The Long And The Short Of It
IG | Nov 26, 2015 01:12AM ET
Commodities have definitely been in the headlines lately, but it’s been a while since there have been so many bearish articles on China, the commodity super cycle and potential cuts to dividends (of various resource plays). Heightened speculation about credit and broker rating downgrades are also in focus, with further concerns that the Federal Reserve could cause a new leg lower.
BHP's (AX:BHP) American Depository Receipt (ADR) is pointing to an open at A$18.98, which would be a fall of 3.5%. The interesting dynamic here is that SPI futures are flat, and as are the moves in copper, iron ore and oil futures from the ASX 200 cash close. One to watch is JP Morgan’s rating cut to underweight which seems to be carrying weight, especially given 40% of the 23 analysts who cover the stock still hold a ‘buy’ rating on the name. The ASX 200 opening call is flat, while BHP’s ADR is bearish which implies either the ADR is much too bearish, the selling in resource stocks will be targeted, or the broader market is a short-term sell from here.
Moves in UK miner Anglo American (L:AAL) could be a catalyst, with the miner falling 7.7% after HSBC cut the stock to ‘reduce’, with the potential for a complete cut of the dividend. With this in mind, the ASX resource space should see strong selling and the short sellers will all be favouring stocks where they can sense a lack of buyers and sceptically ones whose dividend policy and credit rating are at risk. Short interest in BHP currently sits around $21 million, which isn’t stretched by any means, but I wouldn’t be surprised if that number increased somewhat from here.
Looking at the broader market, the ASX 200 seems perfectly neutral. We may see a move into the 20-day moving average at 5176 and a break here could see the selling escalate somewhat. Looking at the market internals, there is no real conviction to push the market markedly lower, but certainly no signals to really increase risk either. We can also see that the level of Aussie corporates above the 20- and 50-day moving average are 61% and 57% respectively. 90% of stocks are trading with an RSI (relative strength index) between 70 and 30, while the level of companies making new four-week highs and lows are below 10%, so again no strong catalysts and the market seems to be in ‘fair value’.
(Bloomberg chart. Top pane – ASX price, middle pane – price momentum, lower pane - % of ASX companies above 20 and 50 day moving averages)
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All eyes will be on Australia Q3 private capital spending (CAPEX) at 11:30 AEDT. The consensus is that we see a 2.9% drop in Q3 spending, but the market is more interested in the fourth estimate of spending intensions for 2015/16. Traders go into this expecting a modest improvement to A$120 billion, with specific interest in improvement in non-mining spending plans. This will make the AUD especially sensitive today. Looking at price action in AUD/USD, we can see some indecision creeping into the daily chart. A good number in the CAPEX intensions should push AUD/USD higher, assisted by a widening of the yield premium demanded by fixed income investors over US debt. This spread is key for the direction of the currency, as well as a further unwinding of a rather crowded short position from the speculative community.
The big momentum trade has been short EUR/AUD though and despite the 10% (1600 pips) decline from late September is mature, the pair is still a sell on rallies as we enter the 3 December European Central Bank (ECB) meeting. Mario Draghi is not to be second-guessed, every time you think easing is priced in, we hear of new potential measures which raise the markets’ expectations even more. That materialised last night with media reports of two-tiered bank charges and a broader range of securities that the ECB can purchase. Without going into huge depth about these issues and the potential fallout from core Europe, one just has to look at the German 2-Year bund, which now sits at -41 basis points, to see the market has become very excited. The premium (or spread) commanded between Australia two-year treasury and German two-year bund has increased 38 basis points (or 0.38%) since the start of the month to 2.43%, and along with falling volatility, has seen short EUR/AUD the most profitable FX trade in G10. This is one to continue watching.
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