For some, the idea of turning the page and closing what has been a fairly bleak month to be long or tracking the Aussie equity market will be welcomed. That being said, being long certain industrial and telco names has seen strong outperformance in the portfolio, so there have been ways to generate good returns in equities.
What won’t be welcomed is the idea that June seasonally is actually the worst month to be long or tracking the Aussie equity market, with the average loss over the past decade at 2.2%. We have seen the past four months of June down by an average of 3.12% and while past performance obviously doesn’t predict future returns it is a consideration. Certainly, something to think about and the technical set-up on the ASX 200 is interesting, with the bulls happy to defend the 5775/77 level yesterday, which as we can see from the daily chart seems a quite pivotal support level representing swing lows in March and May. A break of this level and we should be talking sub-5600, but for now, we are watching to see if the bulls can build on the platform set yesterday.
The leads though are once again tepid at best and as I have said before this is life with implied and realized volatility at just such low levels and that won’t change anytime soon in my opinion. Although, the more short-term trader in me wishes it would as volatility creates opportunity, at least in my world.
There has been some focus on the rates market, where we can see some selling of the July fed funds future and that now sits at 1.12% and thus pricing in 21 basis points (closer to 85%) on tightening for the June FOMC meeting in two weeks’ time. However, look further out the curve and see better buying in future contracts and the wash-up is we see 35 basis points of tightening priced for this year (that includes the June meeting), so one hike in June and a 40% chance of a second at some stage.
We can go out to the end of 2019 and see just over three hikes priced in. It’s no wonder the market is happy to buy the longer-end of the US fixed income curve, with the spread between US two-year Treasuries and ten-year Treasuries falling to 92 basis points (bp) and the flattest curve since October 2016. For those not fixed income experts, it’s worth noting the US curve is having a sizeable influence on the USD, especially EUR/USD. If longer-term interest rates are falling relative to short-term rates the USD is not going higher anytime soon.
I guess we can also focus on Trump’s own approval rating, which has been taking a hit of late for obvious reasons. But his ever increasing frayed relations with the Germans and Europe more broadly is absolutely fascinating viewing too. It has to be seen as a EUR positive that Angela Merkel could be aligning her stance and recognizing that more people in Germany are now actually calling for greater integration in Europe and there is talk we could one day be staring at a shared, common defense budget and even a common fiscal budget (Source: FAZ - http://www.faz.net/aktuell/wirtschaft/merkels-plaene-fuer-europa-koennten-teuer-werden-15035297.html). This is surely a view French Prime Minister Emmanuel Macron would be happy to push as well. Instead of broken Europe could we one day be talking about a more integrated Europe?