The story in Australia is clearly around the moves in commodities and the materials sector. The bottom line is that if you are a momentum, trend trader or even a quaint guy, this space is flashing red hot right now and if you are not exposed to the space then you are missing out on what is arguably the best place to drive outperformance in an equity portfolio.
In recent reports, I had highlighted that really since the 10th January sellers had pulled the ASX 200 lower from the unwind of the morning auction, but at 10:28 (AEDT) yesterday that changed and investors and traders pushed into materials names. Volume was good, with $6.076 billion turnover through the market and 15.8% above the 30-day average. The bulls will take a market closing at its highs every day, but the big flows are in the mining space, although with 196 million shares traded (through the sector) was strong, but not breathtaking.
The good-will should flow through again today with the ASX 200 materials sub-sector likely breaking out to the highest levels since August 2014, with BHP (NYSE:BBL) at the heart of this move with an open some 1.7% higher to $27.46. The pure plays will likely rally more aggressively.
One way to look at the outperformance relative to the broader index is through ratio analysis. Here we can the ASX materials sector / ASX 200 ratio going from 1.24x in January 2016 to currently sit at 1.82x, which is the best levels since mid-2014. Aluminium looks super strong and trading at the highest levels since May 2015, with talk of producers cutting capacity. Copper has pushed 2.5% higher and eyeing a break of the November highs of $2.75p/lb level, while the bulls have seen modest upside in the overnight session after strong gains yesterday.
By way of a guide, just look at Freeport-McMoran (NYSE:FCX) which has well and truly broken out and now trading at the highest levels since July 2015, gaining 7.3% on the session. Shorting in this space is ill advised, it is long positions all the way; that is until price action tells us otherwise.
By way of a lead, the S&P 500 has shown real signs of life and the bulls have pushed the S&P 500 to new all-time highs. A market at all-time highs is bullish and despite the climate of political uncertainty I still can’t understand how we can think of this move in US equities any other way. Earnings are coming in thick and fast and names like DR Horton (NYSE:DHI) and Dupont have reported well. Still, if we look at the sectors it’s a story of financials, energy and industrials putting in the points, helped by a rise in US treasury yield. Clearly fixed income traders have it tough right now, with the yields all over the place.
These leads and the moves in commodities should push the ASX 200 into 5683 on open and through the January downtrend of 5664. Traders will be focused on moves today in copper, iron ore and steel futures (on the Dalian exchange) through the session to give mining stocks another leg up, while the FX traders have the bigger event risk in the form of Aussie Q4 CPI at 11:30 AEDT.
If we focus on the AUD/USD, we can see clear indecision in the market (marked by the ‘doji’ candle), with price trading in a range of $0.7609 to $0.7554. This makes sense when traders saw US treasury yields moving higher again and we have strong Aussie event risk, with calls from one investment house that a core inflation print of 0.3% (quarter-on-quarter) or below could force the RBA’s hand in its February meeting.
Given that the market is pricing in 8 basis points of tightening over the coming 12 months one suspects a number below 0.3% will send the AUD into a tailspin, but I am still highly sceptical it will push the RBA to move in Q1. Lo and behold we could even get an upside surprise and a core print of 0.7% QoQ would really get the hawks excited. Remember the analysts have a poor record of forecasting quarterly inflation and as Citigroup point out, since 2010 we have seen 27 quarterly prints and over a third of them (on core inflation) have missed forecast by 0.3% or higher.