6 things Australian traders will be talking about this morning

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It seems the old market adage “don’t fight the Fed” has been replaced by “don’t fear the Fed” if the overnight rally in stocks and bonds and the rhetoric coming from pundits is any guide.

US bonds recovered the bulk of their losses from Friday while the stock market leapt back toward all time highs with solid rallies and participation across the board.

That should translate to a better day for local traders after yesterday’s 46 point fall on the ASX. The question is whether the local market can regain its losses and close back above 5500. SPI futures are only indicating an 18 point rally at the open so we’ll see where the market goes from there.

Elsewhere oil is under pressure as traders doubt OPEC will get a deal done, the Aussie is slightly stronger day on day, but around half a cent better than the the overnight low as the US dollar lost a little ground. That helped currencies broadly and lifted gold back to $1323 an ounce.

Here’s the scoreboard (7.40am):

  • Dow: 18502 +102 (+0.58%)
  • S&P 500: 2181 +11 (+0.52%)
  • SPI 200 Futures (September): 5,469, +18 (+0.3%)
  • AUDUSD: 0.7577 +0.0025 (+0.33%)

The top stories

1. The Fed and OPEC have the same problem. I’m not sure if traders are saying “get off the pot” or “make my day” to the Fed at the moment. But either way it’s pretty clear that like OPEC, the Fed has the same credibility problem as the boy who cried wolf.

Indeed, the raft of naysayers on a Fed hike in September began early yesterday. Richard Clarida, PIMCO’s global strategic adviser, kicked things off early yesterday saying Yellen’s speech was no news while David Scutt covered a HSBC note saying the Fed won’t hike until 2017. Early this morning, BlackRock’s CIO Rick Rieder said Yellen’s comments suggest just one hike this year – he must know more than Stanley Fischer it seems :S

The key is the Fed has consistently found an excuse not to raise rates and the vast majority of players seem to want to believe that is still the most likely course of action. The problem with that is it increases the chance of a shock – at some point the Fed has put its marker down.

2. Fasten your seat belt – it could be about to get wild in markets. Here comes the volatility transition, says Joe Amato, chief investment office for equities at Neuberger Berman. Bob Bryan covers Amato’s latest market outlook which says with the quiet summer, the market is getting complacent and complacency always comes back to bite investors.

“Market volatility reverts to its mean, but even taking this into account, periods of unusually low volatility have often preceded bouts of unusually high volatility. Volatility was low just before the dollar came off the gold standard in August 1971, for example; it was low at the beginning of 2007 just before the financial crisis began to unfold; and it was low early in 2011 before the Eurozone crisis erupted,” Amato wrote.

3. One for the gold bugs – the yellow metal should be much higher. Should gold be trading at $1700 an ounce? Maybe. That’s the answer Deutsche Bank’s Michael Hsueh and Grant Sporre gave in a note that Akin Oyedele picked up on overnight.

They wrote Friday:

“Let us be clear; we are not saying that gold will trade up to USD1,700/oz in the near term, but when viewed against the aggregated balance sheet of the ‘big four’ global central banks (the Fed, ECB, BoJ and PBoC) the argument can be made if we view gold as a currency, the metal is worth closer to USD1,700/oz, versus the spot price of USD1,326/oz.”

So yeah, maybe gold should be higher.

4. Oil could take another 15 months before the market is back in balance. Oil is down again as the market rethinks the chances of a production freeze. Equally though Reuters reports that Shell says it will take until the end of 2017 for the oil market to get back into balance. On the one hand that’s good, it confirms the market is rebalancing. On the other hand though, if it’s going to take a little longer, then prices will struggle for topside traction for a while.

Shell’s chief energy adviser Wim Thomas told Reuters the potential return to the market of some 1.5 million barrels per day of supply from Libya and Nigeria and uncertainty about Iranian and Iraqi production levels could push a rebalancing further away than many in the oil industry are hoping. “All these things when they come back on the market can again postpone the true balancing,” Thomas said. So oil remains under pressure.

5. The BoJ could exploit changing expectations about the Fed and deliver a massive stimulus package. Japan is mired in deflation with core price rises falling to a 3 year low recently. That means it has to do something and what better time to do it – and weaken the yen – than when the Fed is contemplating multiple rate hikes?

Mark Haefele, global chief investment officer at UBS Wealth Management, told Bloomberg TV overnight that the BoJ “could announce a massive stimulus program both on the monetary and fiscal side or they could end up reducing their inflation targets. Right now, it looks like they are going to use more stimulus”.

It’s a theme David Scutt covered a week or so back and it’s one that is gaining currency in markets.

6. Here’s how we know forex markets are about to explode into a maelstrom of volatility and wildness. Tell me this headline from Bloomberg isn’t a massive “Danger Will Robinson” moment. Bloomberg ran a story yesterday under the banner “Currency Traders Can’t Lose as Strategies Reap Big Gains” and said “Everyone’s a winner in the $5.3 trillion-a-day global currency market this year”.

“For just the second time in the past decade, three major foreign-exchange trading strategies are all producing positive returns,” according to Deutsche Bank research cited in the article. Those strategies, carry trade, valuation, and momentum hardly ever all work together. And the fact that it’s only the second time in a decade it’s happened could be a signal in itself.

The article and the stability of returns just screams the very complacency that will ultimately morph into a more volatile world. Traders will make hay while the sun shines but when the music stops things could get ugly.

I’m Greg McKenna and you can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

Key data for the past 24 hours (with thanks to BNZ markets)
US: Personal income (m/m%), Jul: 0.4 vs. 0.4 exp.
US: Personal spending (m/m%), Jul: 0.3 vs. 0.3 exp.
US: PCE deflator (y/y%), Jul: 0.8 vs. 0.8 exp.
US: Core PCE deflator (y/y%), Jul: 1.6 vs. 1.5 exp.

And now from CMC Markets’ Michael Mccarthy is today’s Stock of the Day

Austal

Boats and guns – what red-blooded trader could turn down Austal (ASB)? Despite reporting yesterday a (well-flagged) loss for 2016 its shares rose by almost 13%. Either traders took a “boys and their toys” approach, or investors are convinced that the US production misses were just a hiccough.

Indeed outside the US operations are ticking along. Given the missteps occurred on the first of a number of US combat ships, there may well be a return to profitability in 2017. Although Austal also deals with the private sector (ferries) its connection to Australian and US government spend mean it could be viewed as a more assured earner.

The chart is painting a more positive picture. After sliding to lows, then trading sideways, yesterday’s move looks like a break out, and possibly the start of a new uptrend. Traders may target the 2016 high at $1.66, although investors may look for a point nearer the 2015 high at $2.56.

Michael McCarthy, chief market strategist, CMC Markets

You can follow Michael on Twitter @MMcCarthy_CMC

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