap reports earnings this week, so the prospect of increased range expansion is in play, although the trend thus far is for better earnings with 80% of companies having beaten EPS forecasts so far, by an average of 6.6%.
Among the traders preferred stocks, watch for numbers from Caterpillar (NYSE:CAT), Apple (NASDAQ:AAPL), 3M (NYSE:MMM), Alphabet (NASDAQ:GOOGL) and Exxon (NYSE:XOM) this week
The reaction in the USD this week is perhaps going to be the biggest theme and while we get a plethora of Federal Reserve (Fed) speakers in US trade tonight (Bill Dudley, James Bullard and Charles Evans), the highlight of the week will no doubt come from US 3Q GDP. Keep in mind that growth has averaged around 1% in the past three quarters, so a snap back to the consensus estimate of 2.5% would be welcomed. Q4 growth is largely expected to drop back however, with the New York Fed’s growth estimate being revised down to 1.4%. Hardly a ‘high pressure economy’. We also get one of the Fed’s preferred employment/inflation reads, the ECI (Employment Cost Index) on Thursday (23:30 AEDT), where this is likely to print a meagre 0.6%. The bar for a December rate hike is low, but all signs point to a ‘one and done’ rate hike.
The USD index has traded to the highest levels since February on Friday, predominantly as a result of EUR weakness. I am not one to fight a trend, as following the money flow in the FX market generally put the odds in one’s favour. However, the currency is starting to look a touch over owned and if we get a Q3 GDP print in-line with Deutsche Bank's (NYSE:DB) 1.3% estimate then I would expect the USD to take a hammering. The event risk this week is elevated.
AUD/USD traded to a low of $0.7588 on Friday and the AUD itself has huge event risk this week with Wednesdays Q3 CPI print likely to cement the view that the cash rate is to stay at 1.5% well into 2017. As things stand the market is pricing 15% change of a cut in the November meeting and we would need to see a trimmed mean (core) inflation print of 0.2% (quarter-on-quarter) to push the implied probability of a cut into 30-40%. The consensus is for a slightly lower pace of inflation to 0.4%, but stabilisation in inflation trends would be welcomed. For FX traders put AUD/CAD on the radar, with price some 30 pips from the hitting the highest levels since September 2014.
Locally, the focus turns to the Australian banking sector with NAB detailing 2H2016 earnings on Thursday, followed by MQG on Friday. ANZ and WBC (CBA release a trading update) the following week. As always the investment community are keen to look out for any further contraction in margin, given the high competition and increased costs within the wholesale funding markets. This is not the only issue, with investors again focused on bad debts, capital, treasury and market income and costs. The banking sector managed to gain 0.8% last week, underperforming the material space (+1.6%), so we will see if there is any rotation this week. If go off their ADR’s (American depository Receipt), one can expect flat opens for both BHP and CBA on open.
US crude prices are not giving too much away for the energy space either, with price gaining 0.4% in Friday. The range of $50 to $52 remains in play and its clear that someone is happy to defend the $50 a barrel level. The USD and weekly inventory reports should drive this week, although much focus remains on commentary from OPEC nations around the November meeting. Iron ore fell 0.2% on Friday.
(Daily chart of US crude – Clearly $50 supported, but a break of $52 needed for the continuation of the September trend)
